Equilibrium - issue 8

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ISSUE: 8 January 2015

Featuring: North to South Single Women and Credit Monocausotaxophilia BRICs and the New Development Bank

Awakening the Dragon

Pg. 4 Pg. 10 Pg. 16 Pg. 22

Contents

Editorial Note Christopher Scott page 3

North to South Are we on the verge of geopolitical change? Christopher Scott page 4

Turkey A Future Power House? Tom Best page 6

The Future of Monetary Policy in the US Fredrick Franklin page 8

Single Woman and Credit What you didn’t know about interest. Dr Judith Spicksley page 10

Is Democracy Necessary for Economic Development? Andrew Pickering page 12

Why Globalization might lead to Economist ruling the world Dominic Rastelli-Lewis page 14

Op-ed: Monocausotaxophilia and Our Love of All Things Simple Harry Quilter-Pinner page 16

Behavioural Economics and Poverty Natasha Bakhir page 18

A Unified Theory of Market Power and Regulation Shakeel Gavioli-Akilagun page 20

BRICs and the New Development Bank Jonathan Neo page 22

The Arab Spring Harry Quilter-Pinner page 24

Uber: The Dark Side of the Sharing Economy Shakeel Gavioli-Akilagun page 26

The End of History, Democracy and Development Lian Zhu page 28

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All images (including banners) are labelled for reuse with modification, sourced using google and within the Public Domain

A Note from the Editor Since the start of the 21st century the global economy has changed dramatically. Developing countries, aided by their large domestic market and scope for catch-up growth, have increasingly begun to overtake major Western economies with respect to GDP. This pattern is likely to continue over the coming decades, with the likes of China, Mexico, India and Nigeria likely to play a far more prominent role in the global economy than before.

Currently international institutions fail to reflect the potential change in geopolitical power that might result from this. The weighting system in organizations such as the International Monetary Fund is heavily biased in favor of the USA and European nations. However such a system cannot be sustainable going forward, as the importance of developing countries in the global economy continues to grow. As such it remains unclear how Western nations would be prepared to adapt to this reality, or even if they would be prepared to do so. For economists this pattern has led to some puzzling questions, and shaken belief in some of the fundamentals that were deemed necessary for growth. For example democracy, which was considered the best form of government for sustaining development, no longer looks as important, given China’s absence of popular representation in its political system. Similarly it also fails to exhibit other characteristics which had previously been considered conducive to growth, such as a free press and an independent judiciary. China’s rapid growth contrasts sharply with the recent stagnation of countries in the Eurozone, such as Spain, Greece and Cyprus. This situation is testing the ability of democratic governments to respond effectively to their internal crises, and raises further questions regarding the best form of government for economic prosperity. The latest edition of Equilibrium explores these issues further, in addition to providing analysis on other contemporary issues in Economics. We are grateful to the students and staff who have contributed towards our magazine, without who this latest edition would not have been possible. We also extend our thanks to the Economics Society and Department of Economics and Related Sciences for their support in producing this. However looking to the future, the magazine depends on a committed network of student authors to continue providing us with thought-provoking articles. Therefore if you are interested in submitting an article in the future, feel free to contact [email protected] to find out more about how you can get involved.

Editor - Christopher Scott

Christopher Scott Editor

Shakeel Gavioli-Akilagun Sub-Editor

Dominic Rastelli-Lewis Sub-Editor

Johnny McMichael Designer

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mailto:[email protected]

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Johnn

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At the start of the 13th Century, China arguably was the world’s most advanced economy. It had adopted innovations in engineering and textiles much earlier than its European competitors, inventing the power driven spinning wheel four centuries earlier than it was conceived elsewhere. Similarly it made great advances in areas such as agriculture, where it made far greater increases in the amount of arable land it cultivated relative to Europe, and by 1160 became the first country to adopt paper money for use in economic transactions. Such advances and innovations ensured that the standard of living enjoyed by people living in China was higher than that enjoyed elsewhere in the world, and in particular Europe. This may seem a far cry from the reality of living in China today. From the 15th century onwards it is generally accepted that European countries both caught up, and indeed began to overtake China. While the reasons suggested for this are often complex and sometimes appear contradictory, it remains likely that institutions were important to this, with countries that limited the power of their monarchy appearing to have developed quicker than those who did not. Additionally interstate rivalries are likely to have helped drive development, in particular as countries became involved in empire building; European nations large quantities of easily extractable coal reserves; and cultural reasons, with protestantism in particular perceived by some to be more conducive to economic development. Regardless of the reasons for West’s higher level of economic development, the result of this has meant that according to the

International Monetary Fund (IMF), China only had a GDP per capita of $9,884 in 2013. However despite the relatively low GDP per capita, China has made significant progress towards industrialisation since the economic reforms launched by Deng Xiaopeng in 1979. By focusing on its manufacturing sector, and exporting the goods that it produces to Western nations, its economy has grown by an average of 10% over the past 30 years. In the process the World Bank has suggested that it has lifted more than 500 million people out of poverty in this time. This has recently culminated in China overtaking the United States as the world’s largest economy (when measured by purchasing-power parity), breaking the United States century of dominance over the world economy. In another sign of its influence growing,

in 2014 China’s outbound direct investment is expected to exceed direct investment going into the country. From 2002 to 2013 Chinese investment abroad has grown significantly from $2.7bn to $108bn, with purchases including acquisitions of major companies such as Weetabix. Having been heavily dependent on attracting Western investment to develop infrastructure for its economic growth, the latest figures show that its role has been reversed, and that China is now an important investor in markets from Latin America to Europe.

A challenge to the West? It is inevitable that as China continues to grow, it is increasingly likely to challenge the Western powers in geopolitics. In July 2014 it agreed to the formation of the New Development Bank (NPD) along with Brazil, Russia, India and South Africa, which it hopes

Are we on the verge of geopolitical change? A special report by Christopher Scott

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North to South

will lead to greater financial cooperation between the countries. Seen as a direct alternative to the International Monetary Fund (IMF) and the World Bank, which are dominated by Western powers, it marks the first response by developing countries to what they see as the disproportionate influence that European countries have on international institutions. For example China, despite the IMF’s suggestion that it accounts for 16.1% of global GDP), only has 3.8% of the IMF’s total voting rights. By contrast the United Kingdom currently has 4.3% of the total. Despite its undeniable economic importance, there are concerns over its interactions with other nations. In particular recent territorial disputes have created alarm of a potential conflict between China and her neighbours. Over the past few years its relations with Japan have deteriorated due to their competing claims over the sovereignty of the Senkaku/Diaoyu Islands, an uninhabited archipelagos in the East China Sea. The dispute has even drawn in the United States, with Barack Obama claiming that the US would support Japan’s claim in the dispute. However China also has similar

claims over islands in the South China sea as well, bringing it into conflict with countries such as Taiwan, Vietnam and the Philippines. On the 2nd May 2014 this even culminated in clashes between Vietnamese and Chinese naval ships in the sea. Such arguments have led to resistance to Chinese influence in international institutions increasing further. There are other indicators that China may not be ready for a greater international role, particularly while it still lacks a democratic political system. This has recently sparked confrontation in Hong Kong, where there have been student protests in response to the Communist Party’s plans to approve candidates for Chief Executive. Although in practice it would enable Hong Kong to select its leaders by popular vote, the nature of the candidate selection process would enable the mainland Chinese government to remain firmly in control of affairs. Dubbed the “Umbrella Revolution” because of the yellow umbrella that activists use to symbolise their peaceful protests, the movement has yet to generate a concrete response from the Chinese government. It is aware of both the reputation damage of

resorting to repression, while remaining determined not to reduce its influence over the city. This democratic deficit has also been evident in its role on the United Nations Security Council, where it is one of five permanent members. In particular its refusal to approve measures against states such as Syria and North Korea, even in the face of widespread human rights abuses, has attracted widespread condemnation from the West, and reinforced distrust in the country. Time to adapt However to deprive China of greater representation in bodies such as the IMF is to deny the changing reality of the global economy. As China cements its status as the world’s largest economy, its influence in financial markets and over international governments is likely to continue to grow. If the international community, and in particular the United States and Europe, do not adapt to reflect this, China is more likely to demand wholesale changes to international institutions, rather than to simply flourish in the present system. This process is likely to involve a reduction in the influences of European countries, who were integral to creating the international order after the Second World War. However to maintain the status quo would be to neglect an economic reality in which developing countries, including the likes of India, Brazil and Mexico, are already starting to overtake Western countries in relation to GDP, thanks to their large domestic markets. As they grow richer their ability to produce goods is likely to catch up further with the West. Developing countries have so far been willing to adopt the rules set by Western nations, often opening up their economies to Western countries and replicating the system of markets they use. However the recent creation of the BRICs bank shows that these countries are becoming increasingly dissatisfied with their lack of influence, and thus it would be prudent for the West to begin changing this before its relative influence were to decrease any further.

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Turkey A Future Powerhouse?

By Tom Best

For centuries, Turkey has been known as the ‘Silk Road’ in reference to the way its location binds the worlds of East and West, both economically and culturally. Traders have long used its corridor-like geography to expand their global reach, and as our world has become more globalised, so too has Turkey’s sphere of influence: it now does business with Africa, Asia and Europe. To truly illustrate this influence we can look to the operations of Beko, a renowned Turkish manufacturer of washing machines. The firm sells heavily into its home market, but has also established significant

presence in Russia and China despite their distance - few firms can claim to have this reach! Still, Turkey’s recent success and future potential rest on more than its location alone. A quick glance at its figures reveals a dramatic upturn in economic fortunes since the millennium, with GDP per capita nearly trebling in that time to a healthy $10,600. Many people inside the country accredit the success to Turkey being a ‘catch-up’ economy, highlighting that the economy had long struggled to find momentum previously. The country has certainly changed in recent decades; consumerism

has flourished and new property, be it residential or commercial, is fast springing up in the capital Istanbul. However, this recent growth hasn’t always been the product of novel thinking - some Turks argue that their deeply-

embedded entrepreneurial culture has driven the country forward. Unlike many of the MINTs and their predecessors the BRICs, Turkey isn’t rich in commodities and so Turks have long had to exploit their selling skills in order to make a living. This culture has stood the test of time and Turks now find themselves involved in entrepreneurial projects across the globe, with other MINT Nigeria often benefitting from Turkish expertise and labour. Such is the zeal of some entrepreneurs that they have even been working in war-torn Iraq. Looking ahead, there are further reasons for Turks to be cheerful. As a MINT economy, Turkey has strong inner demographics; in other words the size of its labour force will grow relative to those who depend on it (the young and elderly). Furthermore, the construction of a huge new airport in Istanbul - overtaking Heathrow as the world’s largest with 6 runways planned - will almost certainly prove a

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watershed moment for economic prospects. With the capacity to handle 150 million passengers annually, the new airport is a sign both of Turkey’s ambition to become a tourist hotspot and of Turkish Airlines’ rapid ascension to global player status in the aviation industry. Despite all this though, none of the MINT economies are flawless and Turkey’s recent political troubles will at the least serve to constrain its progress. For many years, the current President Recep Tayyip Erdogan was seen as a moderate leader, but restrictions on press freedom and the emergence of a corruption scandal within government have aroused tensions from opposition groups. Earlier this year, protests erupted against Erdogan’s administration - only for protestors to be suppressed with tear gas. When visiting Turkey,

Jim O’Neill (inventor of the MINT acronym) found some interesting patterns in the reaction to these events1. On the one hand, there was a perception that Turkey’s imperfect democracy might discourage Western investment, not to mention dissuading the EU from accepting the country’s membership application. However, O’Neill himself feels that such political concerns are overstated, especially when one considers the wealth of export options at Turkey’s disposal. Ind eed, it need only look to trading partners China and Russia, two states that have largely avoided the Western democratic model, to ascertain that business opportunities will likely persist in spite of authoritarianism. 1 BBC Radio 4, ‘MINT: The Next Economic Giants’ (see 3rd reference). Looking ahead, more concrete

concerns are perhaps the rate of female labour market participation, which is the lowest of the OECD economies, and the country’s dependency on cheap foreign loans to finance some of its growth (leaving it potentially exposed to any US interest rate rises). In conclusion, I would argue that Turkey seems on the whole well set for the future - it would certainly be surprising if growth were to stall completely, with projections of a five-fold increase in GDP per capita by 2050. Perhaps the most interesting question is not whether but how the country will grow - looking to the EU might be the best route to prosperity, but such a strategy will require a new Turkish politics to emerge.

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The Future of Monetary Policy in the US

As 2014 comes to an end we are witnessing the first signs that the Federal Reserve may tighten monetary policy in the not too distant future. This will be the first occasion of any tightening of monetary policy by any of the major central banks since 2007 and signals a departure from the zero lower bound, if only in the United States. Interest rates have been at this level for the last seven years in all major economies due to the Federal Reserve's desire to learn from the mistakes made during the Great Depression. According to leading monetarists such as Friedman and Schwartz, a liquidity crisis formed leading to a contraction in the money supply by over one-third between 1929 and 1933, exacerbating an otherwise routine recession. Ben Bernanke, the chairman of the Federal Reserve from 2006 to 2014, was all too aware of this and regularly argued that the largest mistake made by the Fed at the time was failing to address these issues properly and increasing interest rates too early during the recovery. Considering these public criticisms of the Federal Reserve's actions, it isn't difficult to understand why he left the inevitable interest rate hikes for his successor, Janet Yellen, to implement. With the Fed preparing to end its asset purchasing policy this coming year, it is important to recognise that in response to the market issues of 2008, it has been extremely effective. The solution that the Federal Reserve and Bank of England produced to respond to

the recessionary and deflationary fears, having already reached the zero lower bound, was to implement quantitative easing. In 2009 a liquidity crisis had formed in almost every financial asset and was resulting in a credit crisis in the real economy and a recession similar to the Great Depression was looming. The monetary policy implemented by the Fed was successful in the short term in so far as increasing the liquidity of commercial banks and through the first round of quantitative easing, which in total involved the purchasing of $1.7trillion of assets, in lowering the long-term bond yields. This first round of QE known as QE1 reduced the systematic risk in the banking industry by purchasing asset-backed securities and provided liquidity and health to credit markets which had ceased up, but the subsequent rounds after that have highlighted the limitations of this policy. Despite

the massive increase in the Fed's balance sheet, which since 2008 has inflated from $800bn to $4480bn, they have been unable to consistently meet the 2% inflation target and there have even been fears of deflation, all during a period of stimulus that many claimed would lead to hyperinflation. In an economy with a large debt burden, as many developed countries have, this can be a large drag when trying to relieve excessive unemployment. The mediocrity of the second and third rounds of QE, were ultimately because the impact it had (and was designed to have) were only on the monetary base. In pre-2008 periods the textbook result would have been a transmission through the money multiplier and to the money stock, or money in the real economy. However the Federal Reserve Economic Data for the

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Fredrick Franklin

money stock shows the trend growth has remained very much the same. There is an argument to be made for the idea that the only effect the final rounds have had is artificially inflating equity prices to levels which do not reflect the economy's real development. *- Returning to the present day where the Federal Reserve and Bank of England are planning to begin returning to more traditional monetary policy and to lift off from the zero lower bound. This transition will undoubtedly be a long and slow process as no one yet knows how the economy and financial markets will react to a tightening of credit, especially considering that a majority of their trading partners have not yet

emerged from stagnation. Historically a central bank would tighten monetary policy when an economy threatened to overheat and inflation soar, but with inflation stable or even too low, the Fed and Bank of England must now balance the threat of low inflation or even deflation with the risk that may be developing in the form of an asset bubble. If this asset bubble does burst then once again we may return to a credit crisis but this time without extreme fiscal and monetary stimulus to soften the fall. The Fed has long been aware of this issue and hinted at interest rate hikes in March 2014 for mid 2015. This shows the desire of Janet Yellen to limit the negative reaction to these changes by giving investors

as much time as possible to prepare for tighter monetary policy and the uncertainty that will follow. It also further emphasises the reliance a central bank has on its credibility and that this move will not be reversible without dire consequences, even if falling energy prices drag inflation down further. If the Fed is to return to a normalised monetary policy it will almost certainly not be in the near future, with the Fed's own predictions being recently downgraded for 2016 from 3 per cent to 2.5 per cent and may yet be downgraded further during 2015. Considering the Great Moderation era between the mid 1980s and 2006, where interest rates associated with contractionary monetary policy being nearer the double digits, the days of 'normalised' monetary policy may be a thing of the past, particularly if inflation does not catch up with the Fed's targets before interest rates increase. If in fact the transition back to more traditional rates is a long one, then the Fed may face the same problems that the Bank of Japan has battled with since the 1990s, and may no longer be able to assume employment and inflation follow the same path. If this does occur then the Fed and other central banks across the world will need to take a far different approach to monetary policy in the future.

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Single Women and Credit What you didn’t know about interest By Dr Judith Spicksley

Interest rates are often a hot topic in economics, but today we tend to take the fact that we are expected to pay interest for granted. By the time Adam Smith published his Inquiry into the Wealth of Nations in 1776, the payment demanded upfront for the use of capital was part of standard business practice: the lender ‘expects that in due time it [his capital or stock] is to be restored to him, and that, in the mean time, the borrower is to pay him a certain annual rent for the use of it.’i But this had not always been the case. Complaints about rising levels of usury (lending for

profit) in England in the later sixteenth century led to the passing of the Act against Usury of 1571, under the terms of which those found guilty of charging rates of over 10 per cent lost triple the amount of their principle; those demanding rates of 10 per cent or less were less harshly treated, but still lost the interest they had charged. Despite its name, this act proved to be a crucial step in the legal process of separating usury, which became understood as excessive profit, from the concept of moderate interest that we recognise today as acceptable. As a result of

the act, a rate of 10 per cent – though not strictly lawful – gradually gained acceptance. Lenders, it seems, were prepared to risk losing their profit, as long as their principal was safe: in the expanding late Elizabethan economy, there was a demand for capital. Further legal changes followed in the 1620s, and by 1660, with the passing of the Act for restraining the takeing of Excessive Usury, the boundary between unacceptable usury and acceptable interest had gained a clear designation in law. Prosecutions for usurious dealings increasingly came to rest only upon

those who charged excessive interest, as determined by reference to statutory legal rates. The control of profitable lending - defined as usury by the medieval Christian church - had been a central theological concern throughout the Middle Ages. The practice of usury among clerics had been banned by the First Council of Nicaea in 325, and the prohibition was first extended to laymen by fourth century councils at Elvira and Carthage. By the early twelfth century Gratian’s well-known and influential Decretum (1140) had confirmed usury as a sinful practice. The difficulty in accepting the premise of profitable lending arose as a result of two main concerns. Firstly, drawing heavily on the ideas of Aristotle, money was understood to be a facilitator of exchange rather than a commodity in itself. As such it was fungible – consumed in use - and so ownership could not be transferred. Secondly it involved no labour, and so offended against a further Christian precept – that all men, as sons of Adam, were required to work for their livelihood. However, in later Roman law there had been an understanding that compensation should be paid to those who lent out their capital, and with the revival of Roman law in Europe from the twelfth century onwards, interested parties were able to exploit a number of ambiguities in relation to the usury laws that allowed payment on the principal while evading the charge

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of usury. bvThe three most important extrinsic titles, as justifications for taking profit on a loan were known, were: a delay in repaying; the possibility of loss; and the withholding of profit. All were devices to indemnify creditors against any default by the debtor, and encouraged the development of the notion of inter-est (‘is between’), a concept derived from Roman law, that sought to restore the lender’s financial position to its pre-loan level; in other words to avoid the lender suffering any loss, as opposed to making a profit. Developed around the modern idea of opportunity cost, payment of ‘interest’ was allowable at the end of a loan in respect of damages for late repayment, loss, and profit foregone. Such concepts also helped to develop a notion of equitable and fair lending in which the risks of lending were shared between the debtor and the creditor.

So how did we get from a position in which interest was understood as post-loan compensation to one in which

interest emerged as the parallel rent or charge for borrowing? The answer may well lie in this concept of equitable lending. The notion was supported by John Calvin, the hugely influential sixteenth-century protestant reformer, and there is evidence that it constituted a major part of the investment practice of individuals in England in the seventeenth century. You may be surprised to discover that, as a social group, single women – those that were not, and had not yet been married – were the biggest creditors in England in the seventeenth century. They were able to do this because of changes to family inheritance policy that resulted from the 1571 Act against Usury. Drawing on a clause in this act that legalised interest-bearing lending for orphans, fathers and other family members increasingly chose to leave their daughters, sisters and nieces a sum of cash which could be ‘put out’ or invested at interest in the local community, usually until the girl in question married, or reached the age of either 18 or 21. Once adults, and

while still unmarried, such women continued to lend at interest, making their capital available to a variety of local borrowers, and for institutional as well as business projects. Significantly, their lending appears to have been more acceptable than that of any other social group. I have found no examples so far of any that were charged with usury – in sharp contrast to men and widows - and their lending practice can be characterized as equitable. They charged no more than

the prevailing quasi-legitimate interest rates; took a generous approach to late interest and repayment; and demonstrated a reluctance to prosecute recovery at law, all of which speak to the notions of equity, charity and a shared concept of risk. Their activities were supported by shifts in economic theory which argued that the wealth of the kingdom was affected not by the practices of economic agents - including usurers - who hoarded coin, but instead by the balance of trade. It was the amount of goods a country could produce and sell that would make it wealthy. But if economic theories were changing to reflect a belief that trade was the way to wealth, and credit the means to trade, it was the socio-economic benefits delivered by the activities of single women as investors of capital that helped interest-bearing lending become an acceptable part of standard economic practice. If you have a question, or would like to know more, come along to the CHERRY workshop on February 10 at 1pm [Room AEC/201, Department of Economics and Related Studies] when I will be giving a presentation on this subject.

i Adam Smith, An Inquiry into the

Wealth of Nations (1776), Electronic

Classics Series, 2005. See

http://www2.hn.psu.edu/faculty/jman

is/adamsmith.htm.

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Is Democracy Necessary for Economic Development?

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Democracy correlates with economic development. In 2010 only oil-rich states and Singapore simultaneously exhibited PolityIV democracy scores less than 8 and per capita income levels exceeding $20,000 (in PPP 2005 constant prices – see graph). Excluding OPEC members, a regression of GDP per capita on the Polity IV democracy measure using 2010 data yields a t-ratio of 5.0.1 A unit increase in the PolityIV democracy measure is on average associated with an $866 increase in living standards. The scatter plot does not by itself establish causality. There may be a third unobserved variable that simultaneously correlates with both democracy and living standards. Moreover no doubt to an important extent development leads democracy. One possible story here is that as countries industrialise, income levels rise and the population may increasingly demand democracy. On this see Acemoglu and Robinson (2000).

1 Though note the R2 is only 15%. In particular there are many poor democratic countries. India in particular has strong democratic credentials yet its income levels are still low. Democracy is thus certainly not a sufficient condition for development – other variables also matter.

These issues aside, I argue that democracy is necessary for development, at least for most countries. Democracy, in principle, acts as a quality-control. Lord Acton in 1887 wrote that “Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men.” Dictators, eventually, inevitably fail in delivering growth either by choice or indeed out of the necessity of self-preservation. The mechanics of dictatorship failure are not wholly clear. Perhaps dictators succumb to temptation and are just ‘bad people’. Alternatively Bueno de Mesquita et al (2003) argue that dictators, even when ‘benevolent’, will likely require

the support of an ‘elite’. If mass growth serves to undermine the position of the elite then even the well-intentioned dictator cannot deliver growth. The constraining effect of the elite is only ever undermined with democracy. The corollary of Acton’s aphorism is that competition in politics is desirable. In the private sector the benefits (and indeed limits) of competition are well-established. The profit motive can lead to a Pareto efficient allocation. Does it translate that stronger incentives to please voters will likewise translate into better policy and ultimately higher living standards? Whilst international data are

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By Andrew Pickering

suggestive, more convincing evidence is provided by Besley, Persson, Sturm (2010). Their test-bed is state level performance within the US in the second half of the twentieth century. One advantage of this data set is that common culture, history and institutions (at least at the federal level) rule out a lot of the unobserved heterogeneity that undermines inference using international data. Rather than looking at ‘democracy’ per se they examine the extent of political competition. Besley et al (2010) identify a plausible source of exogenous variation in state-level political competition levels. The 1965 Voting Rights Act (VRA) was imposed by the Federal Government and substantially

eliminated the extant voting rights restrictions. Literacy tests and poll taxes were abolished. As a result political competition in many southern states in particular suddenly increased. De facto these states suddenly became more democratic (to be clear – with a small ‘d’.) Using this event Besley et al (2010) compared policy and growth performance before- and after-1965 in US states that exogenously saw an increase in political competition with those that did not. Relative changes in policy- and growth-performance were found to be consistently and sizably greater in states exhibiting greater levels of political competition. Political-economic theory, and both international and US state-

level data point to a consistent positive effect of democracy on living standards. It seems plausible that ‘geopolitical power’ – the topic of this issue – will likely be a function of economic power. If China in particular fails to democratize (and its current PolityIV measure is -7, unchanged in over 30 years) then its continued ascent should not go unquestioned.2

2 Also see http://www.economist.com/news/finance-and-economics/21627627-new-study-asks-how-long-chinese-economy-can-defy-odds-even-dragons-tire.

References Acemoglu, Daron, and James Robinson, 2000, Why did the West Extend the Franchise? Democracy, Inequality and Growth in Historical Perspective. Quarterly Journal of Economics 115: 1167-1199. Besley, Timothy, Torsten Persson and Daniel Sturm (2010). Political Competition, Policy and Growth: Theory and Evidence from the US. Review of Economic Studies 77(4): 1329-1352. Bueno de Mesquita, Bruce, Alastair Smith, Randolf M. Siverson, Randolf and James D. Morrow, (2003). The Logic of Political Survival. MIT Press, Cambridge, Massachusetts.

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http://www.economist.com/news/finance-and-economics/21627627-new-study-asks-how-long-chinese-economy-can-defy-odds-even-dragons-tire





Why Globalization might just lead to Economist ruling the World By Dominic Rastelli-Lewis

During the last two hundred years the world has progressed from a collection of states that did business with one another to a conglomerate of powers that are both nationally and internationally dependent and affected by one another in an infinite number of ways. This has led to a growing middle ground of politics as the flow of human capital, or simply migration, mixes cultures and ideologies together whilst the most powerful nations are for the large part conservative democracies. Whilst those that aren’t are feeling the pressures of becoming one in a time of the Internet and mass communication where their economies rely on those abroad to consume and their citizens at home to co-operate in increasingly precarious

circumstances (the Chinese investment bubble to mention but one). In countries such as ours where political issues create far less confusion in day-to-day life, a focus on both global and national economies is growing in a time when they are more fragile and important than ever. One realization is clearer than ever, politics is no longer done on the battlefield but on the balance sheet, the time of career politicians is over. This is the age of the economist. Daniele Conversi and others point out that as well as through trade and MNC’s many of the key supranational organizations, (an international organization delegated power by member states) such as the world trade organization, G7 (as it stands) and the European Union are all

arguably dominated by the Western powers. Suggesting that power in a plethora of situations; whether it is over trade or military operations, law or human rights, is finding itself in the hands of a few very close states. (In terms of economic and political situations) Whether we agree with Daniele Conversi that Globalization is in fact westernization, a new age of imperialism set against the backdrop of America's preeminent economic power or not, one thing has been made very clear as a result of globalization and recent political events. Power has shifted from government to International Corporation and from politician to banker. Rising prices of a company in one country can mean a budget deficit in another. The plummeting price of Oil in late 2014 and early 2015 is perhaps the most prevalent and simple example; Citigroup have predicted in the UK alone that a 35% fall in oil prices (up to the end of 2014) has led to a household gain of around 14 billion, much of which will enter the economy through consumer expenditure, an increase of around 0.8 percent in GDP and this only describes the household effects. The effect on firms of all kinds will be positive and will very possibly make this 0.8 figure appear somewhat modest even if BP and our national reserves slump in value

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we are a net importer of oil and so we benefit on the whole from this. Countries such as Nigeria on the other hand where 70% of output is reliant on Oil faces far different consequences which its politicians can do very little about given the structure of the countries economy and economic model based on Economic Growth. Now on a more local note, the UK ranked 17th (in 2010) and 6th (2014) on the enabling trade index, a composite indicator of four factors that measures how facilitating an economy is to international trade. This trade integration has a very close relationship with political integration; the Issues affecting the Eurozone have been attributed to a 0.7% fall in the UK optimism index describing UK businesses. Showing that we are more dependent on economic conditions abroad than ever. When discussing the EU it is debt, defaulting and depreciation in currency that the media discusses, that or pedantic euro skeptic observations that exist seemingly because there is a lack of any real political issues for the media to contemplate.

The growing middle ground has made rare political extremism front page news (think the Golden Dawn party in Greece for example) and Europe an economic and social issue rather than a wholly political one, the argument stands between trade from Europe on one hand against legislation from Brussels on the other, separating the realists from the xenophiles and politically disenfranchised. This is not just a European phenomenon however, recently Putin’s actions, defying international law in both Ukraine and Crimea were met not with War but with economic sanctions whilst he threatened to shut off the oil pipeline in retaliation. What does this say if not that globalization has led to trade and economic tools being at the forefront of any government’s arsenal in global politics, business and economics are the most powerful weapons of a modern state. During the last period of government there has been little ideological divide, even between the most polarized parties. In a world where we have not only local politics converging to the

center ground but also global politics; the next election at present is being fought on a spending and austerity front; where we cut and where we spend. The public is increasingly focused on good book keeping after the Global and local financial crisis that would be the deepest recession since the Second World War. The effects of sub prime mortgages and the European sovereign debt crisis has meant that throughout America, Europe and the rest of the western world the public and media are more focused on the economy than ever and less interested than their parents or grandparents generations on whether it is a nationalist or socialist government that leads them. In short, Globalization and its sometimes-disastrous consequences have led to a growing focus on the economic ties between countries and the economic conditions within them. Now more than ever power and responsibility lies with the economist and the business magnate, not with Politicians.

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Op-ed: Monocausotaxophilia and Our Love of All Things Simple

Daron Acemoglu and Jeffrey Sachs have both attempted to explain Africa’s historical failure to induce sustained and widespread economic growth. Sachs argues that the explanation lies in Africa’s geography, meaning the physical location of African countries and their natural attributes and endowments. Acemoglu disagrees; he says that it is Africa’s institutions, the social and legal norms and rules which frame political and economic decisions, which have caused the underperformance. The debate is a classic case of monocausotaxophilia. Coined by the German psychologist and neuroscientist Ernst Poeppel, the term monocausotaxophilia refers to the tendency of academics, researchers and policymakers to simplify the

causality of complex events or occurrences by focusing on just one explanatory factor. This is undoubtedly what both Sachs and Acemoglu are doing. It is palpably clear that both geography and institutions (and whole lot more besides) are relevant when attempting to explain Africa’s economic misfortune. Furthermore, some causes are more relevant in some countries, and others less so. Africa is made up of 1.1 billion people across 54 countries; one explanation cannot hope to capture the complexity of their varying economic situations. But let’s share the criticism round a bit, the case of Sachs and Acemoglu is just illustrative; economists are serial suffers of monocausotaxophilia. If you listen to the ongoing economic

debate on the causes of the 2007/08 economic crisis you will likely hear two explanations. The crisis was caused by poor government policy, notably weak regulation and policies designed to increase consumer spending and debt, or the crisis was caused by the reckless and morally bankrupt private sector. Likewise, if you discuss the Chinese economic miracle two opposing and simplistic arguments will be made. Growth was either a result of the free market policies adopted by the Communist party from 1978 onwards or it was driven by China’s strong government which has marshalled Chinese resources and controlled the dangerous market forces to China’s advantage. I could go on, but I won’t. So now that we know that monocausotaxophilia exists in economics, we need to ask whether it really is a problem. Many academics would say not, in fact many would argue that it is a necessity. Their argument states that it is exactly because the world is so complex that a simpler framework is needed to understand and respond to it. The power of the monocausal framework, according to Acemoglu is its “ability to focus on the most important elements at the exclusion of the rest and in so doing provide a way of thinking about these elements, how they function, how they have come about, and how they change”. This

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Harry Quilter-Pinner

is of course the same justification behind all economic modelling and indeed econometrics. And, there is undoubtedly some truth in these arguments. Attempting to understand the relative importance of the different causes of economic outcomes is important in ensuring that policy responses are well designed and effective. Likewise, if simplification is necessary for, or encourages us to face up to some of the biggest economic challenges – if without it we would ignore them like a rabbit in the headlights - then it is surely a positive thing. However, there are significant downsides to the use of monocausal explanations when addressing complex issues. Notably, monocausotaxophilia risks leading policy makers to inaccurate and overly certain conclusions and therefore the wrong policy response. For example, following the argument of those who believe the economic crisis was caused by poor regulation to its ultimate conclusion would justify a widespread move towards re-regulation. Would this move in

isolation stop the next economic crisis? Almost certainly not; new regulation would be bypassed or would lag behind developments in the financial sector, banks would continue to take risks and innovate in dangerous ways because of their culture, incentive systems and corporate structures. Only by tackling the faults of the private and public sector, and the whole range of other causes that ultimately led to crisis, will our economic system become safer. Likewise, if policymakers take Acemoglu’s institutional arguments in isolation when looking to support growth in Africa, they might come to the conclusion that imposing democracy in African countries alone is the answer. Of course we know this isn’t enough; there are many countries that have democracy and well established policy making institutions but which fail to grow for a range of other reasons, including the geographical disadvantages such as flooding, high temperatures and geographic isolation as argued by Sachs. There isn’t one recipe which will deliver long term growth in

Africa, but pushing African countries in the right direction will require a much more complex and localised set of policy solutions than either Acemoglu or Sachs suggest. Humans may inherently need to simplify issues in their mind. It may be the only way to debate these issues in the public arena; most people won’t engage in a debate if it’s bogged down in granularity and is unendingly complex. It may also be that policy makers demand simplistic answers. Don’t get me wrong, we all want the silver bullet, but we don’t live in a silver bullet world. Simplistic answers lead to simplistic solutions and simplistic solutions don’t work. The world is complex, messy and uncertain; meeting the challenges of the future will need economists to recognise that. Harry Quilter-Pinner is a former University of York student. He is currently an economic and political analyst at Global Counsel, a research consultancy firm run by Lord Peter Mandelson.

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Behavioural Economics & Poverty

Natasha Bakhir

This article will look at the insights that behavioural economics can bring into poverty stricken developing countries. Behavioural economics is a recently emerged discipline that engages with consistent deviations from the models of rational behaviour, such as fairness, redistribution and sympathy, pointing to the incompleteness of the neoclassical homo economicus conception of humans. Dealing with poverty is a critical issue from both the point of view of human compassion and that of economic progress. In his Theory of Interest, Irving Fisher states that ‘a small income, other things being equal, tends to produce a high rate of impatience.’ Indeed, the deprivation induced by poverty

has a direct impact on peoples’ economic expectations and decisions. Rationally, the small income would be spent on the bare essentials to ensure survival and the enjoyment of future utility. The irrational/behavioural side of poverty suggested by Irving is that ‘the effect of poverty is often to relax foresight and self-control and to tempt us to ‘trust to luck’ for the future’. How can we explain these behavioural consequences of poverty? Let’s analyse this by roughly dividing a country’s population into three social groups: the elite (highly educated and with plenty of resources), the middle class (variable degrees of education and resources) and the most unfortunate (illiterate and with

barely enough resources for survival). It has often been observed that the poorest populations fall victims to the phenomenon of behavioural herding, i.e. imitative behaviour. What happens to rationality then? According to Daniel Kahneman, the Nobel Prize-winning psychologist with notable behavioural economics contributions, we could break down thinking into two modes: slow thinking, like actively and rationally considering something and performing mathematical calculations, and automatic or unconscious thinking that is driven by our instincts and natural drives. The key problems for herding (that is ruled by the automatic system) stem from the fact that the automatic mode is less effective in long-term planning than the rational mode. Kahneman has put particular emphasis on the helplessness of the automatic mode when faced with probabilities and statistics. Yet frequently the rational/ slow thinking mode fails to engage with a task due to its inability to detect the influence of the instinctive (quicker) automatic mode. Therefore, it is not surprising that the decisions of the less fortunate, who lack education and economic experience, pressured by the

18


hardship of poverty, are governed by the short-term solutions to their problems offered by the survival-orientated automatic system with little foresight. Look at Keynes’ metaphor of a beauty contest that he uses for explaining the reasoning behind financial speculations: people are asked to choose the photo that they think others will think the most beautiful, not the one they themselves think is the most beautiful. Keynes argued that similar logic works when, say, someone is buying a house as an investment: people will be prepared to pay an exorbitant price not because they independently value the object at that price but because they believe other people think so. Eventually, we end up with instability and a speculative bubble. The elite social group is less vulnerable to herding for a number of reasons: due to the information available to them, their education levels which influence their cognitive abilities and drives them out of the most risk-averse group, and, most influentially, their sincere belief in the superiority of their independent judgement. From a psychological point of view, any member of the elite group rejects the idea of herding due to their inherent sense of self-worth, individuality and difference to the other members of their class. Middle class manifests characteristics of both social extremes.

We cannot neglect psychological, social and emotional factors from our economic decision-making. That is why herding is not always based on calculated mathematical algorithms. People who are unable to base their decisions on independent reasoning and private information choose to follow the crowd because they think that the rest of the crowd is better informed. There has been

evidence from psychological experiments that shows that people with lower cognitive abilities tend to be more risk-averse. Therefore, risk-aversion is also added to the behavioural traits that characterise the phenomenon of herding, alongside copying, clustering, imitating and conforming.

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A Unified Theory of Market Power and Regulation

“He has penetrated deep into the most central issues of oligopolies and asymmetric information” – The Royal Swedish Academy of Sciences.

The announcement of this year’s Sveriges Riksbank Prize in Economic Sciences was something of a rarity, seeing Jean Tirole ascend to the ranks of the now 23 Nobel laureates to have the prize conferred to them alone. Tirole, whose academic career has swayed from engineering and mathematics in his earlier years, to the frontiers of Industrial Organisation theory in the late 1980s, to the establishment of the Toulouse School of Economics (of which he is presently the Chairman) as an independent institution, has through his efforts reformed and reinvigorated the views of economic theorists and policy makers alike, vis-à-vis market regulation. If one looks beyond the oft

confusing ‘walls of equations’

prevalent in modern advanced

economic theory, one arrives at the

most prevalent criticism levelled

against the dismal science:

economics makes too many

assumptions. Before Tirole began

publishing in the 1980s, the

admittedly scarce research being

conducted in the field of market

regulation sought through the

generalisation of economic

principles to arrive at a set of

regulations (at the time broadly

limited to price capping and

antitrust laws) that would apply to

every industry. The culmination of

Jean Tirole’s work lies in the

realisation that market regulation

must be formulated on an ad hoc

basis.

When Binyamin Appelbaum of the

New York Times asked a number of

Tirole’s colleges to summarise his

approach to regulation, the agreed

upon answer was “it’s complicated”.

Indeed, given a precursory glance

over the 2014 press release readers

could easily be forgiven for believing

that much of Jean Tirole’s work goes

against the canonised wisdom of

modern economic theory.

Conventional views on monopolistic

markets, for example, suggest that

the best course of action involves

the imposition of hard price caps or

the capping of prices at some mark-

up of the monopolist’s costs; of

course, the first option leads to

firms(s) pocketing gains from

efficiency, while the second reduces

incentives for increased efficiency

altogether. In this case, Tirole’s

realisation was that there existed a

disparity between the regulator’s

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Shakeel Gavioli-Akilagun

knowledge of the monopolist’s costs

and the monopolist’s own

knowledge. The problem was

essentially one of asymmetric

information.

Tirole’s solution lies in allowing the

monopolist to choose from a menu

of short term production contracts,

in the hope that the firm’s decision

will reveal information about its

production costs. A producer with

high production costs will choose a

contract with relatively high

compensation for his costs, while a

producer that has greater

opportunities to reduce his costs will

choose a contract with relatively low

compensation for its costs. Tirole

goes on to demonstrate, though

advances in contract theory, that

the regulatory policy leading to the

lowest prices is not always the most

preferable. Successive increases in

price caps will over time lead firms

to predicting this ratchet effect and

consequently reducing or altogether

stopping investments

in cost cutting capital;

since increasingly the

benefits will go to

consumers. Contrary to

conventional wisdom

therefore, it is indeed

preferable in the long

run for a regulator to

engage in a policy of

price leniency, and in

so doing maintain the

firm’s incentive for

cost-cutting

investment.

Further seminal

contributions reside in

Tirole’s approach to government

regulation in platform markets

(markets in which two distinct

groups of users provide each other

with benefits). A further cannon of

economic thought is that the sale of

goods below the cost of production

should be prohibited, since in the

short run such prices drastically

reduce competition (in the long run

such a pricing strategy leads to

bankruptcy). In platform markets,

this is not necessarily the case.

Taking, for example, the market for

newspapers, supplying free

newspapers attracts a large

consumer base, which in turn

attracts a advertisers whose fees

cover the cost of production and

distribution. The market, therefore,

is beneficial for all involved. His

work on platform markets is a

precise affirmation of his central

doctrine. As Tirole himself stated in

an interview for the New York Times

“the way you regulate payment

cards has nothing to do with the

way that you regulate intellectual

property or railroads. There are lots

of idiosyncratic factors. That’s what

makes it all so interesting.”

Tirole’s framework has united

developments in game theory and

contract theory, as well as discrete

contributions from colleges such as

Joseph Stieglitz (winner of the 2001

Nobel Prize for Economics), Jean-

Jacques Laffont (who helped

establish the Toulouse School of

economics, and may well have

shared the prize had he not died in

2004) and Drew Fudenberg

(Professor of Economics at Harvard).

This year’s prize, contrasting that of

2013, saw the recognition of

achievements cemented in

theoretical economics. Here’s

hoping that Tirole’s theoretical

unified theory will soon move out of

the realm of theory and into that of

policy.

21


BRICs and the New Development Bank

In July 1944, twenty-two Allied nations came together in the midst of World War II to establish the Bretton Woods system with the intention to rebuild the global economy. The Agreement created the International Monetary Fund and International Bank for Reconstruction and Development (now known as the World Bank) – two organizations which have come to significantly influence the international financial system for the rest of the 20th century. Seventy years later, in the aftermath of the “Great Recession”, the BRICS nations made up of Brazil, Russia, India, China and South Africa created the New Development Bank (NDB), a multilateral development bank to foster greater financial and development cooperation among the five major emerging markets. Headquartered in Shanghai, the NDB will provide development capital to finance infrastructure and sustainable development projects. Together its lending arm which mirrors the function of World Bank, the BRICS agreed to create a Contingent Reserve Arrangement to provide support to member states facing short-term balance of payment

pressures in case of a

currency crisis. The logic for NDB may be obvious at first sight. Emerging economies have immense infrastructure needs. An estimated $3 trillion of annual investment over the next decades is required for developing the necessary infrastructure to foster growth, overcome poverty and promote environmental and climate sustainability in emerging markets, but existing national budgets only cover at most one-third of it (Romani, Stern and Stiglitz, 2002). A new international bank with necessary instruments can provide a strong boost to investments by reducing and sharing risk and generating

mutual confidence between host country and investor. With an authorized initial capital of $100 billion, it could lend up to $34 billion per year. Additional multiplication and risk reduction through mutual leveraging could also come from partnerships with private funding institutions and project sponsors. The Bank can also provide funds for a variety of development projects which do not fall into the scope of World Bank’s lending, such as those in green technologies, biofuels, large dams, and nuclear power plants (Robles, 2012). The NDB will play a significant role in rebalancing the world economy by channeling excess liquidity locked in the BRICS to finance essential infrastructure projects for the developing world. Although the amount remains a far cry from the total value of global saving gluts standing at $75 trillion (Khanna, 2014), inadequate capitalization can be corrected over time. The creation of NDB is a good start in moving in the right direction.

The Contingent Reserve Arrangement – a $100 billion

By Jonathan Neo - Third Year Philosophy, Politics, and Economics Undergraduate


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fund created to stabilize currency markets and reduce BRICS’ dependence on the dollar – is a different story. A framework agreement was signed among the five countries at the 6th BRICS Summit held in July 2014, but progress has thus far been slow. Direct commitments would only come later when the central banks sign further agreements. Many observers cast doubts over the effectiveness of the CRA, pointing to the likely reluctance of member countries to lend no more than token amounts to another member facing a currency crisis in situations of repayment doubts (Eichengreen, 2014). Imposing conditions on borrowers can potentially redress the problem, but conditionality is a sensitive matter. This is especially so when the countries involved are all major emerging powers finding their places in the increasingly multipolar global arena. It is hard to imagine India having to accept policy conditions laid down by China or vice versa.

The operational viability of NDB and CRA has come into sharper focus in light of the considerable differences among the member countries. Despite articulating common development goals, the economic and political relations between the BRICS remain uneven. Although China is the largest trading partner with most of the BRICS, the others trade relatively little with each other (Institute of Development Studies, 2013). Territorial disputes between India and China echo the wider

political conflict which stands between the two countries with regard to their respective roles in Asia, while Brazil, Russia and South Africa focus largely on their regional political standing as well. The limited business and diplomatic relations between the BRICS will be a hindrance to their ability to create a common development agenda to underpin their initiatives. In the absence of political unity, the BRICS countries would be mistaken to think that economic leadership alone would be sufficient to establish a successful bank in the likes of NDB.

The typical narrative that NDB provides the emerging economies with a bargaining chip to walk away from both the World Bank and the IMF is therefore largely unrealistic. The dissatisfaction with the Western-dominated international financial system may have been a strong impetus in the creation of NDB, but the BRICS countries have reiterated that the Bank is not meant to subvert the current global financial system. Brazil’s President Dilma Rousseff has himself avowed that Brazil’s participation is in no means an indication of an intention to withdraw from the IMF. Words have been matched with actions thus far, as the BRICS reaffirmed their commitments to existing international financial institutions. Not only were contributions to the IMF increased, BRICS remain as significant borrowers from the World Bank with loans in 2011 reaching more than S7 billion (Robles, 2012). Moreover, given the proliferation of regional

development banks from the Asian Development Bank to the more modestly capitalized African Development Bank, there is no reason why the NDB should create problems to the existing system. These institutions have co-operated with the World Bank and their existence created no major problems. The same could be expected of the NDB.

It may be more appropriate for us to explore the potential synergy between the NDB and other multilateral and regional financial institutions. With its mandate in financing infrastructure for developing countries, the NDB can help to fill a gap left behind by World Bank’s reduction in engagement with middle-income countries in preference for poorer nations. Continued deepening of engagement in multilateral forums and regional trade forums such as the World Trade Organization (WTO) can also increase visibility of the Bank. Most importantly, the NDB can draw on the experiences of current institutions to develop an appropriate governance framework suited to its objectives. Being transparent and democratic will be essential, and demanding high standards for human rights, social impact and environmental sustainability will reflect its commitment in taking greater responsibility in global economic governance. Only by sticking close to its principles, the NDB will be able to establish itself as an independent institution that earns the credibility it needs in order to succeed.

23

‘The Middle East and North Africa has been shaken by the Arab Spring…the roots of discontent in these countries lie in their poverty’. Or so Daron Acemoglu and James. A Robinson argue in their bestselling book ‘Why nations fail?’. They are not alone in doing so. In ‘The price of inequality’ , Nobel Prize winning economist Joseph Stiglitz comes to the same conclusion, as did Hernando De Soto in the Financial Times in 2011. However, even a brief glance at the data poses a problem for this group of illustrious economists. The decade leading up to the Uprisings in these countries (Egypt, Tunisia, Libya, Morocco, Jordan) saw higher economic growth, increasing per capita incomes and perhaps most surprisingly – given that it is an often cited cause of the Uprisings – lower (or steady) unemployment rates. Of course, growth is not a sure sign of a healthy economy. Unless growth is shared amongst society and translated into real social improvements, economic hardship can still lead to social unrest. Interestingly however, even when we look at more holistic measures of economic and social progress we find that these countries performed reasonably well. The Human Development Index (a measure of education, health and economic performance) has continually increased in both Egypt and Tunisia (1980-2010). Furthermore, inequality has decreased in Tunisia whilst remaining roughly stable in Egypt. This poses an economic puzzle and begs the question; can economics really have been a cause of unrest? The answer is a resounding yes. Leaving aside the myriad of sins hidden by the economic data discussed above,

we can find a major part of the solution to this puzzle in the informal economy. Although originally associated with illegal activity, the majority of informal economic activity is in fact extra-legal. For example, Mohammed Bouazizi, the market stall vendor who committed self-immolation in Tunisia on the 17th December 2010 (an act which precipitated the revolutions) was clearly not undertaking illegal economic activity. He was selling fruit and vegetables; nothing illegal about that. However, his business was outside of the legal system; it went unaccounted in official data, was not taxed and he, in effect, was not part of the labour force.

He is just one of millions of informal workers across the Middle East.

This mass of hidden informal activity distorts the economic picture painted in the official economic data discussed above. It gives us a rose tinted image of the region leading up to the revolutions and begs the question; what are the true economic conditions in these countries? Let’s take the example of Tunisia, the country which gave birth to the revolutions. Firstly, it confirms that the informal economy is large. In Tunisia data suggests that 961000 people –1 in every 8 Tunisians in the labour force (not to mention their families) – rely on the informal sector for an income. Furthermore, when unemployment is considered we find that the formal economy is failing to provide a job for 1 in every 4 Tunisians. What’s more, the income provided by the informal sector is exceedingly small. 1 in 4 ‘extra-legals’ earn less than $US1440 a year which is roughly equivalent to Tunisia’s official per capita income over two decades

The Arab Spring

24


By Harry Quilter-Pinner

ago. Half of informal labourers and dependents earn less than a dollar a day.

Informal workers also face significant insecurity. They are un-contracted, not subject to labour standards and un-unionised. They also fail to benefit from state provided services. 90% of ‘extra-legals’ in Tunisia don’t have access to healthcare whilst educational attainment in the informal sector is also low. Meanwhile informal businesses face high levels of corruption, limited access to finance and very low levels of investment. Some have suggested the informal sector is a strength because of its absorptive capacity and lack of government regulation, but the Tunisian sector certainly doesn’t substantiate this view. Instead we find that the informal sector is significantly large, poor, precarious and disadvantaged in comparison with rest of society to explain much of the economic puzzle of the Arab Uprisings. It helps us understand why countries such as Tunisia and Egypt, which seemed to be performing relatively well in the decade leading up to the

revolutions, experienced such widespread unrest which was often linked to the state of the economy. The messages to be taken from the informal economy are clear: data can be misleading, revolutions are an economic as well as political phenomenon and if Arab states really want to promote democracy, attaining inclusive growth should be a priority.

Harry Quilter-Pinner will be giving a talk on the economics of the Arab Uprisings in the Department of Economics and Related Studies on the 25th of November as part of the Centre for Historical Economics and Related Research talk series.

Harry Quilter-Pinner is a former York student. He is currently an economic and political analyst at Global Counsel, a research consultancy firm run by Lord Peter Mandelson.

25

Uber: The Dark Side of the Sharing Economy

“The Future of Business is Sharing”, so read the title of Lisa Gansky’s spectacularly successful 2010 book, which was among the first to demarcate the sharing economy (a system of collaborative consumption and production based around the sharing of resources). Perhaps the growth of the sharing (or mesh) economy was due to technology catalysing a business model which by definition makes use of a large number of small resources who by virtue of their sizes and locations are in general not subsumed by the market mechanism, or perhaps the the unarrestable growth of urbanisation in the West finally reached its critical mass and in so doing blossomed a new flavour of capitalism. It may even be the case, some hope, that three generations of consumerism have driven a select few to invent a new way of doing business. Regardless of its origins, the last 10 years have seen the sharing economy grow from the quiet musings of academics such as Harvard’s Yochai Benkler, to a sprawling behemoth whose largest member (Ebay) in 2013 benefited from revenue greater than Jamaica’s GDP. If the presumed guiding principles of this transaction form are observed (trust, humanity, and open access to data) then the growth of the sharing economy is indeed something to be celebrated. The evolution of some

firms purporting adhere to this business model, however, hits at at the existence of something more sinister behind the egalitarian facade. If it were necessary to pick a single business whose existence epitomised the level of trust underlying the sharing economy, Uber would be at the very least a strong contender. At its 2013 peak, 1.1million people each week would use the smartphone application to hail a lift from a stranger in an unlicensed, unregulated car. The introduction of UberX in 2012, which allowed any qualified driver to turn his or her car into an ad hoc taxi service further increased the level of trust required on both sides of the transaction for the exchange to be possible. Undoubtedly, Uber’s growth has not been without turbulence. Since its inception the application has seen protests staged by taxi firms in Italy, Spain, Germany, Thailand, the UK, and the US to name but a few; the culmination of these protests leading to the banning of UBer in Frankfurt, earlier this

year. Nonetheless, it was not until recently that Uber could be described as discordant with the ethos of the sharing economy. December 8 (2014) saw the alleged rape of 26 year old woman in New Delhi by an Uber driver. Admittedly, New Delhi itself does not hold the best track record; rape has been a topic of much importance since a woman died in the Indian capital 2012 after being raped on a bus. Nevertheless, the incident has called into question the safety of the service, and rightly so. While Uber

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By Shakeel Gavioli-Akilagun

performs detailed checks on its US drivers, the same can not be said for its operations in New Delhi. Indeed, the man accused of rape had been arrested on similar charges three years earlier. Far worse than negligence on the company’s part is Uber’s willingness to exploit instances of unrest. Following an armed siege in downtown Sydney on December 15 by a self-styled Muslim cleric, Uber increased fares in the surrounding area by a factor of four (to $82 per mile). Though the company has since backtracked on its decision, and has offered free rides and discounts to those affected by the price hikes, the underlying message is particularly damaging. To many users, the principle allure of the sharing economy is not that is it inexpensive or convenient (although it is), but rather that it flies in the face of a capitalist system proven to be both inequitable and harmful. Uber’s decision to cut corners with its security checks in the subcontinent of India was neither illegal nor (from a financial perspective) illogical; in fact, there are few firms who do. Moreover, its price hikes in Australia are perfectly in keeping with the laws of supply and demand. Uber themselves justified the decision with the claim that the increased fare was put in place to encourage more drivers to travel to

the dangerous area. Uber’s lack of foresight lay in that it marketed itself as a bold proponent of the sharing economy. In succuming to its profit seeking instincts, the firm lost a sizable part of its unique selling point; then again, if to Uber all that was lost was it’s USP, perhaps the flavour of the sharing economy was lost long ago. It would be crass and unjust to make a sweeping statements about an economic system on the basis of a single company operating within it. To that effect, and quite aside from the now ubiquitous firms (Ebay etc) who operate within the mesh economy, there exist a number of companies who turn a modest profit while flying the flag of trust and humanity. Zopa (zone of possible agreement) is a firm which since 2005 has sought to bypass the traditional banking system by directly matching individuals who have money to lend with those looking to borrow. Individuals using Zopa are privy to the very epitome of a diversified portfolio. Loans can be made to manyone from newlyweds planning a honeymoon to tech startups, but since small amounts are learnt to each borrower the risk of large scale default remains low. Furthermore, insomuch as loans made through Zopa exist outside of the machinations of the banking sector, borrowers are able to borrow at

relatively low rates. A further example of equitable profit making in the can be found in the US based car sharing network Getaround. Much like Zopa, Getaround produces a direct pairing between a consumer and a supplier. In this case, users of the service can borrow (or rent their own) cars via the internet; owners set their rental prices, and earn a 60% commission from their revenue. Returning to the idea of trust, what could could serve as a better illustration of one’s trust in humanity than allowing a stranger to borrow your car. A whole host of other services (Airbnb- room letting, BlaBlaCar- car sharing, Udemy- online tuition) serve to fortify the idea that the sharing economy can be both equitable and profitable. By way of conclusion, it might be useful to look to the future. Clearly, services such as Zopa, Getaround, and Airbnb have not entirely displaced banks, public transport, and the hospitality industry. Nonetheless, the the sharing economy’s market share is growing, and if all trends are to be believed it will continue to do so. At present, the services offered are taken up in part by those enticed by the convenience, and in part by those who hold a belief that business can avoid waste and base itself on trust. As the sharing economy grows, it is important to remember this.

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The End of History, Democracy and Development By Dr Judith Spicksley

They called it 'The End of History'. The ideas of democracy and freedom were universal to the point of unstoppable and advanced to the point of irreplaceable. It marked the end of historical progress in, somewhat ironically, the Hegelian and Marxist sense. Technology would continue to develop but ideological struggles would cease to exist anywhere except in history books.

Since the 1980s, with events such as the fall of the Berlin Wall and the eventual downfall of the once mighty Soviet Union in 1991, many in the West started to believe that it marked the end of ideological conflicts. We had won, they said. The once autocratic regimes in Europe, Asia and the rest of the world would start to move towards

democracy and enjoy the healthy economic development that was assumed to come with it. Happily ever after.

Some 30 years later, however, the picture is far less clear. Democratic countries, old and new, are facing unexpected challenges both from within itself and less democratic nations elsewhere. This article will attempt to discuss one part of the notion of 'The End of History', namely the relationship between democracy and economic development. After all, development is preferred by everyone and if it can be proved that democracy is the best form of government for development, then we may truly be at 'The End of History'.

Democracy and Development

A vast quantity of empirical evidence has shown that more democratic nations tend to be more economically developed. This is hardly controversial. The debate rises from the age-old problem in economics - does correlation mean causation?

Traditionally, democracy is seen as a key part of economic growth. First, democracy is often associated with a degree of stability. Polling stations cause much less havoc than civil war, providing a solid foundation for investments. Second, democratic elections would also put pressure onto politicians and urge them to adopt policies that the voters like - and economic growth is a major part of it. Without a system for the people to express their opinions, politicians would rule unchecked. The people, though contained in the short run, will eventually erupt and overthrow the dictators as seen during the Arab Spring. Democratic governments are also often associated with institutions such as the rule of law and political freedom, regarded as prerequisites for healthy economic growth.

Empirically, there is plenty of evidence to support this argument. A recent example would be a study done by Daron Acemoglu and his colleagues at MIT (Democracy Does Cause Growth, 2014, NBER Working Paper No. 20004) showing that 'a country that switches from nondemocracy to democracy achieves about 20 percent higher GDP per capita in the long run (or roughly in the next 30 years)'. They suggest that this was the result of democratic regimes favouring reforms and reducing the probability of civil unrest.

However, with the rise of some traditionally undemocratic developing countries and problems facing traditionally democratic western countries, the 'democracy brings development' argument started to encounter challenges. The most obvious one comes from the inability to explain, under the old framework, certain phenomenon. Outside of China, the best example is possibly Singapore.

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By Lian Zhu

It has a democratic system that is laughable at best, but is consistently regarded as one of the least corrupt and most open economies. Though troubled by periodical crises like everyone else, it has managed to maintain high standards of living and a moderate growth rate.

There is also some theoretical base for unlinking democracy and development. In many parts of the undeveloped or developing world, democracy is seen as a very weak form of governance. Rather than promoting peaceful transition of power as the theory suggests, it is rarely actually seen in recently democratised countries. More often than not, democratic governments face opposition from both within the democratic framework (i.e. other parties) and warlords who prefer to speak with AK-47s rather than with the Speaker of the House. It makes the government weak and inefficient without the stability bonus of established democracies.

Which first?

Adding to the mess, the democracy practiced in developed and developing countries are often completely different. Many of the recent 'democracies' in the Middle East and Africa are by name only. There may be an election day with a few polling stations scattered around, but many people are too scared or ignorant to vote, rendering the whole process somewhat superficial. It would take

decades of education, peacekeeping and generally a lot of hard work to construct the foundation for a working democracy.

This leads to a chicken-egg dilemma. Does democracy lead to development or vice versa? Even the defenders of the former would have to admit that better developed economies are better at practicing democracy. The

people are more educated and informed and thus less likely to be swayed by extremists. A population that is better off is also more reluctant to resort to violence so easily since there is more at stake.

An interesting comparison would be Russia and China. Both countries were run by communist policies at first. When the Soviet Union collapsed, the intellectuals at the time promoted a complete makeover of the whole system, both political and economic. A democratic and free market system, at least in name, was rapidly established. China, on the other hand, crushed the political reforms but gradually carried on with the economic ones. The results today are clear. Politically, neither country can call itself democratic anywhere outside of official reports, but economically China is doing far better given its starting conditions. The Russian GDP per capita went from more than 10 times as much as China to just a little over twice as much. The structure of the economy is also much better in China where almost everything is and can be produced. Russia, on the other hand, relies heavily on exporting resources and is vulnerable to global price changes as was evident in 2009. In fact, there is a joke amongst some Chinese circles attributing the success of China to the failures of Russia, first with communism then with capitalism. It is by learning from the mistakes of her neighbour in the north that China has

managed to walk the fine line between conflicting ideologies.

Joking aside, the reality of China's economic growth poses a real problem to those advocating a close causal relationship between democracy and development. When developing countries face political decisions today, they would start to have doubts on where exactly they are going. How do we know that we will not end up like Russia?

The End of History?

In his most recent book Political Order and Political Decay, Francis Fukuyama, the man who brought the term 'The End of History' to the attention of the wider public in 1989, toned down his emphasis on democracy being the end of all political systems. For him, a strong government, rule of law and accountability are now the three building blocks for a successful state.

Having presented some criticisms of democracy, it also has to be said there also does not exist an established alternative. China's political system is officially named 'socialism with Chinese characteristics', hardly something that can or will be exported to the rest of the developing world. Even the party itself admits that it needs to carry out political reforms, though details are only discussed in closed rooms. Most democracies in the Middle East and Africa are painful to look at, but there also exists some Eastern European countries who survived the democratisation wave and are doing relatively well. So where next?

Perhaps it is time to move away from the idea that there is an end to history. If anything, countries like China have not proven that democracy does not work, rather it has shown that it is not the only system that works. Instead of following a single model, be it Western, Chinese or something else, perhaps it is more pragmatic and effective to devise a system that matches and suits the history, culture and experiences of individual countries. History has not ended, it has only just started.

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Date post:	07-Apr-2016
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Equilibrium - issue 8

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