The Drayton Tribune
The Drayton Tribune
Dear Reader,A very warm welcome to the second issue of the Drayton Tribune,
marking the beginning of the final part of term one this academic
year.
The first half term was a busy one, and The Economist’s Society
was proud to host a variety of events, including the Big White Pub
Crawl, the Bank of England Cocktail evening and the weekend trip
to Brighton. In addition to this, the society organised its first ever
reading week trip abroad to Brussels, involving visits to the three
main EU institutions: The European Council, The European
Commission and The European Parliament.
The Drayton Tribune saw a successful start of the year, with Sam
Fleming from the FT joining us for our launch event. Mr Fleming
held an interesting talk about his experience covering central banks
for the British press industry, followed by a Q&A session at the
end. The Tribune also saw one of its largest recruitments of its life-
time, with ten new members being added to the Editorial team.
In this issue you can find articles ranging from an analysis of the
mid-term elections in the US to a discussion about income
inequality in India. The Academic Careers section offers exclusive
interviews with two members of staff at the Economics department,
discussing their career choices and education. In addition to this, we
have introduced an ‘Insights into Research’ section where you can
read a detailed overview of the research from this years Nobel Prize
winner in Economics: Jean Tirole.
If you are interested in writing for the Drayton Tribune, then please
do not hesitate to contact me or any other member of the Editorial
team. Although we do not have any positions open for applications
at the moment, we would like to encourage anyone that wants to
write an article for either the website or magazine to get in contact
with us.
Since our next issue will not be released until January next year, I
would like to take this opportunity to wish you all a very happy
Christmas.
All the best,
Nils LarssonEditor-in-Chief 14/15
On Tuesday 4th November, in the
aftermath of countless hours of media
coverage and billions of dollars spent on
advertising and campaigning, American
voters headed to the polling stations to
decide the direction of the country for the
next two years. Although the presidency
was not up for grabs, all seats in the House
of Representatives and 36 Senate seats
were voted on. The results determine the
makeup of the legislative branch of
American government.
The key result of this election cycle is that
the Republicans now hold a majority in the
Senate. Democrats had a large majority
when Obama was first elected in 2008, and
in each mid-term since then they have
ceded ground. This election, though, is the
key point at which the Democrats lose
control of the Senate majority. Republicans
maintained and increased their majority in
the House, which forms the other chamber
of Congress. What this means is that
Obama now faces more serious obstacles
to his agenda in his final two years; or
from another angle it gives the
Republicans a better platform for their
agenda in the run up to the massive 2016
elections. Having said that, we should bear
in mind that mid-term elections are less
about deciding the direction of the country
than about measuring the attitudes of the
electorate. Turnout is relatively low in
mid-terms, and this cycle was no exception.
The last Democrat President, Bill Clinton,
faced similar challenges when the
Republican Party decisively won the mid-
term in 1994, just two years into his
presidency.
However, Clinton did not face comparable
levels of animosity from his opposition. It
seems that the two party system at the
moment is plagued by extreme dogmatism,
and that lawmakers on each side view each
other as enemies rather than prospective
allies in the nation’s policymaking agenda.
Even politicians in the same party are
distancing themselves from each other, as
shown by many Democrat candidates who
are unwilling to let Obama campaign for
them. Allison Lundergran Grimes,
Democrat Senate candidate in Kentucky,
even refused to state whether or not she
had voted for Obama in previous elections.
The position of many politicians is to not
compromise on anything; a sure-fire
strategy for political stagnation in a
country as diverse as America. Although
Clinton’s attempt at healthcare reform did
not pass, he was able to balance the budget
and make considerable welfare
improvements, as well as introducing some
progressive social policies. At this stage it
appears that Obama may leave the opposite
legacy, as he did manage to pass the
Affordable Care Act in his first term but
has thus far been unable to make any
progress on other issues he values. On gun
control, tax reform, minimum wage,
environmental regulations and immigration
the gulf between the President and
Republicans seems too far to bridge. So
although Clinton left office with high
approval and after successfully working
with Republicans, it may be that Obama
finishes his second term with record low
approvals and after six years of political
partisanship from both sides.
Why is it that Obama’s popularity is so
low? Ask Democrats and they may say that
Republicans have successfully portrayed
him as anti-business and soft on foreign
policy. Republicans will tell you that
Obama has failed to help the middle class
and that Obamacare represents a crushing
new cost on businesses. Of course there are
many reasons for Obama’s low approval
rating, and many of the Republicans’
criticisms ring true, but it must be
remembered that when compared with
Congress Obama is relatively popular.
Although his disapproval rate is 54 per
cent, RealClear Politics has the rate for
Congress at 78.8 per cent. This is an
astonishing rate, and it illustrates the
discontent among many Americans
towards the legislators who are often
viewed as out of touch.
This brings me on to my next point; that
perhaps this is not the best election to win.
Of course individual candidates will
eagerly pursue electoral victory, but from a
strategic standpoint it may be that this next
Congress is not an opportune time to be in
charge. The current Congress is the most
unpopular in recent times, and it is possible
that the 2014-2016 vintage will be even
more so. Given the tendency of
incumbents to struggle at times like these,
it may be to a Party’s benefit if they come
in with a strong opposition platform in
2016 and aim for both the Executive and
the Legislature. In times of economic
turmoil, voters seem to want a change
rather than continuity, as shown by
Britain’s shift to the Conservative right in
2010 but America’s shift to the Democrat
left in 2008.
Politics
Republicans Take the Senate
2
Politics
3
Finally, we ought to consider why the
current state of partisanship exists. There
are, I believe, three reasons. First of all is
the power of lobbyists. Supreme Court
rulings in 2010 and 2014 removed limits
on campaign donations by individuals and
corporations, opening the floodgates for
wealthy individuals to exert a
disproportionate influence on policy.
When so few people have such influence
to achieve policies that benefit themselves,
it is no wonder that the many disregarded
people should be angry at Congress.
Secondly the laws governing constituency
boundaries deter centrist policymaking.
Boundaries are, by and large, drawn by
incumbents, who of course attempt to
make their own re-election as simple as
possible. This favours boundaries that are
dominated by one party meaning that many
seats are now solidly Republican or
Democrat. For candidates, the implications
of this are that their main threat to re-
election comes not from the other Party but
from primary challengers. For example,
incumbent Democrats in safe Democrat
strongholds are not threatened by
Republicans but by other Democrat
primary challengers, attacking their left
flank. The natural result of this is that
many politicians abandon centrist common
sense and adopt left or right wing policies
to ensure their primary success, resulting
in fewer middle ground politicians and
policies.
Thirdly, the sluggish progress in Congress
of recent years is partly there by design.
The stringent separation of powers, while
acting as safeguard against totalitarianism,
can also resemble a firewall against reform.
This stands in stark contrast to the British
system, where (normally) one party
assemble a majority government and can
push its agenda for five years. Without the
separation of the legislative and executive
branches, and with no written constitution,
British leaders can do a great deal while in
power. Each system has its merits, but
there are inherent obstacles to strategic
reform in the American system.
To conclude, the Republicans are now in
their strongest position during the Obama
administration. With both chambers under
Republican control for the next two years
the Obama agenda is all but buried. The
chance of the sort of bipartisan efforts seen
in the 90s seem unlikely. Although the
Republicans now have a better platform for
these two years, it may be that the
unpopularity of incumbents works as an
advantage to Democrats running for
Congress in 2016. Republicans now have
an opportunity to show voters what they
can do, and to outline the vision of a
Republican future ahead of the key 2016
vote. The results of this election herald a
fascinating two years to come, and with no
clear Republican frontrunner for 2016,
there is plenty of time for unexpected
events before the next presidential election.
For Obama, this election brings with it the
promise of increased difficulty in facing
issues he values, such as immigration, gun
control, and tax reform.
Karl Nielsen
Politics
4
A Danish promiseIt is the 10th of December 2013, and the
Danish Prime Minister Helle Thorning-
Schmidt is at the memorial service of
the former South African President
Nelson Mandela. To her right sits the
British Prime Minister David Cameron,
and to her left the President of the
United States, Barack Obama.
Supposedly, in the 21st century, most of
us think like Ms Thorning-Schmidt did
in this moment. It called for the ultimate
selfie. Is it even possible for one to
imagine the sumptuous amount of “likes”
this would get?!
With hindsight, however, a funeral-
selfie might not have been the best idea.
The picture immediately went viral and
was met with outrageousness all over
the world. It might have been “a
moment of harmless fun”, as she later
explained it, but it also caused trouble at
a time where nothing else was really
working out for her. The Economist
called it “the defining snapshot of
Danish Politics”. It is probably safe to
say Ms Thorning-Schmidt had not
thought this one through.
The description is arguably quite
accurate. Helle Thorning-Schmidt,
leader of the centre-left Social
Democrats, was elected as Denmark’s
first female Prime Minister in 2011,
ending ten years of right-winged
government. This was a time where the
world was still in the mist of a financial
crisis, seeing a global tendency of right-
winged governments handing over their
power to left-winged opponents. The
French Francois Hollande and his
Socialist Party is another obvious
example. But it appears that public
decisions of this kind might have
stemmed from unrealistic promises and
desperate cries for changes at points in
time where the tough decisions actually
could not be avoided, no matter who
was in charge. On the Danish political
scene, this became clear very quickly
and evolved into an intense trust crisis
that Ms Thorning-Schmidt so far has not
managed to get out of. After 100 days in
office, the opposition published a list of
100 promises broken by the new
government. This included longer
legitimacy of sickness benefits, cheaper
public transport, grants to senior
employees in the public sector, and
female quotas on boards of directors.
The publication might have pushed it to
extremes, but the message was clear:
The government simply could not live
up to what they had said before the
election, leading to serious credibility
issues. Thorning-Schmidt’s explanation
was that no single party had a majority,
and compromises had to be made - a
questionable argument as no party has
held absolute majority in the Danish
parliament since the beginning of the
20th century. Thus, this can hardly have
come as a surprise for the Prime
Minister when she made it into office.
The many broken promises were
beneficial for the right-oriented
opposition in more than one way. In the
multi-party system of Danish politics,
the Social Democrats had to form a
government with both the left-winged
Socialist People’s Party and the centrist
Social-Liberal Party. With the latter
sharing several views with the right
wing, particularly in regards to the
economy, Thorning-Schmidt’s
government seemed to replace many of
their own promises with ideas and
visions highly associated with the
opposition. In other words, even though
they were not in office, the right-winged
parties were getting quite a bit of their
policies passed. The red block has
“turned blue”, and the general
dissatisfaction with this turn of events
has been showing on the polls ever since.
If we are to believe these polls, the right
wing will once again be in power after
the upcoming election in 2015.
An interesting perspective to add at this
point is that all Danish politics – red or
blue – would seem very left-oriented to
most of the outside world. Denmark’s
welfare system is extremely developed;
free health care, free education,
excellent unemployment benefits, just to
name a few. All the public benefits are
so incorporated into the Danish mind-set
that no government will be able to
noticeably reduce them, which results in
substantial taxation levels regardless of
who is in charge. As an example, this
means that a university student working
as a waitress for the summer will have
to pay 39 % of all her wages to the
Danish state, and there is nowhere she
can put her vote in the hope of reducing
it.
Regardless of tax policies, the
fundamental lack of trust and credibility
does not leave Ms Thorning-Schmidt
with many upsides going into the next
election. During the recent allocation of
top positions in the European Union
quite a bit of speculations were circling
around, predicting her exit from Danish
politics to pursue a career in Brussels: A
possible way for her to avoid facing the
potential political defeat ahead. Both
national and international media,
including the Financial Times and BBC,
mentioned her as a candidate for
President of the European Council.
However, Polish Prime Minister Donald
Tusk was ultimately decided to be the
best choice.
Helle Thorning-Schmidt, Denmark’s
very own selfie-queen, is still in charge
of the Danish government, and she will
have to take up the ruthless fight for
office with the opposition in a year’s
time. If her vulnerable chances of being
re-elected should become stronger, she
would have to deliver some very
concrete political results in the time she
has left. However, it could be too late at
this point, and she is thus facing a
seemingly impossible task of convincing
the Danish population that this time, she
will govern on the same foundation as
she was elected upon. That this time she
will keep her promises.
Maria Uttenthal
Politics
6
The last few months have been a
rollercoaster for British politics. With
Douglas Carswell, the UK Independence
Party gained their first seat in the House of
Commons with a tremendous 60 per cent
of the popular vote in Clacton. The
Conservative’s latest defection, Mark
Reckless in Rochester and Strood, stands a
good chance to take UKIP’s second seat
with a predicted 43 per cent of the vote.
This modern UKIP is a much different
party from the one in 2010 that managed to
scrape only 3 per cent. Against tremendous
odds, Nigel Farage has shaken up the
political system and David Cameron and
Ed Milliband are running scared. But does
UKIP have staying power?
UKIP has derogatorily been called a ‘one-
issue’ party, which they have vehemently
denied, but they have arguably not
expanded past their stance regarding
European independence. They have been
notoriously evasive when answering
questions on their other policies, much to
their benefit. They have painted
themselves as representatives of the blue-
collar worker and outsiders to the political
arena, despite all of their election wins.
This means they can hoover up disaffected
voters looking for an alternative to the
main two parties. But their position as a
protest vote means that any hint of
becoming a ‘traditional’ party may send
voters fleeing. The same happened to the
Liberal Democrats – their popularity
crashed when they came into government
and had to live up to their promises.
However, despite UKIP’s inherent
instability; their tough stance on EU
membership has been making waves in
Westminster.
Prime Minister David Cameron could
never have expected that a party he once
described as “fruitcakes, loonies and closet
racists” would become so influential.
UKIP’s tremendous rise has put him in an
uncomfortable position. He will not risk a
head-on attack since it would only
entrench the idea that UKIP is being
supressed by the political machine.
Cameron has instead resorted to imitation
– by adopting a ‘tough on Europe’ stance
he hopes to steal the spotlight. Indeed,
when the EU requested that the UK should
contribute an extra £1.7 billion to their
coffers it seemed that Cameron was
determined to out-anger Farage.
Cameron’s failure to effectively deal with
the UKIP threat has even spurred rumours
of a vote of no confidence. These drastic
responses suggest that there is a deep
concern within the Conservative ranks that
UKIP is going to gain momentum.
UKIP has built up a core group of
supporters that appreciate its tough stance
on Europe. David Cameron has attempted
to gain back voters by promising an in/out
referendum in 2017, but evidently has not
done enough. International relations has
always been a hot issue, particularly
immigration, but opinions across the UK
are varied. Polls show that immigration is
largely an issue for people who live in low-
migration areas and for the elderly.
Luckily for UKIP, Clacton ticked both of
these boxes, but Rochester and Strood does
not. Therefore the upcoming by-election
will be indicative of their chances in the
rest of the nation. Winning would show
that they have gained mainstream attention
and will set the ball rolling for the general
election in 2015. Losing may be a setback
that UKIP cannot recover from.
Britain is no stranger to parties that burn
bright for a short time but vanish when
political winds shift against them. The
SDP – Liberal Alliance once enjoyed
tremendous popularity in the early 1980’s
with polls showing them at 50 per cent of
the popular vote when Margaret Thatcher’s
government was proving unpopular due to
high unemployment. However, the way the
Conservatives handled the Falkland Island
crisis in 1982 and an uptick in employment
pushed public opinion back in their
direction and gave them the momentum to
win a comfortable lead in 1983. Following
disappointing results in 1987 the Alliance
dissolved and the remaining members
combined to create the modern-day Liberal
Democrats. There are differences between
the Alliance and UKIP but there are also
worrying similarities. David Cameron has
been desperately searching for a “big win”,
and if he lands one before the 2015
election it could spell disaster for Nigel
Farage.
Martin Wickens
Does UKIP have staying power?
5
Politics
‘…Dangers of a serious outbreak are
extraordinarily low’
Obama calls for extra quarantine measures
and extensive airport screenings, yet
attempts to assure the West not to panic.
Arguably, actions speak louder than words.
The responses so far have driven a surge
of anxiety and unease onto the public and
the media may not be making matters any
better. It has resulted in Michael Luke-
Anthony, a cabin cleaner at John F.
Kennedy International Airport, to tape his
trousers and shirtsleeves, as a way to
prevent skin exposure. And on a wider
perspective, despite the President’s
reassuring words, two-thirds of Americans
are worried about an Ebola outbreak in the
US, according to the new Washington
Post-ABC News Poll.
The fundamental reason for this Ebola
scare is that households are unclear about
what the virus is and the actual chances of
catching the infection itself. Over the past
few months, the US Center for Disease
Control and Prevention (CDC) has stated
that the disease is not contagious and that
individuals must be in direct contact when
symptoms start to show from the infected
to get the illness. By direct contact,
humans must be exposed to bodily fluids
from an infected person or contaminated
objects. The symptoms include high fever,
weakness, aches, diarrhea, vomiting and
stomach pains. Others include difficulty
breathing or swallowing and bleeding,
which can also be internal. The alarming
fact is that these symptoms can appear in
8-10 days after the virus exposure, which
means it is much easier for travelers to
board a plane without showing any signs
of the infection; this would mean that once
the individual begins to experience the
symptoms, they would have already
moved to another location and are likely
to spread the infection across borders,
rather than it being contained in a single
region. This was indeed the case with the
health worker, Thomas Eric Duncan, who
died in Dallas. He was checked before he
left Liberia but developed symptoms a
few weeks later, leaving mass panic in the
US. To add to this, the CDC recently
announced that Ebola virus could now be
airborne, contradicting its previous
statement. There is an increasing fear that
the virus can spread through droplets
suspended in air and absorbed in the
airway, which would explain the
exponential increase of Ebola cases.
We could also ask the question: ‘Why
now?’ The 2014 outbreak is more extreme
than all the previous incidents combined.
The first contractions of the virus
appeared in 1976 in Democratic Republic
of the Congo and South Sudan. Peter Piot,
a professor of Global Health of the
London School of Hygiene & Tropical
Medicine who travelled to Africa when it
was first discovered, said ‘It is frustrating
that we will know too little to treat it
effectively’ and also added that Ebola is
easy to contain. ‘It is an infection that
causes epidemics only if basic hospital
hygiene is not respected…a disease of
poverty and neglect of health systems’.
With this in mind, could the institutions,
CDC or WHO, be at fault? Critics say that
the WHO might have been scarred by its
attempts to stop the 2009 swine flu
pandemic. They developed a ‘pandemic
preparedness’ plan, implemented when
swine flu broke out.
Yet, the flu was mild and WHO were
criticized for over-exaggerating the
situation. With Ebola, it seems to have
gone the other way round. The virus was
not expected to reach West Africa and
although the outbreak was first found in
Guinea late last year, it went unnoticed for
a few months. The WHO played down the
expectation of a mass outbreak; they
believed it was limited to a small
geographic area, thus fuelling further
unruliness in the media.
Another source of this restlessness may be
due to the fact no one really knows how
many people have been infected or died
from the virus. The WHO released its
latest update stating that there are just over
13,700 confirmed, probable and suspected
cases of Ebola and the current death toll is
4,920. However, it could be argued that an
even larger amount would be a better
estimate and that these numbers will grow
rapidly. These actual figures are difficult
to collect due to the lack of infrastructure
and health systems within certain
countries such as, Sierra Leone, Guinea
and Liberia, where the outbreak is at its
worst. It may be plausible that people are
becoming infected by the virus, without
being noticed and hence, therein lays the
issue of understating the absolute
magnitude of the epidemic. The New
England Journal of Medicine indicates
that further analysis on fatality rates
remains top priority; case fatality is
consistent in Sierra Leone, Guinea and
Liberia, estimating at around 70 per cent
but these rates were derived from recorded
clinical outcomes of 1731 patients. And in
particular, case patients in Liberia may
already have died before being diagnosed.
Consequently, the fatality rate may be
disproportionately low.
Regardless of the confused statisticians,
the US’ response has been on high alert
across the world. Obama is set to monitor
the spread of Ebola ‘in a much more
aggressive way’ but urges Americans to
trust the government’s ability to tackle the
virus. Firstly, Obama has already
strengthened screenings across US
airports, but the previous incident of
Thomas Eric Duncan has proven that this
may not be the best method of preventing
the spread. The screenings are unable to
check if an individual has been infected,
since symptoms do not show until after 8-
10 days.
As panic spreads, Obama is now listening
to expert advice and evaluating the policy
of travel bans. However, the director of
CDC, Thomas Frieden, has argued against
such travel restrictions as this may
encourage travelers from Africa to hide
information, making it difficult for them
to be health checked. Other critics have
said that a reduction in travel would
damage the West African economies and
even frighten volunteers from traveling to
these countries to help Ebola patients, if
they know they will not be able to return
to the US after. If the US follows through
with travel bans, this could create a
domino effect on other countries to
implement further travel restrictions;
international fear would escalate to
unprecedented levels, causing additional
difficulty in stopping Ebola.
FEAR-BOLA
6
Politics
Another way used by Obama in the attempt
to calm the situation has involved the
creation of a $1bn Ebola trust fund in
cooperation with the UN; this would be
used for ‘back-up money’ to contain Ebola.
But again, this response has been put under
attack. Christopher Stokes of Medecins
Sans Frontieres (MSF) insisted that this
money would ‘not have any significant
impact’ and Action Aid has advised that the
outbreak should be combated at the source.
Supply for doctors, nurses and medical
supplies would be much more helpful than
money itself; West African government
systems are increasingly fragile and the
money could be used inefficiently. Further
pessimism has also revolved around the
potential of a vaccine. GlaxoSmithKline
said it would ‘come too late’, even though
they are attempting to fast track a vaccine
through its testing trials. But this does not
mean that the vaccine is not going to come
at all; experimental vaccines are still
promising and should be available by the
end of the year, once the trials have been
completed.
In addition, other methods could be used to
tackle the virus at its source. Obama has
planned to send 3,000 US troops to develop
healthcare facilities and educate health
workers within the most vulnerable areas.
These will take time to set up but in the
mean time, raising awareness of basic care
using rehydration and painkillers could
slow the spread. Already, medical kits are
being deployed throughout regions and
campaigning has been pushed. So, will the
Ebola outbreak be contained?
The forecast is looking bleak. The CDC
predicts that 1.4 million people will be
infected by January. It is also most
unfortunate that the two worst affected
areas, Sierra Leone and Liberia, are still
recovering from civil wars in the 90s that
have damaged their infrastructure and, thus,
hinders their efforts to resolve the situation.
But if we were to think optimistically, there
are some hopes of containing the virus
within some areas. For instance, in Nigeria:
a case has not been brought up since 8th
September, passing the 42-day period
needed to officially confirm that the virus
has been stopped. This could prove that
Ebola is not a major global problem, as it
seems. Nigeria is known for its corruption
and extreme poverty and yet, its system
works effectively to combat the virus. And
so, surely Obama, who has democratic rule
over a prosperous US, should be able to
control the virus and ease the anxiety
amongst the Americans? Obama could use
some advice from Nigeria and implement
one of their key policies: to involve
communities and encourage individuals to
be open about where they’ve been and
whom they’ve been in contact with.
Furthermore, the Nigerian government
asked leading figures such as politicians
and celebrities, to spread accurate
information to reduce the hysteria, clouding
Ebola. Considering Nigeria’s case, we can
see that there is some hope for controlling
the outbreak in the upcoming months and
lessons are to be learnt here, which the US
desperately needs to follow.
Vanessa Ma
7
EconomicsBusiness in China
Doing business in China is an attractive
opportunity too big to ignore, however, is
it still worth taking the risk?
It is a well-known fact that China is the
world’s second largest economy by
nominal GDP. Furthermore, according to
IMF predictions, it is expected to overtake
the US economy by the end of this year in
terms of the purchasing power parity (PPP).
Research undertaken by McKinsey, an
American consultancy firm, suggests that
China’s GDP will continue to grow at an
annual rate of 7.9 per cent over the next six
years, compared with 2.8 per cent in the
United States. This level of growth means
that, by 2020, Chinese GDP will account
for 19 per cent of the world economic
output, compared with 9 per cent in 2010.
However, the nature of economic growth
in China and the US seems to be slightly
different. The US economy is famous for
the technological sector; one can see this
simply by looking at Apple and Google
that are among the most innovative
companies in the world. This can be due to
the fact that US companies have more
flexibility and freedom, to some extent, in
their decisions; therefore, it is quicker for
them to develop new innovative products.
In the case of China, manufacturing and
export sectors have been key drivers of
growth over the past years. The country’s
low-cost labour may be one of the reasons
for this.
However, we will later see that China’s
cost competitiveness has been changing
over time. Coming back to where we have
started, given such an impressive size of
the Chinese economy, can global brands
and leading multinationals afford not to be
in China? Indeed, the opportunity seems
too big to ignore, at least at first sight.
However, is it worth taking the risk? No
one can deny that such a decision involves
a high degree of risk. Perhaps there is a
way to balance the risk and reward. The
answer is hidden behind the ever-changing
external environment of the Chinese
market.
Let us consider the economic side of the
argument. The Chinese government’s
attempts to rebalance the economy away
from export-led growth towards
consumption may imply a lower future
economic growth, as the recent five-year
low figure of 7.3 per cent in the third
quarter of 2014 proves. The data adds to
expectations that China will miss its annual
growth target of 7.5 per cent for the first
time since the Asian crisis in 1998. Indeed,
provided that trade accounts for over 70
per cent of China’s GDP, it may be
difficult to imagine how China can be
successful in retaining its high rates of
growth and in rebalancing the economic
growth at the same time. However, what if
this anticipated slowdown may actually be
good news for businesses wanting to
succeed in China? There are at least two
reasons to suggest this can be true. Firstly,
the approach taken by the Chinese
government to prevent a potential
slowdown has included spending more on
healthcare and pensions to encourage
households to save less. More consumption,
as a result, sounds positive for businesses
looking to get a higher return from their
investment through higher sales. Secondly,
rebalancing the nature of growth may help
China achieve a sustainable economic
expansion in the long run – something that
any business should welcome to secure the
future of its investments. A lower growing
China is therefore not necessarily less
favourable for businesses operating in the
country. Similarly, the New Development
Bank for BRICS countries (an alternative
to the IMF and World Bank) may help
with the provision of funds for the
government that can be used to invest in
the productive potential of the Chinese
economy, its supply side, which once again
is a way to sustain the economic growth in
the longer run.
However, any economic phenomenon has
several sides of the argument, and
rebalancing growth is no exception.
Consider, for instance, the new consumer
law that came into force on March 15th
2014 in China. As part of this, consumers
have the right to return products within
seven days, and in case of online purchases,
no reason is needed for the refund. Should
this be considered as a potential threat for
firms that may tie them up in red tape and
bureaucracy or should it be treated as a
potential opportunity of higher consumer
protection and, as such, more spending and
sales? What is more certain is the
consumer spending patterns according to
McKinsey. It is predicted that with rapid
urbanisation and growing middle classes,
who have incomes beyond basic needs and
aspire western brands, consumption by
urban households will reach 27 trillion
yuan by 2022. Provided that, at the
moment, China accounts for over 20 per
cent of the global demand for luxury
products, this figure is likely to double by
2022, if this pattern of growing middle
classes continues. Another question to ask
is whether there is any example of a
company that has been equally successful
in China in the past 20-30 years and now.
The answer is yes. KFC has seen its sales
rising rapidly in China for several years.
Yet, the company’s plans to open 700
more outlets in China may imply that it
sees the Chinese external environment
equally attractive now, as well as when it
entered the market in 1987.
8
Moving forward, however, the real risk to
businesses wanting to expand in China is
likely to be the loss of demographic
dividends – low-cost, young labour.
Indeed, some would argue that the
Chinese economy has already reached the
Lewis turning point, or according to IMF
predictions it will inevitably reach it by
2020-25. What does this mean? This is a
part of the Lewis dual sector model of
development which assumes that countries
have dual economies with the traditional
agricultural and the modern capitalist
sectors. At an early stage of its
development the agricultural sector, in
other words the subsistence sector is large
with scarce land and surplus labour. At a
later stage of development, the so-called
capitalist stage, demand for labour
becomes higher than the demand for land,
pushing labour resources into scarcity.
When applied to China together with an
ageing population and the one - child
policy, this is likely to put even higher
pressure on wages, as the demand for
labour has been growing faster than the
supply over the recent years in China. This
is the point when wages start rising – the
Lewis point. Consequently, this yields a
loss of competitive advantage (low-cost
labour) for businesses with production
based in China and a loss of the Chinese
comparative advantage in manufacturing.
The Boston Consulting group’s (BCG)
Global Manufacturing Cost-Competitive
Index may well prove this point. It
suggests that global businesses are making
decisions on out-of-date assumptions that
labour costs are the lowest in China,
whilst the reality is that China’s
manufacturing-cost advantage over the US
has shrunk to less than 5 per cent in recent
years, according to the BCG’s Index. Here,
political and economic external
environments (market conditions and
events outside a firm’s control, which
determine opportunities and threats for a
business) are interlinked. Consider, for
instance, the Five-Year plan of the
Chinese government that states that firms
must increase wages by at least 13 per
cent every year, adding more pressure on
the labour cost competitive advantage in
China. Does this mean that external
environments in China become less
favourable? Not necessarily.
The important point not to be overlooked
is the nature of the business. Economists
like assumptions, however, here we
should not assume that a given firm has a
labour intensive production and is
attracted by low wages. For a capital
intensive producer, rising wages may not
be a problem. Arguably, firms need to
look beyond wages and take into account
differences in productivity and hidden
costs. For example, productivity growth
combined with rising wages may help
keep costs down. This seems to be
achievable for China that has potential for
productivity growth, if only it uses the
opportunities from advanced technology
wisely.
As such, it is debatable whether the
economic external environment in China
has become less attractive for global
companies. It may be more certain that
political climate is becoming less and less
favourable. Consider, for instance, the
recent anti-corruption drive and higher
government scrutiny of several firms, such
as GSK and Prada, to name a few. The
only way to overcome this threat in the
external environment is to be corporate
socially responsible (known as CSR in
business economics), in other words have
long-term business goals that are based on
the stakeholders’ interests, rather than
pure profit motive. Unfortunately, let us
be honest: in the real world not all
companies are like this. Once again,
nature of the business is important; how
can crackdown on corruption create a less
favourable external environment for non-
luxury brands (e.g. KFC)?
9
Economics
Source: McKinsey Insights China – Macroeconomic model update (March 2011); Global Insight
Another question that needs to be
addressed is why 48 per cent of foreign
companies fail in China within two years
of entering the market (according to
ACBW Australia-China Business Week).
Stronger internal competition is the
answer. Local firms in China, such as
Lenovo, Alibaba, Huawei, Xiaomi, have
already gained international experience
and, therefore, are ready to compete
against global brands, such as Apple and
eBay. For example, Lenovo is aiming to
raise its market share in the PC market to
20 per cent by the end of the 2014 fiscal
year, while Samsung and Sony see the
reversal of fortunes in the PC business.
Localisation may be the way to overcome
this threat for companies that are new to
the Chinese market. It is necessary to
clarify what is meant by localisation: it is
the adaptation of the existing products to
meet different consumer needs in another
country or region. Indeed, consumer wants
in China are likely to be different from
consumer wants in the UK. "Never
assume what works for your mature
markets will work for China. Success
comes for those who stay relevant to the
needs of the Chinese consumer "(Millward
Brown). Let us contrast eBay and IKEA:
eBay failed in China within four years of
entering with a loss of 30 billion dollars in
market value. The company was not able
to compete against Alibaba, the local e-
commerce giant, arguably due to the
failure to recognise the difference between
the Western and Chinese markets. In
Chinese e-commerce, market trust
between consumers and producers is much
more important than in Europe. Consider
Alibaba’s AliWangWang chat between
buyer and seller prior purchase and Alipay
(an alternative to PayPal) with the money
released only once the seller is satisfied
with the good received. In contrast,
IKEA’s strategy has been different in
Europe and China. The value proposition
is different; the main focus in Europe is on
low price, in China on good quality, so
that it is an aspirational western brand for
the growing middle-class. Similarly,
IKEA adapted their products to reflect the
smaller apartment sizes in China.
However, some may argue that eBay
failed in China due to a slower speed of its
website, compared to Alibaba’s Taobao
(an alternative to eBay), rather than due to
the failure to understand the Chinese
market .While being a foreign company,
eBay faced a greater scrutiny from the
Chinese government than local Alibaba,
thereby giving Alibaba an unfair
advantage in terms of the speed. The
government of China, as indeed any other,
is interested in promoting domestic firms,
whether through the greater scrutiny of
activities of foreign firms or through the
subsidies given to local businesses. As
such, foreign companies that want to
succeed in this controversial market
should treat the government intervention
in China as a potential threat in the
external political environment.
Ultimately, some may question whether
external climate in China has ever been
favourable. With high degree of
unpredictability, as political external
environment clearly shows (anti-
corruption drive and the new consumer
law), and individual sub-markets with
different demographic, cultural and
economic characteristics, China is a tough
market to do business in. This is evident
when looking at Tesco’s Chinese branch
which has dragged with high losses for
each of its nine years trading alone in
China, and external environment can
hardly ever be favourable for this firm. Put
it another way: what if it is now too late to
enter China? First-mover advantages have
already been gained by many firms and
local companies are likely to protect their
market shares. While coming back to CSR,
if a firm is ethical and corporate socially
responsible, Chinese external environment
with growing wages (less labour
exploitation), crackdown on corruption
(more honest and ethical behaviour),
slowing the pace of economic growth (less
exploitation of scarce resources) may
seem to be the most favourable it can ever
be. Yet, it is difficult or even impossible to
find the real example of a business that
measures expansion opportunities in terms
of CSR and ethical behaviour, rather than
in profits.
Anastasia Yermakova
10
Economics
However, its results should be complemented with other
indicators of living standards such as the Human Poverty
Index and the Human Development Index.
Another economics concept useful to represent income
distribution is the Lorenz Curve, reprsented in figure one.
Developed by Max O. Lorenz in 1905, this curve is a
graphical representation of the cumulative distribution of
wealth or income and can be used to calculate the Gini
coefficient.
The 45 degree line of perfect equality depicts a perfectly
equal income distribution. Where else, the combination of
the x-axis and the y-axis denotes the line of perfect
inequality. The Gini coefficient is the ratio of the area
between the line of equality and the Lorenz curve to the area
between the line of perfect equality and the line of perfect
inequality. The higher the coefficient, the more unequal the
distribution is. In figure one, the Gini coefficient is
calculated as A/(A+B), where A and B are the indicated
areas.
Economics
Income Inequality
The Bitter Truth
Figure 1. Source: http://en.wikipedia.org/wiki/Lorenz_curve
The developed world is a whole different place than it was in the
1800s. Our forefathers hardly had rest from working the lands with
their bare hands. But today, we enjoy the luxury of watching
machines take over our work while we reap the economic benefits
of higher productivity and living standards derived from technology.
Innovations and revolutions have taken us far ahead of the 1800s, as
they should have. But mankind has failed to address one issue that is
now back to the level it was in 1820 - the important issue of income
inequality. In it’s recent report, the Organisation for Economic
Cooperation and Development (OECD) concluded that "The
enormous increase of income inequality on a global scale is one of
the most significant and worrying features of the development of the
world economy in the past 200 years.” The world has time after
time failed in its fight against income inequality. Gender and racial
inequalities have to some extent been reduced and dealt with but the
most notorious one, income inequality, has yet to be tamed fully by
any country.
Economists around the world rely on the Gini coefficient as a
measure of income inequality. The Gini coefficient calculates how
unequally a set of income is divided into half. It ranges from zero to
one, the higher value being the state of totally unequal distribution
of income. The Gini coefficient is handy in the comparison of
inequality across countries but it cannot tell us where the inequality
lies. Whilst oversensitive to changes in the middle of the
distribution, the coefficient tends to be less sensitive to changes at
the top and bottom of the distribution. This spells trouble for
policymakers working on mandates to reduce income inequality as
they are dealing with insufficient and skewed information. Despite
its shortcomings, some argue that the Gini coefficient is the best tool
we have to measure income inequality.
11
Photograph by David Leane
India – Home to 100 billionaires and
nearly half a million beggars
“India happens to be a very rich country
inhabited by very poor people.” These
words by Manmohan Singh, India’s ex-
prime minister, provide a description of
what India is today. India is a country
brimming with potential. It has all the
resources, talents and technology it needs.
The only thing keeping it from reaching a
developed status is its massive poverty and
income inequality status. India is currently
the second poorest country in South Asia,
after war-torn Afghanistan, which is
surprising for a country that boasts with
high economic growth and is endowed with
resources. India produces four fuels, 11
metallic, 52 non-metallic and 22 minor
minerals and its gross domestic product
(GDP) growth rate has averaged around
eight per cent in the last decade. Yet, India
has failed to allocate these resources and
growth efficiently to combat its ever
increasing poverty levels.
Amartya Sen and the World Bank’s chief
economist Kaushik Basu have argued that
the bulk of India’s growth is occurring
through a disproportionate rise in the
incomes at the upper end of the income
ladder. Their views are well supported by
recent statistics; according to the OECD,
“Inequality in earnings has doubled in India
over the last two decades, making it the
worst performer on this count of all
emerging economies.”
According to the 2014 Multidimensional
Poverty Index, there are 340 million
destitute people in India out of its 1.2
billion population and 40 per cent of the
world’s poor call India home. Moreover,
based on the World Health Organization’s
international growth standards, more than
half of India’s children are severely
malnourished, worse than many countries
in sub-Saharan Africa.
Eradicating poverty in India would mean
ensuring proper access of water, sanitation,
health, nutrition and housing for every
person. Nevertheless, it is important to
understand that the problem of poverty
cannot be solved by a single panacea. In an
article which appeared in the Forbes India
magazine issue of 15th July 2011,
intellectuals Abhijit Banerjee and Esther
Duflo said most policies fail since they
hope to solve all aspects of poverty at once.
Banarjee also stressed that a well-designed
development programme would be
independent of the intentions of the
implementing officials.
Economics
12
Source: Poverties.org, Research for Social and Economic Development
Source: AveAsia official website
What went wrong?
In the early 1990s, India joined the list of
other capitalist countries by opening up its
economy. Since then, its economic growth
has been evident but the wage distribution
ratio between the top and bottom ten per
cent has doubled. The country’s income
inequality is evident both between states
and within states. Goa is the richest state
in India with 5.09 per cent of the people
being below the poverty line. The
correspondent figure in the poorest state,
Chhatisgarh, is 39,93 per cent. Although it
is the richest state in India, life in Goa is
not easy for everyone. Out of the 14 towns
in Goa, three are ‘slum towns’, home to
people who earn little or no income at all.
Source: Poverties.org, Research for Social
and Economic Development
It is easy to pin down the Indian-growth
inequality paradox. The economic reforms
of 1991 have created massive income
inequality within cities and between rural
and urban areas. Two thirds of India’s
population live in rural areas and, thus, the
government could have alleviated poverty
significantly by improving the agricultural
sector, as China did in the 1990s. But
instead, the Indian government gave
disproportionate priority to the cities and
service sectors such as entertainment,
tourism and banking. Hence, although
India’s GDP is benefitting from the
growth of its secondary and tertiary
sectors, income inequality is building up.
The rural poor of India have no access to
this growth because their source of income,
the primary sectors, have been neglected.
Reduction in investment into agriculture
and lack of infrastructural development in
rural areas have thus resulted in wider
income gaps between the rich and the poor.
Education opportunities in India is another
huge problem. Education is key to
building a brighter future as it equips
people with skills and qualifications
required to get a job. But whether or not
you get an education in India depends a lot
on your parents’ economic status. Many
children growing up in slums and rural
areas never step foot into classrooms.
Instead, they spend their childhood
begging on the streets and working odd
jobs. A recent report by the International
Confederation of Free Trade Unions states
that there are approximately 60 million
child labourers in India who do not have
proper access to education.
Even if some rural area children are lucky
enough to be admitted into a school, the
quality of education they receive is mostly
unsatisfactory. Overcrowded classrooms,
absent teachers and unsanitary conditions
are common woes. In 2012, the
independent Annual Status of Education
Report into rural schools found declining
levels of achievement, with more than half
of the children in standard five unable to
read a standard two-level text.
In many conservative and backward states
in India, girls are not educated. According
to Jacqueline Bhabha, the director of
research at the Harvard University's FXC
Centre for Health and Human Rights, less
than 20 per cent of rural girls in India
make it to secondary school and only 6 per
cent move on to college. All this stems
from the lack of awareness among people
and it is clear that state governments are
not doing enough to support equal access
to education in India. This explains why
many of the poorer people in India remain
in the same conditions as their future
generations rarely get the chance of
obtaining quality education.
According to the World Bank in its
publication ‘Making Transition Work for
Everyone’, the lack of competitive
markets also contributes towards income
inequality. Large corporations in India are
increasing their monopoly power in major
industries by investing into research. The
findings are used to secure high trade
deals and reallocate funds to support their
growing wealth. Such information
asymmetry prevents smaller sized firms
from gaining proper footing in the market.
Hence, the rich become richer while the
others hardly have the chance of making
profits in such monopolised markets.
The danger that lurks
A skewed income distribution poses much
danger to economies like India where
population growth is on the rise. Income
inequality creates an economy of
exclusion, where the lower income earners
are being more and more excluded from
enjoying the economic progress of the
country. Much of India’s potential is
wasted due to income inequality and the
country would be a different place today if
the income gap was lower and people had
equal access to basic necessities such as
healthcare and education. A more equal
India would mean better health and
education for those on the lower income
end. This will potentially lead to higher
literacy and lower mortality rates in India.
Such improvement in India’s human
capital would enable its youthful
population to maximise its potential in
driving economic growth as more people
in India will be equipped with the
necessary knowledge and physical state.
Hence, income inequality is slowly
becoming one of the major obstacles faced
by India in spurring sustainable economic
growth and claiming its desired status as a
developed country.
The obvious reasons for income inequality
can be corrected by the Indian Federal
Government and more Indians are coming
to realise this. If the government does not
act soon to reduce economic polarisation,
it could spur social and political unrest in
India. India’s economic, social and
political reputation is at stake and
authorities have to act fast before the
danger that lurks becomes the inerasable
fact of India.
Income inequality – Not a problem
specific to India
India may be one of the most unequal
countries in the world but it is definitely
not the worst. As shown in the figure to
the right, India’s gap between the rich and
the poor is above the median level of 60
per cent for emerging economies, which is
alarming. But there are many other
emerging countries such as Lebanon and
South Africa that have higher income gaps.
Even advanced countries such as Spain,
Italy and Greece face higher income
inequality than India.
This is proof that income inequality occurs
everywhere in the world, however, one
may argue the obvious effects of it differ
from country to country. Despite having
large income gaps, Spain and Italy are
today advanced economies while India is
struggling to upgrade its emerging country
status.
Income inequality is slow poison for any
country and in countries like India that
face higher dosages of it, something needs
to be done soon to address the problem.
Some argue it will not be long before the
recent economic growth in India is
overwhelmed by its growing poverty.
Economics
13
Can India be saved?
This is a question running in many minds across the world,
whether they are Indian citizens or not. Many policies have
been suggested by distinguished economists to address the
issue of income inequality in India.
So far, the Indian government has taken a few initiatives to
curb the problem, such as the Mahatma Gandhi National Rural
Employment Guarantee Scheme and National Rural Health
Mission. The former scheme is aimed at providing not less than
100 days of guaranteed wage employment in a financial year to
every rural household while the latter was launched in April
2005 to provide accessible, affordable and quality health care
to the rural population, especially the vulnerable groups. The
success of these schemes would have led to a much desired
decrease in India’s income inequality and poverty levels.
However, unfortunately, these programs have not translated
fully into beneficial outcomes due to greed and corruption
overshadowing the welfare of the poor. To prevent such a
failure from recurring, a greater voice needs to be provided to
traditionally oppressed and suppressed groups. This can be
done by enabling the development of unions and associations,
and in general making public and corporate private activity
more transparent and accountable to the people.
If India wants to reduce its inequality, it will have to focus on
the redistribution of assets and income. This could be carried
out via a more redistributive progressive tax system and
ceilings on profits and executive incomes. Economic reforms
will also have to be fair to all income groups and economic
sectors. A two-tier system has been created in India over these
years, with largely privatised quality education and health care
for those who can pay, and a large population left to fend for
themselves with very poor quality public services. Allocating
more funds to improve sanitation, healthcare and education,
especially in rural areas, should be the key focus of the Indian
government.
Above all, regulation in India needs improvement and so does
the level of corruption. None of the above reforms will make a
difference if the country and state leaders do not play their part
There has been a significant change in India’s politics with
Narendra Modi being sworn in as prime minister. Modi
campaigned for inclusive growth, promising the largest
democracy in the world more job opportunities and economic
development. He has also vowed to reduce corruption and
increase investment in infrastructure.
Of course job creation and economic development policies
alone are insufficient to curb income inequality but it is
nevertheless a good start. Additional jobs will help tackle the
high unemployment rate in India and provide more people the
opportunity of joining the labour force. Modi’s government
needs to create high quality jobs that provide rights and
economic mobility for even marginalized groups to access
them.
India is hoping for a brighter future under Modi’s governance.
His promises seem persuasive, but only time will tell if Modi
keeps to his words and makes India the superpower it deserves
to become, or if he continues the legacy of non-delivering
politicians in India.
Nareen Kaur Sidhu
Economics
After three rounds of sanctions imposed by
the European Union and the United States,
the macroeconomic performance of Russia
has systematically been deteriorating. In the
past few months European authorities were
heavily criticised for their inability to cope
with the Russian incursion in Eastern
Ukraine. Poland and Baltic countries have
been demanding further diplomatic action
against the Kremlin, accusing Moscow of
supplying the separatists with increasingly
sophisticated weaponry. These pleas have
been partially satisfied during the NATO
summit in Newport, Wales. The alliance’s
bases in Eastern Europe are planned to be
expanded, so that NATO is able to respond to
any act of aggression from Russia in no more
than 72 hours. Some experts suggest that only
a gradual increase in the collective military
power of the member-states can persuade Mr
Putin to abandon his provocative foreign
policy. However, recently published
economic data suggest that sanctions can be
equally successful in this matter.
Measures imposed against the largest Russian
banks (including Sberbank, Gazprombank
and Vneshekonombank) reduced their ability
to borrow in foreign currencies. As a result,
Russian domestic demand for dollar and euro
is exceptionally high. Lack of stability and
prospects of further sanctions have been
among the major factors deterring investors
from buying roubles.
Is Russia in trouble?
Economics
32
37
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014
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7/2
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014
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/2014
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/2014
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014
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014
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/2014
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/2014
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/2014
10/7
/2014
10/1
2/2
014
10/1
6/2
014Exch
ange r
ate
USD
/RU
B
Exchange rate USD/RUB (Source: Investing.com)
High supply of rouble in foreign
exchange rate markets caused an
unprecedented drop in its value (from 32
USD/RUB in November 2013 to 41
USD/RUB in October 2014). A weak
currency means higher prices of imported
goods, mainly: consumer goods,
pharmaceuticals, meat, fruits, and
vegetables. Despite low estimated GDP
growth (<1 per cent in 2014, World
Bank), inflation rate (CPI) hit 8 per cent
in October. Following the annexation of
Crimea, the Central Bank of Russia raised
the key interest rate from 5.5 per cent
(February) to 8 per cent.
The policy is designed to impede soaring
inflation and to encourage investors to
buy rouble, which could prevent its
depreciation against US dollar. By now,
however, the CBR has been unsuccessful
in achieving these goals. Arguably, a
rising three-month interbank interest rate
(currently 9.36 per cent), alongside with
increasing uncertainty about the future
inflation rate, is expected to discourage
consumption and investment. These, in
turn, can undermine weak GDP growth
even more.
5
5.5
6
6.5
7
7.5
8
8.5
6
6.5
7
7.5
8
8.5
CBR
Key I
nte
rest
Rate
(%
)
Year-
to-y
ear
inflation r
ate
(%
)
Inflation rate Key Interest Rate (CBR)
Weakening rouble is mainly responsible for rising price level in Russia. By imposing countersanctions (e.g. bans on fruit imports from the EU) the Russian government put even higher pressure on domestic prices.
Inflation rate & Key interest rate (Source: Investing.com, Central Bank of Russia)
15
Economic factors seem to play against
Russia. It is hard to believe that dates of
signing the ceasefire agreement by the
separatists (06/09/2014) and the EU summit
(01/09/2014) are simply coincidental. The EU
officials were threatening that further
sanctions might include a ban on purchasing
Russian bonds by Europeans. This step could
have forced the Russian government to
reduce its deficit by cutting social
expenditures in the following years.
Low oil prices in the third quarter of 2014
seem to enhance the effect of implemented
sanctions on the Russian economy. The price
of crude oil fell from the peak in June
(106$ per barrel) to 81$ per barrel in mid-
October. It automatically reduced the
government revenue and worsened the fiscal
stance. To finance its rising debt the CBR has
to issue more bonds. Investors’ reluctance
and poor macroeconomic performance of the
Russian economy has already resulted in
several failed bonds issues this year. The
Russian 10-years bond yield has gradually
been increasing since May 2013. Its current
value exceeds 9.9 per cent (coupon rate: 7 per
cent).
Rising costs of borrowing proves to become a
significant challenge for the Russian
government. Russian energy officials
suggested that oil prices may be deliberately
manipulated by the Organisation of
Petroleum Exporting Countries (OPEC),
whose members cooperate with the White
House (mainly Saudi Arabia) to increase
pressure on Mr Putin’s cabinet. Despite
increasing worldwide supply of oil, the
OPEC announced no reduction in supply of
oil by its members. Hence, the future price of
crude oil is expected to oscillate over the
80$ threshold.
In the long-term, “economic arguments”
persuaded Mr Putin to suspend Russian
military intervention in Ukraine, but several
issues remains unsolved. The Russian
Federation has not ceased to support the
separatists - the Ukrainian government does
not control its Eastern border- and most
importantly, Crimean Peninsula is still
illegally occupied by Russia.
Economics
Crude oil prices ($ per barrel)
Crude oil Shares’ prices(Source: London Stock Exchange 2014)
Sberbank of Russia (USD) Gazprom NEFT (USD)
Russian 10-year bond yieldThe Russian government was forced to offer higher incentives to investors in order to sell new bonds.
While further sanctions are unlikely to be
imposed in the near future, those already i
mplemented will continue to have an adve
rse effect on the Russian economy. Can ec
onomic sanctions weaken Mr Putin’s posit
ion in Russia?
How long will Russian elites and the Russ
ian society approve of the tightening polic
ies towards Ukraine, the EU and NATO?
These questions remain open.
Personally, I believe that comparing curre
nt economic situation in Russia, though u
nfavourable, to the period preceding the c
ollapse of the Soviet Union is euphemistic
ally inadequate. However, the Russian eco
nomy certainly has weaknesses that can at
tenuate Mr Putin’s negotiation position in
the future.
16
Do you believe that the sanctions
recently imposed by the EU and the
USA can substantially influence the
Russian foreign policy?
The current economic situation in Russia is
not comparable to the one before the
collapse of the Soviet Union. Russia,
unlike the USSR, is involved in
miscellaneous economic interactions with
Western economies. That means that
sanctions should be regarded as a doubled-
edge weapon. In the long-run, sanctions
could succeed, but that requires decisive
actions from the Western authorities. Mr
Putin is certainly aware that Western states
are divided about the problem of sanctions.
He will do everything in his power to
prevent their unification around this issue.
To what extent can rising inflation
(perhaps double-digit next year) and
recession prospects undermine Mr
Putin’s popularity within the Russian
society?
Macroeconomic indicators are out of
interest for an ordinary Russian citizen.
People care about the overall standard of
living, state benefits and pensions. The
Russian government has enough resources
to sustain current social expenditures;
therefore, a sharp decrease of Mr Putin’s
popularity due to economic issues is
unlikely in the short term. Obviously, it is
like eating its own tail. In the long-run,
successfulness of Russian economic policy
highly depends on the price of crude oil.
Please recall that in 2008-2009 the price of
Brent crude oil fell to 35 dollars per barrel,
however, after nine months the trend
reversed and Russia was able to rebuild its
reserves.
What is the role of propaganda in
shaping social attitude towards the
sanctions and the Ukrainian crisis? Is
the Russian society capable of having an
unbiased judgement about these
matters?
The role of propaganda is absolutely
critical. The main source of information is
television (approximately 80 per cent),
outlining only the government’s point of
view. The Russian-language sites (also
known as parts of Runet) are under the
extended state’s control. Politically
independent websites are filled in with
junk comments, and sometimes, though
quite rarely, blocked. Russian opposition
does not seem to be unified about the
Crimean crisis; therefore,
it cannot constitute any influential
alternative source of information. In fact,
an ordinary citizen does not have almost
any chance for objectivism.
The current economic situation in
Russia has already encouraged many
affluent Russians to migrate. Sergei
Guriev, Mr Miedwiediew’s financial
advisor, fled to France. Is the Russian
elite enough unified and cooperative to
influence current Kremlin’s foreign
policy? What can be the outcomes?
Guriev is not a millionaire. Emigration
increases, although their main drivers are
not millionaires. Russian business is highly
anxious about the sanctions and in high
proportion against Mr Putin’s policy. Yet,
the majority remain silent, aware of
possible “consequences”. No resistance
mechanism has been established.
Do you expect further limitation of
social freedoms and worsening of
widespread corruption as a result of the
prolonged macroeconomic
underperformance?
Further tightening of internal policy is
unlikely, given that Mr Putin’s popularity
is more than “sufficient”. Some exceptions
are possible, being a result of the
authoritarian features of the Russian
political system e.g. possible closure of the
Memorial, Russian non-governmental
organisation popularising research about
civil repressions under the communist’s
regime, and monitoring human rights in
Russia and other post-soviet republics.
There are some symptoms of increasing
fear in the society. In terms of corruption, I
regard it as a system phenomenon, fairly
independent of the economic cycle and the
short-term political changes.
Mateusz Stalinski
Interview with Dr. Radzisława Gortat
Economics
Dr. Radzisława Gortat
Senior lecturer in the Institute of Political Science of the University of Warsaw, participant of the International Research Program Contemporary
Central Asia, expert of the Centre for Social and Economic Research
17
Quantitative Easing in the UK
Economics
Quantitative easing (QE) falls under the
bracket of unconventional monetary
policy. It is commonly used for the
objective of stimulating the economy when
conventional monetary policy has become
ineffective. Conventional monetary policy
includes cutting interest rates and this may
be a desirable outcome for a central bank.
For example, with higher interest rates,
loans are more expensive and so there is
less borrowing occurring. High interest
rates also leads to a fall in demand for
goods and as a consequence spending
diminishes. This cycle occurs because the
higher interest rates means saving is a
more favourable option for people.
However, as seen in the midst of the most
recent financial crisis, when the US
Central Bank, the Fed, and the Bank of
England lowered their overnight interest
rates in the hope of catalysing some sort of
economic recovery, the drop in interest
rates failed to satisfy this objective. In this
case, the central bank must call upon other
instruments to spark a recovery, which is
when the introduction of QE may be seen.
QE is a process whereby the Central Bank
generates money ‘electronically’ and
injects it into the economy to spur
economic activity. The Central Bank uses
this money to purchase securities, such as
government bonds, equities and corporate
bonds, from financial institutions such as
banks, insurance companies and pension
funds. As the bank purchases the bonds,
their prices increase due to the increased
demand, deterring investors from these
particular assets. On the other side of the
deal, the financial institutions that have
sold the bonds to the Central Bank have
raised capital and can use this to increase
their investment in businesses or boost
their lending to individuals. If the financial
institutions feel more confident about
providing loans to companies and
individuals, then the desirable outcome of
this would be a fall in interest rates,
leading to an increase in spending and a
boost to the economy. The final step of QE
is where the Central Bank sells back the
bonds it previously purchased, removing
the money it receives from the economy.
This ensures there is no extra money
floating in the economy.
However QE is not a risk-free strategy and
there are many issues to ponder when
deciding whether QE is effective in
producing a favourable outcome or not.
For example, the measure may cause a
surge in inflation. This occurs because
even though there is an increased money
supply, the quantity of goods remains the
same, and so the competition for these
goods increase which drives up the price as
agents are willing to pay more for the
relevant goods. QE also pushes investors
into more riskier investment strategies,
which could have dire effects in following
recessions. It may also cause the country’s
exchange rate to depreciate in value since
the currency will be less attractive due to
the increased inflation and lowered interest
rate. This currency depreciation can affect
international trade. For example, if the
country importing is using QE, the
exporters may soon realise they are trading
their goods and services for capital that is
deemed to be less valuable than before,
dissatisfying businesses trading on foreign
markets. Additionally, the depreciated
currency may lead to higher exports and
thus higher GDP, as goods in that
particular country may be cheaper than
elsewhere.
In response to the global financial crisis
that struck a few years ago, the Bank of
England (BoE) turned to QE with the hope
of reviving consumer spending and
boosting economic growth. The BoE began
with its implementation of QE in March
2009 with a £75billion commitment to
purchase Gilts, which are bonds issued by
the UK Government. During the year, this
figure later increased by £50billion in
May, £50billion in August and £25billion
in November, giving a grand total of
£200billion within the first year of QE’s
debut to tackle the financial crisis. As of
today, the BoE’s commitment to QE
measures lie at £375billion. The reason the
Central Bank resorted to QE was because
the steps taken by the BoE’s Monetary
Policy Committee (MPC) to cut interest
rates when the 2008 financial crisis hit was
not substantial enough for nominal
spending to improve. The MPC slashed the
bank rate, the interest rate set by the BoE
on overnight lending, by 3 per centage
points during the fourth quarter of 2008
and then a further 1.5 per centage point
was seen during the early period of 2009.
By the time March came, the Bank rate
was at 0.5 per cent. Despite this, the MPC
said this loosening of policy would not
increase spending levels by a sufficient
amount for the targeted CPI inflation rate
of two per cent to be achieved in the
medium term.
Has the UK benefited from QE? Martin
Weale, a member of the MPC, answered
this question with a ‘yes’ by referring to
figures stating the UK economy is
approximately £50billion better off thanks
to the efforts of QE. Mr Weale was quoted
saying: “Overall, these findings are
encouraging, because they suggest that
unconventional monetary policy in form of
asset purchases can be effective in
stabilising output and prices”. In a paper
produced by Mr Weale and his colleague
Tomasz Wieladek, they both commented
on the effect QE had in lessening
uncertainty in the markets. They also
mentioned that QE might have triggered an
increase in house prices due to increased
access to reduced mortgage rates.
Mark Carney, the governor of the BoE,
was recently quoted saying the following:
“Given the recovery has strengthened and
broadened, I don’t see a case for
quantitative easing and I have not
supported it.” This statement may be
related to the MPC’s unified decision,
taken this September, that there was no
need for economic stimulation. The MPC
has several times stated it is uncertain
whether the economy would require
further assistance from QE.
Zaim Beekawa
18
The last four and a half years of the
coalition government have been
characterised by stringent austerity, a
series of budget cuts and pay freezes. The
Tories stress the necessity of exercising
fiscal discipline and cutting the UK’s
budget deficit, while Labour bemoans of a
cost of living crisis gripping the country. It
is these two stances which appear to
characterise the economic policies outlined
by the two parties at their annual party
conference in the run up to the general
election in May 2015.
For Labour, the key to success will lie
heavily on proving their economic
competence. Some voters still view Labour
as responsible for the financial crisis,
despite the big influence of global forces.
It would be wrong to judge their economic
capabilities on the memory of 2007,
especially when one can debate to what
extent a recession was unavoidable,
however, Ed Miliband did not instil
confidence when he failed to discuss
reducing the budget deficit, which stands
at 5.8% of GDP, in his keynote speech at
the party conference. Instead, he focused
on the NHS. He promised £2.5bn to be
spent on recruiting more staff with the
money coming from a new ‘mansion’ tax
on properties worth over £2m, a tax on
tobacco companies and attacking tax
avoidance by big companies, such as by
Starbucks or more recently Facebook.
On the face of it, these are likely to be
popular policies. The NHS is a source of
pride for most Britons, who are keen to
preserve it. For the same reason, Mr
Cameron and Mr Osborne have promised
to protect the NHS from any budget cuts;
though, given the soaring cost of health
care provisions, they would effectively be
instigating a cut in real terms. However,
Labour’s pledge of £2.5bn, while more
substantial, is still likely to be insufficient.
The NHS has been under financial pressure
for several years now and spending keeps
rising. In 2013/14, the government spent
£109.7bn on the NHS in England, and for
2014/15 it is planned that figure will rise to
a roughly £113bn. Demand for NHS
services is said to be rising at four per cent
a year, especially under Britain’s ageing
population, and it is expected that by 2020,
there will be a shortfall of £30bn. The
£2.5bn figure would seem meagre in
comparison and one could question how
easily this money can be raised. A mansion
tax is likely to win cheers from the
majority of the electorate but it is difficult
to enact. The details of the policy have yet
to be revealed, a telling sign of the
complexities in designing an effective
formula. Similarly, enforcing the policy
will be costly both in terms of time and
resources. Potential tax avoidance by rich
homeowners, equipped with dedicated
accountants and lawyers, also means it is
hard to predict how much revenue would
be generated. A similar argument can be
made against the proposed tax on tobacco
companies.
Mr Miliband’s third proposal to stop tax
avoidance by big corporations might also
fall flat. It is a global problem arising from
the freer movement of financial flows and
thus needs to be tackled with global
cooperation. The UK can take a tougher
stance, but being too tough can create an
unfriendly business environment, turning
away crucial investment while at the same
time not generating much tax revenue. In
2012-2013, HM Revenue and Customs
(HMRC) estimated that the tax gap, the
difference between potential tax revenue
and the actual amount collected, for
corporation tax was £3.9bn. This is a
sizeable figure, and in fact the total tax gap
for all taxes in the economy was calculated
by HMRC to be £34bn. Some effort should
be exerted to recover this but to recover a
significant amount may require more
spending than the government is able to
afford with its present fiscal constraints.
These three key policies proposed by Mr
Miliband would appear to also present a
sizeable opportunity cost. Otherwise put,
he would be sacrificing resources from
more worthwhile causes. Although
politicians shy away from a discussion of
reforming the NHS, it might be worth
investing in methods aimed at boosting
efficiency within the organisation. While
additional funds to hire more staff will
help improve service, the improvement is
likely to be temporary. The gulf between
the amount of money required and what is
available means it is almost imperative to
find some cost savings, perhaps through
extending better management and injecting
competition into the internal markets
within the NHS. Such a reform might not
be as popular as a mansion tax, but it may
go much further in mending the NHS and
ensuring its longevity.
The UK General Election
Economics
1419
While Labour has promised £2.5bn to be
spent on the NHS, the Conservative party
has given a promise of a cut in income tax
that would amount to £7.2bn a year once
fully implemented in 2020. The Prime
Minister agreed to raise the personal
allowance, the amount one can earn before
having to pay tax, from £10,500 to £12,500
and for middle-income earners the 40 per
cent tax rate will start from £50,000
instead of £41,900. Again, likely to be a
popular policy but it has raised doubts of
credibility. Can the UK actually afford
such a big loss of tax revenue? Alongside
the tax cut, the Chancellor, Mr Osborn,
detailed a £25bn reduction in government
expenditure. According to him, the
austerity measures should finish by 2018,
by which time the deficit will be curbed,
and by 2020 the tax reductions would
begin.
So, will the sums add up? Given the time
frame, the Tories should have enough
fiscal room to implement tax reductions.
However, it is possible that income tax
revenue will fall more than anticipated and
put pressure on government finances. In
their October 2014 report, the Office for
Budget Responsibility noted that their June
2011 forecast had failed to account for a
£25bn shortfall in income tax for 2013-14.
According to them, the reason for this
forecast error was the impact of “lower
wages and salaries and lower effective tax
rate” as well as the issues with the UK’s
employment-driven growth, which they
argue resulted in a large amount of
workers in low paying jobs protected by
the tax-free personal allowance. While the
UK economy is growing slowly – it
increased by 0.7 per cent in the third
quarter of 2014 in comparison to the
second quarter – growth is not robust.
Labour productivity is feeble and
preventing salaries from increasing. It is,
thus, possible that Mr Cameron might be
unable to responsibly fulfil his promise.
Though signs of incredible promises can
be found in both party’s policy proposals,
Labour’s reluctance to detail measures of
austerity is a serious source of uncertainty
over their economic competence. Equally,
both parties ought to draw more attention
to business activity. Business investment
picked up by 3.3 per cent in the second
quarter of 2014 compared to the first
quarter, a positive sign but larger increases
are needed to sustain job creation. Greater
private investment would help improve
UK infrastructure and alleviate fiscal
pressures from the government to do so.
The party leaders should ask themselves
whether there are enough incentives in
place for such investments to occur. This
can be key to improving export earnings
and building a strong recovery that is not
just centred on dangerous debt-fuelled
consumption.
At a time when the party leaders should be
looking to embrace an open, global
economy, the rise of the UK Independence
Party (UKIP) is detracting leaders from
this objective. Both Mr Cameron and Mr
Miliband repeatedly assert their anti-
immigration stance and play into a one-
sided rhetoric concerning Europe and
immigration. Nick Clegg’s attempt to build
a case for open Britain was not endorsed
by any of them. The Liberal Democrats
have long been suffering from
ineffectuality. The policy offerings at their
annual conference featured a mix of those
proposed by Labour and the Conservatives.
Mr Clegg announced an increase in the
personal allowance to £11,000 starting in
April 2016 and then £12,500 by 2020.
Capital gains tax would be raised from 28
to 35 per cent and a new mansion tax
would be introduced. There was the
obligatory mention of welfare cuts to
combat the deficit, however, the emphasis
was on the wealthy bearing the burden of
deficit reduction. Despite being coalition
partners, and potential decision makers in
another hung parliament in 2015, the
Liberal Democrats seemed to get little
media attention. The focus instead has
been stolen by UKIP. Indeed, the Liberal
Democrats are polling abysmally whereas
UKIP have secured their first MP in the
seaside town of Clacton this autumn. The
party once described by the Prime Minister
as a group of “fruit cakes, loonies and
closet racists” looks set to shake up the
political landscape.
Economics
20
UKIP’s success appears to be in their
ability to tap into the voters’ discontent.
The risk, however, is that voters might
wrongly believe immigration is the source
of all their discontent. The controversial
picture that has been painted by UKIP is of
immigrants as the cause of varying
problems in the country, from languishing
public services to low wages and
unemployment. Mr Cameron and Mr
Miliband ought to add a touch of balance
to this image rather than further perpetuate
it. The reality is that while EU immigrants
might utilise public services, which would
naturally exert some pressure over them,
they also contribute to the economy. Last
November, a report by Christian Dustmann
(University College London) and
Tommaso Frattini (University of Milan)
found that immigrants from the European
Economic Area who arrived after 1999
“made a very sizeable net fiscal
contribution and therefore helped to reduce
the fiscal burden on UK-born workers”;
they were 45 per cent less likely to claim
benefits or tax credits and contributed 34
per cent more in taxes than they received
in state transfer payments.
Undeniably, immigration will be a key
battleground in the election and there is
pressure on Mr Cameron and Mr Miliband
to take a stern position. Having said that, it
is hard to believe leaving the EU and
stopping immigration would resolve the
problems UKIP voters fret over. The
constituencies where UKIP are popular are
the more deprived areas in the UK. The
Financial Times details that places like
Clacton have “higher than average
numbers of people who are white, old,
poor and without university education”.
The individuals in Clacton and other
similar towns can be viewed as the initial
losers in globalisation. The economies of
such small towns tend to be characterised
by relatively low-skilled jobs in the service
or manufacturing sector. Many jobs in
these areas have been lost to countries with
lower unit labour costs, such as China or
India. New jobs have not been created to
revive the local economy. Instead,
investment has flown to metropolitan cities
where the high-skilled industries, that
Britain has a comparative advantage in, are
located. Seaside towns like Clacton, which
used to have a thriving tourist industry,
have also suffered through the rise of
foreign holidays to sunny European
destinations, made easy to visit by freedom
of movement. Leaving the EU might
appear to be a remedy to these problems
and, perhaps, some Britons may indeed
choose to frequent British seaside towns
for their holidays. However, it is more
likely that some of the problems would get
worse. The EU is not without its pitfalls
but membership offers the UK freer trade,
bigger markets and greater political power
in the world. An out vote in the 2017
referendum over EU membership would
create volatility, shake investor confidence
and risk many jobs in the process. The
constituencies with weak economies,
where UKIP have gained so much
momentum, would remain victim to
stagnation.
Mr Cameron and Mr Miliband should
show recognition of voters’ concerns but
attempt to address them by presenting
more credible and coherent policy. Free
movement of labour is an intrinsic part of
the EU, making Mr Cameron’s proposed
negotiations on border control difficult to
carry through. Jose Manuel Barroso, the
outgoing president of the European
Commission, reiterated the EU’s stance
that “any kind of arbitrary cap [on
migration] seems to be not in conformity
with European rules”. The most effective
solution to reducing immigration would be
to leave the EU, as UKIP argue, but is
immigration the problem that needs to be
solved?
The party leaders should broaden their
focus from simply bringing immigration
figures down to considering how they can
revive Britain’s ailing local economies.
They should look to develop transport
links to neglected towns or offer tax credits
to attract businesses to move there.
Education policy should also attempt to
ensure pupils are equipped with the skills
required to attain the jobs available in the
country. The present tactic of attempting to
appear as vehemently against EU
immigration as UKIP is futile distorts the
argument. Globalisation has a created a lot
of changes which are difficult to reverse.
Fighting the change will present little
reward; accommodating them may be
more fruitful. In the run up to the general
election, the party leaders should add more
balance to their stances and begin chasing
the middle ground.
Tuli Saha
Economics
21
The Paradox of Savings
Time to rethink our perception
Economics
After the credit crunch led by the Lehman
Brother crisis in 2008, the US government
has been vocal in enhancing the savings
rate of households; perhaps US citizens
have forgotten that saving, being thrift, is
one of the virtues of lives. Everything
sounds decent and orthodox, but in the
following model we are demonstrating that
whenever one wants to save more, one
saves less. This model was stated in a
publication back in 1714 in a book called
‘The Fable of the Bees’, and popularised
by our fellow countryman John Maynard
Keynes.
Simply put, the model concludes that if
everyone tries to save more during the
torrid times of economic recession, then
aggregate demand will fall, resulting in
lower total savings of the country as a
whole. The decrease in savings is all down
to a decrease in consumption and its
multiplier effect. It sounds simple, but the
insight of the model is far-reaching, not
only in the field of economics but also in
the world of reasoning and logical
thinking.
It is far from conventional that a model
would be named as a paradox, but this
model falls prey to this mysterious
category. As a paradox, the insight
provided by the model seems self-
contradictory yet it may be true. In this
particular one, the critical part is the
difference in response of individuals’
saving choices and the overall impact we
observe on the economy. Narrowly
speaking, that total savings may fall even
when individuals attempt to save more;
broadly speaking, that increase in savings
may negatively affect the economy. The
two claims are paradoxical due to the
fallacy of composition, namely that what is
true of the parts must be true of the whole,
in simpler expression, over-generalisation.
The narrow claim transparently contradicts
this assumption, and the broad one does so
by implication, because while individual
thrift is generally averred to be good, the
paradox of thrift holds that collective thrift
may be bad for the economy.
Basic derivation of the model is rather
simple. To make things clear and easy to
comprehend, we consider first a closed
economy with two sectors. Also, the
investment level is assumed constant,
irrespective of business cycles.
According to the Keynes’s cross of GDP
calculation (expenditure approach),
In other words, at the equilibrium, the
savings level must equate the investment
level no matter how we are playing with
other variables. Remember, since we are
considering a closed economy, there are no
possible funds or whatsoever that can be
obtained from overseas institutions.
IS
YCCYS
YCCC
10
10
then
ICY
As seen in the graphical presentation of the
model above, when people become more
frugal and thriftier their marginal rate of
consumption (C1) drops, in other words the
marginal rate of savings increases since all
unspent income is saved. It turns out that the
investment level does not falter, but the GDP
dwindle. What does this mean? It means
economic recession, deteriorating living
standards and bleak lives.
As seen in the USA, right now they are up
against the nearly zero Federal Reserve
prime rate. What does that imply? A higher
personal savings rate and a larger savings
level cannot lead to more investment by the
means of lowering interest rate. Up to today,
the real GDP of USA is only a little bit over
4.5 percent about as the previous peak.[Graph 1]
22
Having staged on the academic front of
economics for decades, the model is
constantly challenged in that the implicit
and explicit assumptions of variables may
be too strong.
Perhaps the one most recognized is Say’s
Law. The law postulates that a market is
always efficient and concludes that when
demand slackens, price falls and the lower
price will stimulate demand. As long as
we are producing more (economic
recession may not mean decrease in
technological level and productivity), we
will see higher living standards. Another
opposition is coming from the variables
that affect the total investment. As a
matter of fact, investment levels should
not only depend on gross output but also
the interest rate. At the time people
attempt to save more, there will be more
loanable funds in banks, which in turn
will drive down the interest rate,
encouraging investment since the cost of
capital has decreased. Investment
spending would lead to rounds and rounds
of reinjections of output into the
economy, and the increase in investment
would be cancelled out with the
augmenting effect on GDP by reduction
in consumption.
Notwithstanding the challenges that the
model faced, we all have to agree on one
thing – economics brings insights to
humans. As a final attempt, we are
extending our model to describe our
modern world. As a typical open
economy, we have household
consumption, investment, government
purchases, exports and imports
What does this mean? The derivation tells
us a key fact: Increased governmental
saving by means of higher taxes would
not lead to a gross increase of the savings.
Also, the savings and investment rate
depend on the balance of payments
position, captured by the difference
between X and M.
Once countries enter recession,
government agencies normally reduce the
base rate to boost investment with the
objective of stabilising the economy. An
interest rate reduction translates into a
powerhouse for the economy in the
following manner: A lower return on
savings leads to a reduction in the demand
of the currency (Mundell-Fleming
model), leading to a depreciation in the
country’s exchange rate. A weak currency
may improve the export competitiveness
of the country, which would hugely
support total output. Also, the government
may practice debt-financed fiscal policy,
temporarily spending what it is capable of
in the long run to drain up the excess
savings in the market, to maintain a
legitimate return to deposit, with an aim
to revive the economy with its immense
trickle down effect. Another policy that is
currently practiced by the Federal Reserve
is directly buying up corporate bonds to
solve the issue that banks are unwilling to
lend despite holding large amounts of
savings.
Also, firms in other countries may take
advantage of the low interest rate and
invest in the country. Money from these
channels can be effective in pulling the
country out of economic recession. In this
case, the condition for paradox of thrift to
happen may not hold, as shown in the
graph on the next page.
Economics
Moving on, we go one step further by
relaxing our constraint though allowing
both investments and savings to be
functions of GDP. By conventional
understanding, they are both
monotonically increasing functions, for
the fact that it is logical to assume that in
the better times, promising business
environment would encourage firms to
carry out investment projects, and
households have a lot more disposable
income to spend.
As seen from graph two, when people
become thriftier, our model tells us a
rather bizarre result. That is; the overall
savings level decrease although we are
attempting to save more. The mechanism
is straightforward. When the marginal
propensity to consume drops, each round
of re-injection of money by household
spending into the economy is less. Thus
the money multiplier, or what we
perceived the power of money, is less
effective. The slump in the output level
is supplemented by the proportional drop
in the savings, and by the identity, the
slide in the investment levels.
)(
Saving) Total(
)(
MXI
GTTCY
S
TCYS
GTS
MXGICY
P
G
[Graph 2]
23
After all, shall we forget the traditional
wisdom? Should the government advise
people to be less thrifty? The simple
answer is no. The conclusion from this
simple model is of much relevance only
in the short-run. The momentary desire of
consumers to save more is vital to short-
term economic fluctuation. But in the
medium and long run, other mechanisms
come into play. Over time, an increase in
the savings rate is likely to lead to higher
aggregate savings and output.
Founded by Robert Merton Solow, the
1987 Nobel Prize winner in Economic
Sciences Laureate, the Solow-Swan offers
an insight into how the economy is
behaving in the long run given increases
in the savings rate. To preserve the
brevity of our explanation and mechanism
of the model, the total savings level of the
society is assumed a fraction of the total
output. In this model, the effect of capital
depreciation is also taken into account.
The straight line of the curve captures this
effect, as the depreciation rate is constant,
irrespective of the amount of capital we
possess in the society.
As time passes by, increases in the
savings rate would lead to higher output
in the long run.
Economics
We can conclude that in the short run, an
increase in the savings level during a
recession would potentially worsen the
situation. However, over time, countries
with high rates of savings should
prosper.
Kenneth Fung
[Graph 3] [Graph 4]
[Graph 5]
24
Happiness. There are a plethora of
platitudes, thousands of self-help books,
and millions of people who strive to
achieve this elusive state of being.
However, how does this subjective issue
relate to the logical field of economics?
Humans behave in a perfectly rational
manner to maximise their utility, and it is
difficult to see where ‘feeling good’ fits
into the picture.
Happiness economics is a new field of
economics that tackles the subjective
question of what really makes people
happy. This branch of study barely existed
at the start of the century, but over the past
decade, happiness economics has grown
enormously. This has been due to the
influence of many leading economists,
such as Joseph Stiglitz, Richard Easterlin,
and Paul Krugman, who argue that we
must consider happiness in our economic
analysis. This is not a novel idea, as
happiness has been the subject of
speculation for philosophers and thinkers
for many centuries. However, it has only
recently been introduced into the domain
of social science.
Happiness is based on surveys asking
people ‘How satisfied are you with your
life as a whole?’ or simply ‘How happy are
you?’. Rather than having economists
determine what makes a good life from an
armchair perspective, happiness economics
strives to identify the aspects of well-being
from the people’s perspective.
Economics places particular importance on
the conditions of life in determining well-
being, namely income and employment.
The classic belief in economic theory is
that higher incomes increase life
satisfaction, and this metric is used to
determine one’s standard of living. It is
true that people with more money are, in
general, happier than those with less; this
holds true for rich and poor countries as
well. Furthermore, when looking at survey
results, most people state that money
makes them happy. Interestingly, when
asked how much more money they would
need to be completely happy, people name
a figure that is, on average, 20 per cent
greater than their current income.
However, as Richard Easterlin famously
concluded in his report ‘The Economics of
Happiness,’ higher income does not
correlate with increased happiness in the
long term. Money, like everything else, is
subject to diminishing marginal returns.
This has become known as the Easterlin
Paradox. To be more precise, Daniel
Kahneman calculated that well-being only
increases up to an income of $75,000, and
plateaus afterwards. Looking at the issue
on a larger scale, the reported average
happiness of Americans has stayed the
same for the past 40 years, even though the
average person’s income has risen by 116
per cent.
One explanation for the paradox is that it is
the relative level of income that matters,
not the absolute value. Therefore, as
incomes increase for everybody in society,
our personal criterion for happiness
changes as well. As we increasingly
compare ourselves to those around us, the
rise in our personal criterion for happiness
undercuts the effect of the actual growth in
income on our well-being. As a result,
happiness remains unchanged. In addition,
research by Howell and Guevarra has
shown that expenditure in general does not
lead to an increase in happiness; spending
money on life events and experiences,
rather than material items, contributes to
greater remembered well-being. A key
point here is ‘remembered’ well-being –
since happiness is not concrete, it is the
memory that matters most in our analysis.
An important question to ask is whether
happiness equates to utility, the measure of
an individual’s preferences over potential
choices. We assume that humans desire
happiness and actively try to feel happy. It
seems like such a basic assumption, but
research shows that this is not necessarily
the case. Surveys show that happiness
maximising choices and our actual choices
are positively correlated, but not equal;
people do not always choose what they
think will maximise their well-being. This
implies that since humans always strive to
maximise their utility, happiness and utility
are not equal.
The Economics of Happiness
Economics
25
There are situations in which the ways
people behave do not reflect their true
preferences. For example, there is a -
shaped relationship between hours worked
and reported well-being. Unemployed or
part-time workers usually feel happier
when moving to full-time, but as working
hours increase after that point, the joy of
labour subsides. This shows that people
sacrifice happiness for other goals, often
higher income. This partly explains the
long hours, high pay, but low well-being of
investment bankers. It is also interesting to
note that research shows that happier
workers are more productive workers.
Therefore, the productivity of those long
hours of investment banking is rather
debateable.
Another noteworthy example is the effect
of a tax on cigarettes; we would think that
the tax would be bad for smokers.
However, there’s more to the picture, as
many people actually want to quit
smoking. A pair of economists Gruber and
Mullainathan found that an excise tax
actually makes smokers happier, because
the intuition is that some people actually
quit smoking when the price rises, making
the new non-smokers better off. Therefore,
it is possible to improve welfare by
imposing a tax that makes some people
unhappier in the short run.
Happiness is certainly a difficult concept to
measure and consider in our mathematical
economic analysis. Gross National
Happiness is subjective, and its value can
vary greatly depending on the desires and
prejudices of each person. We cannot
completely replace it with GDP, because
as concluded above, utility is not equal to
happiness. GDP, despite its flaws and
inadequacies, is at least objective.
Replacing this with a highly subjective
measure will not get us far in terms of
social progress.
Nevertheless, the importance of happiness
is slowly starting to make its way into
mainstream thought. For example, David
Cameron introduced the National Well-
Being Survey in 2011, which aims to
measure the happiness of British citizens.
We must remember that GDP is simply a
measure of the value being added to an
economy. Problems only arise when GDP
growth becomes too important a goal. It’s
only a metric, like a pint or a metre, and
we should use it as just that. Public policy
should be defined by a consideration of all
types of well-being: material and
emotional. This is certainly not easy or
formulaic, but necessary in order to
understand humans, which is what
economics is all about. It is crucial not to
discount happiness, because as John F.
Kennedy famously said, GDP measures
everything except that which makes life
worthwhile.
Kiuree Kim
Economics
26
The first thing you are told when you start
learning economics is that we assume
people behave rationally. Many of the
economic theories we learn throughout the
three-year course are based on this very
assumption of the rational agents. Most
certainly, if we attempt to make one
unifying theory of economic phenomenon
or behaviour, the neoclassical model which
focuses on the determination of prices and
outputs in markets through supply and
demand, works the best and, ultimately, it
seems necessary to assume we are a
homogenous rational being. However,
certain cross-bred subjects challenge this
unrealistic assumption.
Neuroeconomics, for example, a concept
that uses neuroscience and social
psychology to understand how people
make decisions, rejects this assumption
and focuses instead on how individuals
make decisions in case by case scenarios.
This might sound more reasonable than our
neoclassical economics. However, when it
comes to designing public policies, it is not
very helpful since neuroeconomics does
not assume to predict large-scale human
behaviour. Behavioural economics, on the
other hand, studies the effects of
psychological, social, cognitive and
emotional factors on the economic
decisions of individuals and institutions. It
also includes how market decisions are
made and the mechanisms that drive public
choice. Behavioural economics gained
fame through the Nobel Memorial Prize in
Economic Sciences in 2002, when it was
awarded to Daniel Kahneman, a
psychologist not an economist, for his
work in prospect theory. His theory
describes the way people choose between
probabilistic alternatives that involve risk,
where the probabilities of outcomes are
known. The theory states that people make
decisions based on the potential value of
losses and gains rather than the final
outcome, and that people evaluate these
losses and gains using certain heuristics.
The model is descriptive, meaning that it
tries to model real-life choices, rather than
optimal decisions.
Behavioural Economics and Cognitive
Biases
Here is an experiment that briefly
describes his theory and you can test
yourself to see if your decisions can be
irrational. Imagine I give you a £10 note.
Then, I give you a choice about how much
more you could gain. You can either take a
safe option of receiving an additional £5 or
you can take a risk by choosing to flip a
coin. You will get another £10 if it is tail.
You will get nothing extra if it is head.
What would you do? Most people in this
case go for the certainty of the extra £5. In
the winning frame of mind, people are
rather cautious.
But what about losing? Are we similarly
cautious when we are faced with a
potential loss? This time, imagine you are
given £20. You now have a choice of
either losing £5 or taking a risk. If the coin
is tail, you do not lose anything but if it is
head, you will lose £10. What would be
your decision in this scenario? Did you
make the same decision on both cases or
did you change your mind in the latter
case? In fact, it is exactly the same
outcome. In both cases, you face a choice
between ending up with a certain £15 and
tossing a coin to get either £10 or £20.
However, the catch here is that when the
risk is framed in terms of losses, people
tend to take a risk.
Our slow rational system would work out
the outcomes are the same, according to
Daniel Khaneman. However, our fast
automatic system makes a rough guess and
takes over our lazy slow system. It is all
about a crucial difference in how we feel
when we win or lose, and our readiness to
take a risk. The willingness to take a
gamble is very different depending on
whether we are facing a loss or a gain.
In some sense, the neoclassical economics
makes an assumption that people are so
rational that they would figure out
themselves that the outcomes are the same
in both scenarios and make the same
choices. However, in real life most people
do make choices depending on the
environment or the frame we are in rather
than the optimum choices.
Economics
How rational are we in
decision-making?
27
Such loss aversion is merely one of many
other cognitive biases that are widely
known to be deep rooted into ourselves
and cause systematic deviations from a
standard of rationality or good judgement.
Examples include the Present Bias, also
known as Time Inconsistency, which
relates to how each different decision-
maker may have different preferences over
current and future choices, as well as the
Money Illusion, the tendency to
concentrate on the nominal value of money
rather than its value in terms of purchasing
power.
Cognitive biases affect anyone at any time
including the people working in the
finance industry. In our current complex
environment, we now have the mean as
well as the motive to make very serious
mistakes. People calculate the risks and
rewards and decide accordingly. But we
are not always as rational as we believe we
are. The kind of systematic mistakes
demonstrated earlier can play crucial roles
when it comes to the global financial
system, which can lead to catastrophic
consequences. Understanding the pitfall
has led to behavioural economics as we
know it today. It takes into account how
we actually make decisions instead of how
we say we make them. Most behavioural
economists seem to agree on the fact that it
is hard for us to overcome those biases,
even if we understand that we make such
errors. However, what we can do to
alleviate the consequences is to build a
world that would allow us to make better
decisions and avoid our likely mistakes, by
taking our cognitive limitations into
account.
Economic Policy and Behavioural
Economics
When it comes to public policy,
behavioural economics has been one of the
most fashionable ideas.
David Cameron, for example, spoke highly
of behavioural economics in a TED talk
right before he became the Prime Minister
in 2010. He said: “The best way to get
someone to cut their electricity bill is to
show them their own spending, to show
them what their neighbours are spending,
and then show what an energy-conscious
neighbour is spending.”
Tim Hartford, the author of ‘The
Undercover Economist’, in his recent
article at Financial Times pointed out that
Cameron was mistaken. The single best
way to promote energy efficiency,
according to him, is to raise the price of
energy. A carbon tax could do even better
as it would not only give people the
incentive to save energy but also to switch
to lower-carbon sources of energy.
Nonetheless, the appeal of a behavioural
approach is not its effectiveness compared
to other policies but its popularity in a
democratic society.
Behavioural economics certainly do have a
voice within today’s policymaking
processes. Nevertheless, it is not, certainly
yet, to replace the macroeconomic
framework we operate with today when
designing public and economic policies,
even though it is widely known that many
assumptions we make are completely
unrealistic. One of the reasons behind this
may be that under behavioural economics,
there can be many expiations and special
cases if we try to make one model to
explain certain phenomena. But we might
be able to find a way to unify and
formulate such behaviours by
understanding how we make decisions in
general and finding out the decision-
making patterns.
Boyoung Ahn
Economics
28
Prior to being announced as the winner of
the 2014 Nobel Memorial Prize in
Economic Sciences, Jean Tirole was
hardly a household name. Unlike some
darling economists of the media, his work
cannot be easily summarized into an
elegant one-liner, nor are any of his eleven
books the sort to be found in
neighbourhood bookstores. Tirole’s
research is so multifaceted that it is
impossible to do it justice with a mere
paragraph or two. But, for those who do
know about him, his work is undeniably
“nobélisable”. Still, the world did not
know about Jean Tirole, until now.
Tirole, the chairman of the board of
directors at Toulouse School of
Economics, and director of several french
research institutes, specialises in game
theory, finance, industrial organization,
and regulation. Having been interested in
research since the age of 25, his work on
market regulation and analysis began in
the early 1980s. 30 years later, it has won
him a Nobel Prize.
Tirole’s education began in the École
Polytechnique, where he studied to
become an engineer. Soon after, he
completed his PhD at the Massachusetts
Institute of Technology (MIT) with a
thesis titled “Essays in Economic Theory”.
Over the years, he has had more than 200
papers and articles published. His
impressive list of awards and honours
takes up an entire page, but even more
respectable is his air of modesty and
humility. In response to being
congratulated for his recent award, Tirole
said: “Well, I’m very proud, it’s true. But
it’s also about being with the right people,
the right place and the right moment, you
know.”
Insights into Research
Jean Tirole: This year’s Nobel
Prize winner in Economics
29
In an interview with a french journalist last
year, the rumour of him winning a Nobel
Prize was brought up. His name had
started circulating ever since winning the
Gold Medal of CNRS in 2007, much like
Maurice Allais who went on to win a
Nobel Prize. And many could not help but
come to the conclusion that Tirole would
do the same. In response, Tirole had
admitted that winning a Nobel prize would
be a huge honor, but had laughed saying,
“Faire une déduction en partant d'un seul
point, c'est précisément ce qu'il ne faut pas
faire en économie” (To make a deduction
based on a single shred of evidence is
precisely what should not be done in
economics).
Tirole’s private life remains outside the
scrutiny of the public and Google, and it is
safe to say that he is very much a family
person. His gratitude upon winning the
Nobel Prize went first to his family, and
then to the late Jean-Jacques Laffont, his
longtime research partner and mentor .
Jean Tirole won the Nobel Prize for a
plethora of reasons. But a few things about
his research that really stands out are his
ingenious policy suggestions for regulating
firms with market power, and creating a
unified framework for approaching
industrial organisation. Before Tirole,
regulators have attempted to apply general
rules to every firm with market power.
Tirole argues that “one-size fits all”
policies do not work well. “What he did
that was truly remarkable was to put all the
tools of game theory that had been
developed, starting in the 50s and to which
he also contributed extensively in the late
70s and early 80s, [together] to reorganise
our understanding of industrial
economics”, says Antonio Cabrales, an
economics professor at University College
London. “The field came reinvigorated
from that effort, and many new
phenomena could be understood: the
impact of incomplete information in
markets, the study of strategic entry
deterrence, vertical foreclosure, two-sided
markets, and one could go on and on. The
interesting thing is that having totally
revamped an entire field within economics,
he has also made fundamental
contributions using game-theoretic tools
many of which he developed himself, in
financial economics, macroeconomics, or
political economics.”
In a perfect world, firms behave exactly
like they should in textbook models.
Consumers and producers have perfect
information, and markets are perfectly
competitive. But the reality is not a utopia,
and competition is hard to come by,
especially when firms are natural
monopolies. A firm becomes a natural
monopoly when it is inefficient for other
firms to enter the industry, for example
due to the need of large infrastructures,
such as railway and electricity networks, to
participate in production. It would be
expensively unnecessary for a country to
have multiple electricity companies, each
with their own power grids.
Generally speaking, market power is
undesirable because it creates deadweight
losses in society. Thus, to increase
competition, a government would seek to
regulate firms like these without altering
the dynamics. But then we have another
problem. How should these firms be
regulated? How much should dominant
firms be compensated to convince them
that production is worthwhile, without
using taxpayers’ money for excessive
profits?
One of the biggest problems with
regulation is asymmetric information
between regulators and firms. Regulators
cannot know how much a firm’s
production costs are, and whether it is
using the most efficient techniques.
Making use of game theory and
mechanism design, Tirole and Laffont’s
elegant and ingenious solution is to
provide firms with contract choices. The
contracts that profit-motivated firms
choose will signal to the regulator the
types of production costs firms face, hence
allowing regulators to negotiate better in
future contracts. For example, a firm that
chooses high compensation is likely to
have high inflexible costs. Whereas a firm
with the ability to innovate better will
choose to have low compensation, but a
higher set price.
In the field of economics, many theories
are based on idealistic assumptions or
perfect conditions. But situations are rarely
ideal. People are often unpredictable and
sometimes the theoretical is not the
applied. As Paul Broca once said, "To be
sure, observation is superior to theories,
and one must sometimes know how to bow
before a fact, however inexplicable,
however paradoxical, it might seem to us."
What sets Tirole apart from many other
researchers is his ability to build his work
around reality, thus making his research
completely and immediately relevant to
the specific industry he is studying. Being
highly realistic, he takes into account
collusion and bribery between regulators
and firms. In many countries, the
government commissions an independent
body to regulate firms. Tirole and
Laffont’s main conclusion was that
governments should first create a
framework explicitly to minimize the risk
of collusion happening between regulators
and firms. Although the best-designed
framework will not stop regulators from
acting as advocates for firms on occasions,
it should in general prevent bribery and
deliberately concealing information from
the government.
Especially appreciated too was Tirole’s
contribution of the analysis on platform
markets. Lowering prices below costs is a
tactic often used to drive competitors out
of the market, which, in many cases, is
illegal. But in the case of platform markets
like the newspaper market, undercutting
prices might not be such a bad thing after
all. Capturing the market means being able
to provide a large base of readers to
advertisers. And these advertisers in turn
cover the firm’s losses incurred during
production and distribution. Similarly,
web-based firms like Google and Spotify
fall under platform markets.
Having studied several industries, from
telecommunications to banking, Tirole
proposes specific policies for optimal
regulation of each industry. Again and
again, Tirole’s research has proven that
there will never be a set of rules that can
be applied generally to every firm. His
life’s work has shed light on the subtle
mechanisms of industries previously
ignored or inadequately explained. In the
words of Cabrales, “Jean Tirole is a total
economist. It is no coincidence that the
Nobel committee has chosen to give him a
prize alone, something that does not
happen very often.”
Yap Jo-yee
Insight into Research
30
University Life
In the morning of the Sunday 2nd
November, 75 UCL students gathered at
the Channel Terminal at St Pancras
international train station. After the
security check, everyone boarded the
Eurostar train that would take The
Economist’s Society on its first ever trip
abroad - to Brussels.
Indeed, such a large journey requires much
planning, and Nikolaj Pedersen, the Head
of Social Events at The Economist’s
Society, began organising the trip in April
this year. Sponsored by the UCL
Investment Society and Chinese Change
Makers Association, The Economist’s
Society could offer an extensive
programme, including a tour of the city,
two nights out, a three course meal at a
restaurant and, most importantly, visits and
talks at the three main EU institutions: The
European Council, the European
Commission and the European Parliament.
Upon arrival at hotel Meininger at Porte de
Flandre, a 15-minute walk from Grand
Place, the bags were put in the storage
room and the group went out to explore
Brussels. Everyone was taken on a tour
exploring the main sights of the town,
including the central square Grand Place,
the Mannekin Pis, the famous bronze
statue depicting a naked boy urinating into
a fountain, the Royal Palace of Brussels,
the Belgian Federal Parliament and the
Cathedral of St. Michael.
The capital of Belgium is known for many
things, but food wise it is its chocolate
industry that takes the prize. Walking
around in the centre of Brussels, one can
easily see at least one chocolate shop at
every corner, each offering its own types
of ‘bonbons’ and free samples. The
production of chocolate in Belgium dates
back to the 17th century, when the Spanish
occupation meant upper and middle class
people were introduced to it. Later,
approaching the 1900s, chocolate shops
were able to import large quantities of
cocoa from Belgium’s African colony, the
Belgian Congo, expanding the production.
Interestingly, there is a law dating back to
1884 stating each new piece of chocolate
needs to contain at least 35 per cent cocoa.
Having been up since the sunrise, many
people used the time after the tour for well
deserved power-naps. However, in the
evening it was time for the first night out,
taking the group to three different pubs in
Brussels. A large amount of beer was
consumed and the karaoke machine in the
second bar well used by most people. The
other guests got to hear songs such as
ABBA’s ‘Waterloo’, Queen’s ‘We are the
champions, and Beyonce’s ‘Irreplaceable’.
Once again waking up early, the group
enjoyed a continental breakfast at the
hotel. There was a mixed turnout with the
people having enjoyed a few extra beers
the night before trying to recover before
the visits to the EU institutions. At 10.30
am, the group arrived at The European
Council.
The EU Journey
31
The European Council is the EU institution
that joins the heads of states and
governments from the different member
states, together with the leader of the
Commission and the council’s own
president. It has no formal legislative
power but sets up the general political
directions of the union. The Economist’s
Society was greeted by Ms Magdalena
Canowiecka, a Political Administrator at
the Economic and Financial affairs
Directorate, who went through a brief
outline of the structure of the European
Union including the legislative process and
the responsibilities of the different
institutions. After the presentation, the
group was granted access to the Council’s
canteen, where EU officials meet at lunch.
Moving on, the tour continued to The
European Commission where Mr Mauro
Galluccio, a member of the speaker team at
the Director General for Communication
for more than 20 years, spoke in more
detail about the Commission’s
responsibilities and powers. He also
informed the group about career
opportunities within the EU institutions
and the application process for internships.
The European Commission offers
traineeships for graduates ranging from
three to six months. The applicant needs to
be a citizen of one of the member states
and speak at least two EU languages,
where one has to be English, French or
German.
Noticeably, it was quite a hectic day for
the people working at the Commission.
The same day as our group visited, the new
Commission, led by president Jean-Claude
Juncker, had its first working day. The
second speaker, Ms Sabine Berger from
the Directorate General for Economic and
Financial affairs, emphasised this and said
the institution was not completely
organised yet as people were still settling
in to their new roles. Ms Berger moved on
talking about her department’s
responsibility in providing economic
forecasts for the EU and Euro areas.
Once our visit to the Commission was
finished, it was time to move to the
Parliament, the working place of the 751
directly elected MEPs from the 28
different member states. We were greeted
by Mr Jeppe Kofod, the Head of the
Danish Social Democratic delegation, who
spoke about his job as a newly elected
MEP. At the end of his talk, he took some
questions from the audience, discussing
issues such as how to minimise the
influence of more EU-sceptic parties as
well as how to increase the voting turnout
in the Parliamentary elections. The visit
ended with a tour to the plenary chamber.
After finishing the visit to the EU
institutions, it was time for a welcome
drink at one of the most central Belgian
restaurants, La Bergerie, followed by a
typical Belgian three-course dinner. The
night ended at a cocktail venue where
endless cocktails and beers were served,
coutesy of The Econonomist’s Society.
After checking out from the hotel on the
Tuesday morning, most people spent the
day enjoying their final hours in Brussels
by trying free chocolate samples, drinking
more beer and doing some shopping. At 7
pm, after what had been a successful trip,
the group took the Eurostar home to
London.
The Economist’s Society would like to
take this opportunity to thank everyone
who went on the EU Journey. We hope
you all had a great time and look forward
to seeing you on our upcoming events.
Nils Larsson
University Life
32
On Tuesday 14th October 2014, The
Economist’s Society welcomed Philip
Coggan, Buttonwood columnist and
Capital Markets Editor of 'The Economist’,
to give an insightful talk about future
economic challenges posed by ageing and
technology. He provided an extensive
overview of the current macroeconomic
climate, and expounded on imminent
challenges mature economies may
encounter as a result.
To begin, Mr Coggan outlined recent
demographic trends such as the increasing
life expectancy across the globe. This is
attributed to an increase in antibiotics, a
reduction in smoking and a decrease in
manual labour among other factors. Birth
rates were high before the industrial
revolution of the 18th century, where
children were viewed as a source of labour
as well as a form of security and support in
one’s old age. The consequent
phenomenon is a “Malthusian trap”, where
income stays largely stagnant in the long
run because technological improvements
only have resulted in an increased
population instead of a sustained increase
in living standards.
In the modern era, the balance of
population is shifting, with the proportion
of people aged over 65 increasing at a
great rate. In 2014, the percentage of over-
65s was 14.7% in the UK, and in 2015, this
is expected to rise to 25.4%. This “silver
tsunami” has led to a decreasing working
age population (Germany is expected to
lose one-eighth of its population by 2030
due to retirees) and dependency ratio
(number of workers to dependents) in the
last quarter of a century. Japan has already
seen her dependency ratio fall from 6.6 in
1970 to a predicted 1.2 by 2050.
In Malthusian theory, rising economic
growth, meaning higher income for
workers, leads to a larger working
population and higher output. This
however, has proved false in the case of
the UK, which despite strong economic
growth in 2013-14, has seen low
productivity levels in its workforce due to
persisting spare capacity.
The increase in life expectancy has
allowed those aged over 65 to continue
working informally as many move on to
new careers in order to supplement their
pension income. As a result, the supply of
labour has increased and wages have
fallen. The reduction in wages has hit
unemployment rates hard, especially
among the youth. Between 2008 and 2011,
OECD statistics show that youth
unemployment among 15 to 24-year-olds
increased in the UK by 35% and by an
average of 15% in the G8 countries. In
Scotland, new data from the Office for
National Statistics also show that 72,000
16 to 24-year-olds were unemployed in
2013, the lowest level recorded since 2008.
Mr Coggan went on to talk about the
increasing rich-poor gap, arguing that
improving technology has instead made
“basic manufacturing labour” redundant as
machines can often do the job of a worker
at a much lower price (less than US$4 a
day in most cases), and used the example
of driverless cars. Hence, rising technology
has prompted and still continues to prompt
a strong divide between the wealthy elite
and the rest of society.
“Future Economics Challenges:
Ageing and Technology”
University Life
33
Improving technology aside, Mr Coggan
cited globalisation and expanding financial
circles as other causes of rising inequality
within society. Globalisation has allowed
for MNCs (Multinational Cooperations) to
exploit comparative advantage by
spreading their operations across the
world. The procurement of cheap labour
consisting of unskilled workers in other
countries has subsequently increased
unemployment in developed economies,
especially those in the West. Coupled with
increasing inequality of opportunity,
wealth disparity seems to persevere as a
vicious cycle. Case in point, many children
from underprivileged backgrounds are
unable to attend university to gain
necessary skills for employment. Given the
rapid growth pre-2008, the audience
questioned if we were truly doomed to
inequality.
For the final part of his talk, Mr Coggan
highlighted the reasons why he believed
that these challenges have not been
mitigated. First, politicians and policy
makers are simply not delivering what they
promised leading to political backlash,
with many people losing faith in their
abilities. In consequence, there is an
increase in “outsiders” entering the
political race, present in parties such as
UKIP in the UK and the Front National in
France, who are offering more radical
solutions to these problems.
The second reason Mr Coggan provided
was the issue of geo-political risk. To
illustrate his point, he brought to mind the
reign of the Roman and British empires,
when times were relatively “peaceful”.
Better domestic and international relations
allowed for higher levels of trade between
countries and for both the Roman and
British empires to have more than 20% of
the world’s GDP in their peaks. However,
in today’s multi-polar world, world
“superpower”, America, has to
accommodate to the growing BRIC
economies as well as the persisting
instability in the Middle East. He
compared some of our current global
context with similar circumstances in
1913, paralleling an Austrian-Hungary
empire struggling to assert power over its
neighbors to Russia’s influence in the
Ukraine today and Germany’s rapid
increase in trade then, to China’s booming
economy, stating that the latter’s growing
economic might will increase her political
clout in the long run.
Mr Coggan left the audience with food for
thought about whether globalisation is
creating losers with the rapid increase in
technology and whether globalisation is
the best way for ageing societies to grow.
In conclusion, Mr Coggan’s talk was
thoroughly enjoyable and intellectually
stimulating. It is particularly relevant to us
now since we are the ones who will have
to tackle these challenges later on in life. It
was a great honour to host this event, and
on behalf on the Economist’s Society, we
would like to again thank Mr Coggan for
giving us his time to share his valuable
insights and gracing us with his presence.
Abbiraam Indran & Genevieve Yeoh
University Life
34
Academic Careers
Professor Antonio Cabrales specialises in
microeconomics and game theory. He
became a professor at UCL in 2013.
During our interview, he shared with us his
education background, career choices and
some precious advices to students.
Interested in the economic and political
situations in Spain, Professor Cabrales
obtained his bachelor’s degree in
economics at Universidad Complutense de
Madrid. “In 1982, Spain had gone through
six-to-seven years of recession. I wanted to
understand what was going on and why
unemployment in Spain went from two
percent to 25 percent within a few years,
something that hadn’t been seen since the
1930s.” he explained. In a sense, the
university education he received was quite
unique compared to the previous batches
of students. “I was lucky because by the
time I entered the university, which was
and still is not a very good university, a
bunch of people who had studied abroad -
obtaining their PhDs in the United States -
were coming back to teach.” Following
their path, he completed his MA and PhD
in economics at the University of
California, San Diego [UCSD]. He
explained to us that taking the PhD course
has always been the typical path for
students who wish to do further studies in
the US. Universities would award the
students with an MA two years into the
PhD programme as some form of reward.
Professor Cabrales was again very
fortunate to be at the right place for his
post-graduate studies. “At the beginning, it
[UCSD] wasn’t that prestigious. But by the
time I was there, it had grown to become
very good. In fact, two of my professors
there later became Noble prize laureates,
Robert F. Engle and Clive Granger, for
their studies on econometrics and time
series analysis.” Nevertheless, he decided
to major in game theory rather than
econometrics. “I wanted to understand the
relationships between people and the
decisions they are making.”
Professor Cabrales moved on by outlining
the main differences between the American
and European university systems at his
time. “In Europe, the education you got
was thinner and shorter. There were smart
people, but they were extremely
specialised in one area. Whereas in the US,
they had two years of intensive trainings
and this created economists who had very
solid knowledge in all branches of
economics.”
Some of the differences still hold true
today. For example, the UK university
system requires the students to decide on
their field of study when they enter
college, whilst in the US, students will
attend elementary courses first. “You start
to take a few courses in Maths, Economics
and History. Since the bachelor’s degree in
the US is typically four years, it is not
really until the mid of your second year
when you make a decision.”
Dr. Antonio Cabrales
35
The interview continued with us asking
about his career, the relevant experiences
and the important decisions made at
different stages. Professor Cabrales first
held a position in Barcelona before moving
on to Madrid. Recently, he came to UCL
to continue with his teaching and research
due to the worsening economic
environment in Spain. “This university
[UCL], as you have probably seen in the
latest rankings, is ranked maybe 5th in the
world overall and its economics
department is probably in the top 10 or 15,
so it is one of the best place to work in.”
Having moved across different countries
and universities, Professor Cabrales
believes in the importance of geographical
mobility. “I think all scientists need to be
in touch with other scientists in the field.
Since the work of a scientist tends to be
relatively specialised, it is very hard to find
people who work on exactly the same
thing within your working location.”
Although he never had the need to find a
job as an undergraduate, he has
acknowledged its difficulty.
“You will have to use all the
possibilities, including job fairs,
internships and trainings or simply
sending your CV to different
companies that are advertising for
positions.”
Professor Cabrales also recognises the
importance of personal connections. “To
my understanding, about 50 percent of the
jobs that people find are through personal
connections.”
Moving on, he told us about how difficult
it was to find a job as a PhD student at his
time. In the US, the meeting of the
American Economic Association was
almost the only place for PhD graduates to
look for potential employers. The
competition was possibly more intense at
this level. “You would send out your
application packages to about 100-150
universities. Depending on how good or
lucky you were, you might receive 10-15
interviews and finally you might end up
with 3-4 offers to choose from.” The
graduate would then be hired as an
assistant professor which is equivalent to a
lecturer in the UK.
Professor Cabrales continued by
describing the career path within an
academic institution. He explained that the
promotion to associate professor or reader
often depends on the evaluations and
references made by previous colleagues
and teachers. Usually, one has to teach and
research for six years before being
considered for promotion. “The standard
evaluation involves first your teaching
which includes how your colleagues see
your work, your preparation for classes
and your students’ evaluation, plus an
assessment of your research outputs, which
typically consist of publications in
scientific journals.” The same process is
repeated after another few years and the
person is then promoted to professor. “If
you produce more research output and
your teaching broadens.”
While working as an academic, Professor
Cabrales has done some editorial work on
the side. However, he clarified that his
involvement in editing was not
extracurricular in nature. “The editorial
work that you do for some scientific
journals is just part of your research
work.” After submitting papers and
research to the academic journals for
vetting and publication, the editor will then
contact professionals in the area to ensure
the accuracy and quality of the articles. “It
is a process called peer review, meaning
your work is evaluated by someone else.
You will also need to evaluate the work of
others.”
He then mentioned an interesting story
where he helped his friends to start up a
company. A friend, who was working with
a financial company, visited Professor
Cabrales when he was still pursuing his
post-graduate degree. “I advised him to go
and see the lecture by Robert F. Engle and
he saw the light from the lecture.” The
lecture was about the Auto-Regressive
Conditional Heteroscedasticity (ARCH),
which is a model that predicts the volatility
of a market. “He realised that this would
be very useful because having the correct
volatility input is very important for option
pricing.” Partly due to this incident, this
person founded a company, the
Experimental Financial Services in
Madrid, and has been working with that
for the past 20 years, advising companies
on their operations use tools from
econometrics .
We also asked for some advices from
Professor Cabrales on future career paths.
We classified the routes after completing
our undergraduate studies into four main
categories; further education, finance,
industries and public sectors. He felt that
the paths are less distinct and segregated.
“I would just say that the post-
graduate education does not
necessarily conflict with the other
choices that you have mentioned. You
could do an MSc or MA and later go
into finance, industries or the public
sector. It is also possible to go into
one of the three fields and then back to
post-graduate study. For the MBAs,
the latter is actually the recommended
route.”
To reinforce his points, Professor Cabrales
provided us with examples where the
different career paths intersect. “You may
be surprised, but many of the people who
have a PhD do not go into academic
careers and university life. One of my
former students from Barcelona is in a
hedge fund in London. Another one, after
completing his PhD, spent a few years in
academia before leaving for a hedge fund
in the United States.”
However, there are crucial differences in
the types work taken by a PhD student and
an undergraduate one. Jobs that require
technical and complex modelling can only
be taken by someone with a PhD. “If you
are going to manage a billion or ten billion
pounds and your trading styles are very
complicated, you better know what you are
doing really well. This is going to require
quite a bit of very technical and
sophisticated training.”
At the end of the interview, we asked
Professor Antonio Cabrales to give some
general advices for students across all
three degree levels. Referring to the earlier
example, he recommended the students to
be engaged in their lectures.
“Just like my friend, you never know
when an idea will jump up and you
can use it to create your own
business.”
As for future actions to take, Professor
Cabrales recommended anyone who is
considering the option of pursuing post-
graduate studies to take the GREs and
GMATs. “For the others, you should
consider your options carefully. Try to
enjoy your life, it is a very interesting
place that you have come to and you
should take advantage of everything that
UCL has to offer.”
Lang Kun
36
Academic Careers
Dr. Malcolm Pemberton views himself as
a mathematician rather than an economist.
He has spent the majority of his time on
mathematics, studying or teaching,
researching or writing. As amusing as he
always is, the interview was definitely a
pleasure to conduct. During the interview,
we discussed his education background,
career paths, and his role as a writer. The
interview started with an introduction of
his early education in Cambridge,
revealing details of his academic studies,
teaching experiences and later decision in
obtaining another MSc at UCL.
Dr. Pemberton’s love for maths began at
an early stage. “Maths was the only
subject I was really interested in.” he told
us. His talent and passion made him one of
the most distinctive maths students at
Churchill College in Cambridge and he
did not see any reason to stop after
completing his bachelor’s and master’s
degrees. “I stayed on to do a PhD in maths
of differential equations. So I was in the
applied maths department, the same one
Stephen Hawking was in. Every day he
would come for coffee.” Although he
enjoyed living in Cambridge, Dr.
Pemberton decided to move to London
after finishing his PhD. “I did a bit of A
Level teaching at private schools in
London. I also taught somebody who was
doing MSc Economics here at UCL. That
got me a bit interested in economics.” He
was later suggested by some of his
colleagues to do an MSc in Economics at
UCL and decided to change career path
away from mathematical research . “I
knew I was good at maths but I wasn’t the
best at doing mathematical research.
Although I could do it, I was not certain
that it was the right way for me to go. I
decided to switch direction slightly into
the field of mathematics for economics
and I’ve been here at UCL ever since.”
With an MSc in economics, Dr.
Pemberton was delighted to find his ‘niche’
in the department as a mathematician who
“knows some economics; not much but
some”. It turned out to be rather accidental
that Dr. Pemberton found himself well
suited for economics where he can still be
a mathematician. The master’s degree in
economics was achieved after his PhD in
mathematics. For him, it was a means of
switching into the economics discipline. “I
thought economics was looking interesting
to me: it’s obviously quite mathematical,
so it was a good area for me to work in. I
then made the decision that I would spend
a further year doing an MSc in economics
at UCL.”
Even though Dr. Pemberton did not have a
bachelor’s degree in Economics, he still
managed to complete the MSc with no
problem. “It [the exam for MSc
Economics] was by far the easiest exam
I’ve ever done. The entire exam was very
predictable and straightforward.”
Although his interests in films and cricket
enriched his university life greatly, it
might have been the persistent passion for
restaurants that eventually brought him to
London. As much as he enjoyed life in
Cambridge, he felt that he had had enough
of the town. Unsurprisingly, his fancy
towards maths did not end there. “My
voluntary work was all about maths. I
taught someone mathematics at a local
hospital when I was still in Cambridge.” In
a sense, his work today is still all about
maths. The advancement of the
college/tutorial arrangements in
Cambridge rendered him cynical about the
system used at UCL. “You are assigned a
personal tutor who is meant to in a way be
looking after your life here. That doesn’t
really work.” All the criticism, though,
was more of his good will, hoping the
university will be even better.
We then talked more about his careers,
including some of his major decisions and
relevant experiences. “I always thought
that the academic life would suit me and
probably think it still does. I taught all the
time when I was in Cambridge. Then I
realised I liked teaching maths and have
been doing it ever since. You don’t
become as rich as you would if you go out
into the real world, but it’s nice to have the
complete independence.”
In spite of his smartness, Dr. Pemberton is
still a mortal. He did consider working
outside the academia with companies like
Shell, where he was interviewed but did
not get hired. “I think they were looking
for somebody already with experience in
the industry. That was one of the problems
as a mathematician. There was not an
enormous amount of jobs for
mathematicians in industries then. There
was a problem if you were just a PhD and
didn’t have enough experience.” Although
getting an academic job wasn’t easy, it
was certainly not a concern for him. “I
started off as a temporary lecturer, and I
just stayed on. I didn’t have to apply for a
permanent job.”
Academic Careers
Dr. Malcolm Pemberton
While he was teaching maths at the
Economics Department, the dissatisfaction
with most other textbooks gave reasons for
Dr. Pemberton and Dr. Nicholas Rau to
write a textbook, known to us as
Mathematics for Economists: an
introductory textbook. Pemberton told us
about the birth of their book and some of
his opinions about mathematics in the
economics discipline.
According to Dr. Pemberton, the book
evolved out of the lecture courses. “I
thought it seemed appropriate to write one
given that there was no other book that I
ever liked using. Now I get my two lecture
courses I give to first-year students out of
the book. It is not trying to make it easy
for the students, but to give them the real
story. We have expanded and extended it
over the years.” In fact, they now intend to
extend it further, covering probability in
the next edition. Again, speaking from the
perspectives of a mathematician, “We
[mathematicians] like to write textbooks,
since it’s a way of putting down your
views and thoughts on the subjects.”
Writing the book was important both for
the authors themselves and the students
who benefit from it. “It doesn’t make
much money, but it makes a bit of money.
It’s a book which is quite respected. It’s
used in Oxford, Cambridge and many
other parts of the world such as Canada.”
The following section of this interview
provides more information on the writing
of the textbook. In particular, Pemberton
was asked whether they encountered any
problems in the production process. In
spite of the long duration [roughly 4-5
years] of the operation, the content did not
cause much trouble as it was their area of
expertise. However, Dr. Pemberton did
mention two issues they encountered. “We
didn’t really focus on that the writing of
the book because we were doing other
things. We got distractions and delayed it,
behaving just like students.” Another
problem was the disagreement among the
two authors at various stages. However,
Pemberton was quick to add that
disagreements are normal and
understandable. “We got there in the end.
We had a publisher very early on, that was
never the problem for us. It has actually
done very well in the UK, but we still have
problems with our publisher in the United
States and Canada.”
Moving on, we showed a book review
taken from Why the Nerds are Rejoicing,
Times Higher Education (2002) to Dr.
Pemberton.
“Malcolm Pemberton and Nicholas Rau
do a better job of integrating the maths
with the economics. Nowhere is maths
included except soon after a relevant
economic application. For example, matrix
algebra is introduced as it is required,
rather than in one hit. An impressive
explanation of circular functions and
complex numbers sensibly precedes the
chapter on higher order dynamic
equations. The chapters are short, and
formal material is judiciously appended
when necessary. This organisation is
complemented by a relaxed but informed
writing style; the reader is warned when
the going is about to get tough, and the
speed of progress is proportionate to the
difficulty of the material.”
Reading this, Pemberton smiled and said
he was happy to be counted as a nerd.
“Economics is full of nerds. The nerds in
economics are the people who come from
a very mathematical point of view and
they say that the nerds have won.”
Subsequently, we asked about his thoughts
on the extent of maths used in economics.
Dr. Pemberton reckoned that the amount
of mathematics included in the syllabus is
controversial. “Some people think there’s
already too much. If you are purely based
on the kind of economics you are learning
in your BSc degree, you can do it without
much maths.” Moving on, Pemberton
illustrated the importance of maths with its
application in the financial services
industry. “Many people who have taken
the economics degree end up in finance
where you will need most of the maths. If
we get rid of some of the maths, which
was discussed very recently about my
second course, to at least make it optional.
Then the people who want to do finance
will end up at a big disadvantage.”
Dr. Pemberton displayed his humble side
when we asked him to share his secrets to
success in his career. “I’m not certain how
successful I am, probably not that
successful. But as I said, I do this job
because I enjoy the complete freedom it
gives. Secrets of success, all the obvious
things, you’ve got to decide what you
want to do and go directly to achieve it.”
Dr. Pemberton undoubtedly thinks like a
pure mathematician, believing in the
strength of mind. “I’m not going to say
that you just have to work harder and
harder. Doing research in maths is not a
matter of just saying ‘Right, I’ll work very
hard on this for three months’ and it will
work. You need to keep thinking about
what you want to achieve and find ways of
achieving it, which in maths can be quite
difficult. Your mind needs to be able to
float around in different directions. It’s not
that everybody can do it. I wasn’t great as
a mathematical researcher. That’s why I’m
happier doing what I am doing now. For
people who are really good at
mathematical research, it’s not a matter of
just working hard – they have special
types of minds. I’m not certain that I’ve
got a sufficiently unusual mind myself.”
At the end of the interview, Dr Pemberton
preferred not to give any general advice to
students, but some of his thoughts as a
form of encouragement. “The students that
I’ve seen at UCL do very well. I think they
do better than their counterparts at LSE for
all sorts of reasons. The best students I’m
teaching at the moment are definitely
aiming very high at going to very good
places in the US for master’s degrees and
PhDs. I’m actually impressed by our
students.” In addition, he never forgets to
praise the ones that go into conventional
jobs, who also do amazingly well.
“I would say keep following the examples
of the students we’ve got and you will go
far in life. I wouldn’t want to give any
other advice because I didn’t have advice
then. They are just examples. Each person
does his or her own thing. This is why
there’s no big secret to generalise success;
it can come in many forms.”
Jasmine Kang
Academic Careers
38
FTI Consulting is a global business
advisory firm offering services within
Corporate Finance, Economic and
Financial Consulting, Forensic and
Litigation Consulting, Strategic
Communications and Technology.
Founded in 1982, the firm is today one of
the largest in the industry with more than
4,200 people employed in 26 different
countries. It had an average growth rate in
revenue of twelve per cent between 2004
and 2006, classifying it as one of the
fastest growing companies in the market.
FTI offers graduate programmes for
finalists. With the deadline for
applications quickly approaching, we have
interviewed Joseph Kirby, an FTI
Associate working within litigation and
international arbitration in the Economic
and Financial consulting division. Having
studied for both a BA in Philipsohy and
Economics and an MSc in Economics at
UCL, Joseph joined the graduate
programme in 2012. During our interview,
he shared some of his experiences working
in the business advisory industry, as well
as giving some general advice for
prospective applicants.
How did you end up at FTI?
I think a UCL alumnus was working at
FTI and sent an email around to the
department, which made me have a look at
the website and research the job. It wasn’t
that clear what FTI did but it looked like it
might be somewhat interesting. Then I
went through the application process and
talked to people who worked there. I went
through case studies they had done and
thought it was something I could enjoy
doing.
Was there a significant part of your
degree that helped you in the
application process?
UCL is obviously recognised as top
university, increasingly so these days. I
think having that on your CV suggests
you’re a somewhat intelligent person.
You’re going through the type of degree
that is quite challenging and prepares you
for doing other challenging things in a
more professional context.
So you work in disputes. Could you
elaborate a bit on your work?
I guess contentious valuations and
estimates of lost profits and damages in a
dispute context is the bulk of what I tend
to do here. That could be a dispute
regarding the value of an asset - such as
for example shares of a company, or of
more complex financial derivatives. It
could also be the quantification of lost
proftis. For example, I have been involved
in cases ranging from the valuation and
risk assessment of a complex structured
credit product, to a dispute regarding the
outsourcing of some IT systems where we
had to estimate the damages the firm had
incurred due to various problems with
their outsourcing. So there is quite a broad
variety.
So you work a lot with analysing
numerical data?
Yes it’s a very data driven job. But that’s
not to say that I’m just doing analysis all
day. We produce analysis but the end
product of that itself is usually a written
report that will be submitted to a client. So
you’ve got to structure the analysis and
justify it in a clear manner that’s
accessible to people who aren’t
necessarily experts in this field.
Academic Careers
FTI Consulting - Joseph Kirby
40
How come you ended up in disputes?
I was drawn to this because it was called
Economic and Financial consulting, and I
liked economics and finance so I wanted
to do something within that area. I was
also interested in valuation more generally
and as I was going through the process and
talked through some case studies I thought
valuation in a dispute context was quite
interesting. The general principles of a
damages claim is to restore a party to the
economic position they would have been
in, but for the alleged breach or damage.
That involves quite a lot of hypothetical
thinking and you have to understand quite
deeply the characteristics of the parties
involved. So I thought it combined a lot of
interesting factors.
Because when one looks at the disputes
work in particular, one would think it’s
more relevant to a Law degree rather than
an Economics one.
Yes, a lot of students think that when I talk
to them at career fairs. Basically, my job
involves working side by side with
lawyers, who frame the legal issues with
you and provide you with a set of
questions they want to have answers to on
the analytical front, and it’s your job to
perform that analysis and justify it. You
don’t have to get too deep into the legal
business of it.
Apart from disputes work, would you
say there are any other divisions within
FTI relevant to an Economics student?
There are five practice areas here and
whilst there is some degree of integration
between them they are distinct business
units. Students interested in restructuring,
M&A or tax, might be interested in
Corporate Finance positions, for example.
But within Economic and Financial
Consulting there is also a range of work
including things outside of disputes work.
There is a pure economic advisory side
which has grown quite a lot now. That
would, for example, involve advising
healthcare providers on pricing schemes
and so on. There’s a lot of work in energy
- both dispute and and non-dispute work.
The disputes are to do with the regulated
price controls. I’ve never worked on those
projects myself so I can’t speak in too
much detail, but there is a growing pure
economic advisory side to Economic and
Financial Consulting.
Did you have any prior experience in
consulting before joining FTI?
I did not, no. I’m one of the rare dying
breed of people who didn’t do an
internship. That seems to be increasingly
rare these days.
Would you say that put you at a
disadvantage?
No, I don’t think so at all. People seem to
have mixed experiences from internships.
Some do real work and learn things; some
people not so much. I think most of the
things you learn in an internship are quite
practical things. And frankly, there is a
two week induction programme when you
join here which puts everyone on an even
ground from the start. And from then on
the skills you need to be able to work here
are developed on the job and through
ongoing training (such as sponsored ACA
or CFA study). So whilst having some
experience and working in a professional
environment confers some general
benefits, it is not a substitute for being
here later on and picking up stuff at he
actual job.
What would you say differentiates FTI
from other consultancy firms?
I think there is a refreshing degree of
common sense in the culture here. One
thing I liked when I was applying to the
job was that I wasn’t being interviewed by
HR people only asking generic questions
to tick off a list. Consultants here handle
the entire recruitment process which
means a lot more focus is placed on hiring
the right people than at other firms. It is
quite a relaxed environment as well freely
and there are lots of social events. There
are drinks every Friday and an annual
away trip to Portugal, so it’s a quite nice
place.
Do you have any specific advice for
someone applying for the FTI graduate
programme?
As with every firm, we encourage you to
apply as soon as possible. There are
opportunities to meet us at our drinks
events and that is probably the most useful
thing you can do. Basically, talk to people
here - ask about projects they’ve worked
on and aspects of their job and try to put
yourself in their shoes. Think to yourself
whether it is something you would like to
do.
What skills is FTI generally looking for
in a suitable candidate?
Obviously, because a lot of our work
involve dealing with numbers and is
analytical, there are certain maths
requirements. At the very first stage of the
process you’re given an online maths test
and then there is a CV and cover letter
submission. The mistake many people
make in their cover letter is not putting
anything specific about the job in it. The
cover letter is never going to get you the
job, but a bad cover letter will get you
rejected. So make sure your cover letter is
clear and concise, free from errors -
spelling and grammar errors on a cover
letter do not go down well and we get a
surprising amount of those. Assuming you
get past the online submissions, there is an
assessment center here in our offices that
consists of a more challenging
mathematics test that we have designed
ourselves. You’re also given a verbal
reasoning test and will have a group
exercise which tests the applicants’ ability
to go through an economic problem as a
group and present their findings. My
advice to people doing that would be to
collaborate with your team mates. Often
you get people that try to hold the
limelight which doesn’t go down well.
After the assessment centre, successful
candidates are invited to do a case study
and interviews.
And in the interview, are there any
specific things you’re looking for?
In the CV based interview we’re testing
the softer competencies that can’t be tested
through tests and so on. It’s not too
structured but you should be thinking
about demonstrating you can work in
teams, take initiatives and those sort of
things, as you talk about your experiences.
Nils Larsson
Academic Careers
FTI Consulting Graduate Programme for the finalists
Deadline: 17 November 2014
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