No 218: The way ahead?

By Galeeva Dariya

"Give me a one-handed economist! All my economists say, On the one hand ____, on the other ____,." 

Harry S. Truman

2011 was definitely a hard time in economic terms. However, 2012 has already brought some positive signs such as forecasts of a higher GDP growth of 0.6% than the previous year. The unemployment rate is increasing slower as well (According to “UK unemployment rises by 28000 to 2.67m, ONS reports” article BBC News 14 March 2011) .

The government is trying to return the country on the way of stable economic growth and to breath life and confidence back into both consumers and suppliers, still having serious doubts concerning the economy's stability. Some of the government actions have been in use since the crisis of 2008, nevertheless, the UK recently faced a danger of having a double dip recession. (“The UK will avoid a double-dip recession but growth this year will be slower than previously forecast, the British Chambers of Commerce has said.” BBC News stated 5^th March 2012)

So what are possible ways of regulating economy nowadays and why the situation is so controversial to decide on the best regulation?

First, one of the possible measures is reducing the rate of interest. In theory, this measure if taken by the Bank of England, will lead to other banks to reduce their interest rates. Therefore, the savings are going to decrease, whereas the increase in spending is going to occur. As the result, the aggregate demand will increase causing the GDP to increase. The decrease in savings will also increase the money actually used in the economy, so it’s going to be an additional injection into the economy, which will certainly boost the latter. One of the drawbacks is inflation, however, in such need of an actual growth a European countries are, this seems to be a fair price to pay.

But this is only theory. In practice, lower refinancing rate does not force banks to lower their rates significantly. Considering the losses of banks after the financial crisis, they are not going to do so in the nearest time as it is much more profitable to gain benefits from both – 0.5% of refinancing rate and their own high interest rates.

It is doubtful that the government can change the situation. There is not much possibility of decreasing the base rate even more significantly with current figure at 0.5%. Intervention of the government into the market can discourage the banks of having their main assets in the UK and possibly will lead to banks switching to other countries.

Second, one of the measures that can be taken is increasing government spending and/or decreasing taxation. Decreased income taxation will increase consumers’ purchasing power, so encouraging buying more; decreased taxation for firms will possibly lead to increase investment (which affects actual and potential growth) and/or the output itself. The government spending is an important part of AD, so its increase will boost the economy as well. Therefore, both measures will certainly increase aggregate demand, which will lead to increase in GDP and inflation (the possibility of which we have already discussed).

Nonetheless, it is hard to rely on increased purchasing power, as people may tend to save more, which will be a certain drawback for the economy.

Furthermore, both will also cause an increase in the budget deficit. This is important, if we believe that the government should stick to its Deficit Reduction Programme, so it is hard to expect significant increase in the government spending for another 5-6 years.

Third measure, which is widely discussed nowadays, is rebalancing the economy, i.e. changing the share of the service industry that comprises 27% of the whole economy and developing  manufacturing industry. This measure is thought to make the economy more stable since the manufacturing industry is less liable to fluctuations and shocks compared with services and banking. One of the strongest arguments for it is that Germany and France - the strongest economies in Europe nowadays – have strong manufacturing sectors which helps them to avoid a steep decrease in GDP and makes them less dependent on the banking and services sector.

This makes some people believe that if the same is done with the UK economy, the latter will see prosperity in a few years. But is that really so?

If we think of comparative advantage, that is vitally important in the modern globalized economy, the UK in the last several decades had one in the service sector. That has happened for the reason that developing countries with lower wages and lower costs for raw materials compared with Europe and the USA have gained their comparative advantage in the manufacturing industry. Therefore, in case of the UK developing its manufacturing sector, the companies will be faced with strong competition with foreign countries’ firms even in domestic markets. This actually means that in this way the time needed to see the real development in manufacturing will be rather long.

The government is also carrying out quantitative easing policy which has already injected 325 bn pounds in the economy. This has increased the money supply, which, according to the Fisher’s equation M^.V=P^.T, will increase the value of transactions, therefore GDP. By this measure, the Bank of England is buying UK Government bonds from the banks, providing banks with more loanable funds and less incentive to buy bonds themselves. However, the drawbacks of this measure are almost the same as with interest rates as banks are not likely to inject this money into the circular flow of income. And this will certainly lead to a significant increase in inflation.

An important fact is the term “political economy” that was replaced by Alfred Marshall in 1890 with just “economy” seems to have more sense nowadays. Because of the globalization process and stronger political, economic and cultural connections between countries, some of the measures cannot be taken. For example, a decrease in exchange rate can in theory increase exports and decrease costs on imports, thus increasing aggregate demand and, consequently, GDP. However, this will worsen the international position of the UK, which is rather undesirable in the situation of a fragile economy after the crisis. Also, the very large size of the market for pounds means that the UK government has to let the exchange rate "float", thereby giving up the option of controlling it themselves.

As we can see from above all the measures have their drawbacks even if advantages are strong enough. This actually does make it difficult for the government to decide on the measure to be taken. However, by the latest information on improvements of the economic situation the advantages are overwhelming the drawbacks.

NO 217: The effects of the OLYMPIC GAMES on the economy

By CENGXIAO XIAO

        With the approaching OLYMPIC GAMES in the UK, the amount of interest in it has increased significantly.In most people's opinion,the OLYMPIC GAMES should benefit the economy of host countries.The games have positive effects in some cases because of the benefits obtained from tourism and retail selling.However,the costs for preperation may also reduce the amount of benefits gained,such as construction and operating these building.To explain in more detail,according to Markus Brückner and Evi Pappa:

       AS the diagram shows above,the exports of the host countries would increase significantly by selling the goods which are connected with the OLMYPIC GAMES and national speciality goods.But when the sports events finish,the demand for them may have a certain decrease.Regarding investment,more capital goods will need to be purchased because people require them for the preparation.However,similar to the output,after the events,the incentive for businesses for purchasing capital goods will not be as much as before which leads to a drop in the investment.

         As for the consumption,the majority should be the amount of tickets which can help the government to cover the amount of spending and the amount of profits gained by local businesses from tourism and selling goods may cover the costs. If there is an excess demand in the market, consumers must offer higher price for products and the inflation may increase.Interestingly,the influence , according to this diagram,also will last for a long time.Unfortunately, the reason for the exchange rates which are decreasing during the period of OLYMPIC GAMES is not given .

         Therefore, whether the host countries can make profits from OLYMPIC GAMES really depends on the situation of the rest of the world and the amount of money gained and spent.For instance,the OLYMPIC in Greece,according to PricewaterhouseCoopers European Economic Outlook June 2004 • 23,”the Olympic Games, estimates that Athens could receive an additional 450,000 tourists annually on average until 2011, giving a total boost to the Greek economy averaging 1% of GDP each year for the entire period 1998-2011..”During this time, the economic growth of other European countries was not very high with the average of approximately 1%.

          However,the economy in Greece seemed to work well during this time with economic growth of around 3.6%.That is the result of many reasons,for example,the reduction in the exchange rates but the influence of OLYMPIC GAMES also can not be ignored.

          However,as we know now, the economy of Greece actually is in deep trouble and the effects from OLYMPIC GAMES may also have contributed to that.For instance,there may be a certain drop in the number of investment because people reduce their demand for the capital goods,which may lead to the reduce in the amount of profits can be made by businesses.Also,the amount of money Greek government spent on the OLYMPIC GAMES may lead to opportunity cost.For instance,the amount of money could be used for education and unemployment.

            As for the effects of LONDON OLYMPIC GAMES,'the UK economy to benefit from a record breaking spending injection during London 2012 'and 'Consumer spending set to hit£750 million, the biggest ever consumer spend at an Olympic and Paralympic Games 'according to the prediction of Visa.And also we can know more details from the video from youtube.

             Generally speaking,the host countries of this games can obtain benefits from the goods and services connected to the games but the costs of that and the negative effects on the economy after the games may also reduce the overall benefits from the OLYMPIC GAMES.However,the economic growth of countries should not rely on these special events and the government should think about some normal methods to solve the problems existing in the countries' economy.And it also should be noticed,however,that countries want to host the OLYMPIC GAMES for many reasons ,for example, honour,which are not related to the economy.

NO: 216 - The economic benefits of legalizing the drug industry.

By: Kahyee Liew Elena

Critics argue that the battle in the “war on drugs” has been long lost and the government should find other alternatives to fight this war. The “war on drugs” has forced the state to spend billions of dollars on drug interdiction forgoing other crucial aspects such as education, health etc.

The argument presented today, is why shouldn’t government just legalize drugs all together given the perceived benefits? There are some states such as California that has decriminalized marijuana use, but not as far as every drug.

Some argue that it is due to the government losing support. Clearly, it is a controversial decision that has differing opinions in society and it is likely that the conservative and religious vote is lost. The following article will look at the pros that drug legalization brings economically.

According to the National Drug Intelligence Center, this is the government spending on health and crime related to drugs in 2011.

NB: Values in red are calculated in thousands

 

The amount of funds used for drug interdiction as seen at the table above is a considerable amount. These funds are used for the police force, legal enforcement etc. However, this can be used to subsidize other crucial aspects such as health or education. If the government is the seller of the drugs, they can tax the narcotics industry and that tax can act as further subsidies. Government can also significantly lower drug related deaths, as the government would most probably carry out quality controls as drug users normally die due to impurities in the drugs and not the drug itself. Prohibition has led to the stigmatization and marginalization of drug users, there are strict access to needles causing high rates of diseases such as HIV and Hepatitis C which leads to man social costs. Users discount future costs.

By legalizing drugs, it also collapses a very big industry that has been long dominated by gangs. It would arguably, lower drug related inter gang rivalry and killings. Hence improving public policy. A prime example of how prohibition failed leading to an eruption of crime and violence could be seen when the USA decided to prohibit alcohol. If it wasn’t for that, organized crime might not even grow big and the situation with drugs today is pretty much the same

These are some of the arguments brought forth that economically, drug legalization is justifiable and that governments should pursue such a policy in order to emerge victorious in the current “war on drugs” that is seemingly failing. However, this is most likely not going happen due to the social problems and consequences that come with it.

No 215 INDIA'S ECONOMIC HURDLES TO SUCCESS

By: Cheng Yi Xuan

THE GLOBAL ECONOMIC RECESSION of 2008 has affected the economic growth of many countries around the world. The United States for instance faced a maximum negative GDP growth of 8.9% in 2009 and in the same year, the GDP growth rate for the United Kingdom was at negative 2%. The global economic recession also affected fast growing developing economies such as India with a GDP growth rate drop of 3.9% between 2008 and 2009. In 2010, the Indian economy seemed to have recovered from its lower GDP growth rate with a peak of 9.4% growth in that period. However between India's peak GDP growth in 2010 and the present year of 2012, we can see a trend similar to that of the 2008 economic recession, in contrast to IMF's projections of GDP growth of 8.7% for 2011. In this post, we are going to look at the cause recent decline of the Indian economy.

Recently several news articles reporting on the rapid decline of the Indian economy has surfaced on the Internet. A report published by the AFP on 6 June 2012 states that India's prime minister, Manmohan Singh, admitted that the Indian domestic economy is heading into 'turbulent weather'. In the report, the prime minister indicated that the economic slow down in India is mostly due to the eurozone debt crisis and the rising international petroleum and commodity prices. (Article:Put cap on public debt, RBI tells Government)On the other hand, an article published on The Economist magazine blamed India's economic slowdown on problems within the country. It states, "The state is borrowing too much, crowding out private firms and keeping inflation high. It has not passed a big reform for years. Graft, confusion and red tape have infuriated domestic businesses and harmed investment. A high-handed view of foreign investors has made a big current-account deficit harder to finance, and the rupee has plunged."(Article:Farewell to Incredible India).

First we are going to look at how the eurozone debt problem could affect the Indian economy. Firstly the eurozone debt problem was the result of countries like Greece having too much government spending. Before the financial crisis of 2008 which started in the United States, they were able to sustain their spending. However, past the 2008 crisis, people started questioning some of Europe's economies. When people lost confidence in the Greece economy, other European countries like Spain and Italy also saw more people being cautious in spending.

At the present stage amid government bailouts, government spending cuts and increased taxation, the many of those European economies currently affected by the crisis are seeing little or no growth in their economy. As such, import growth rate in to the European union faced a steep decline in import growth, falling from about 32% in January 2011 to 0% in December 2011. With imports into the European Union being so severely affected by the eurozone debt crisis, India's export industries are likely to be affected as well. With exports declining, India will ultimately see a decline in growth of its economy.Another problem that might cause a decline in growth for India's economy would be the rising commodity prices between the period of December 2011 and March 2012.

 



 Indicated by the graph above showing an index of commodity prices. Rising commodity fuel prices meant that firms would face increased productions costs and thus their profits is reduced. Hackett's research conducted a survey among firms affected by the rising commodities and fuel prices and respondents reported that they will pass half of the costs to their buyers while the other half is absorbed by their individual firms. Either way, we can see that quantity in the market will be reduced. Firms will reduce the supplied quantity when there is less profit to be made by supplying at the current quantity. On the other hand, some buyers will choose buy the products at a higher price while others leave the market. It is possible to visualise this situation by having the supply curve shifting inwards in a supply and demand graph. Thus the overall reduced quantity will affect the growth of the GDP.

Another problem that could affect India's GDP growth is the large public debt to GDP ratio. According to an article on The Economist website, India's public debt currently stands at about 60%(using data from the IMF) and its fiscal budget deficit is currently standing at 5.9% up from 4.8% a year ago. At the second search conference held in Mumbai in February, Dr. Subbarao governor of the Royal Bank of India stated that excessive deficit will militate against growth and that government debts should be capped at a percentage of GDP. At the conference, Dr. Subbarao also mentioned that the government should improve the quality of government expenditure, such as spendings on merit and public goods that will improve social and human capital and also physical infrastructure.

Furthermore if India's government keeps spending on things that will not benefit long term growth, such as on loss making state owned enterprises, then we can only see an increasing misallocation of scarce resources and thus will not facilitate the growth of the Indian economy. Since the Indian government have been accumulating more debts to fund its revenue shortfall, a side effect of such an action would be the crowding out of private sector credit. Since there is a likelihood that private sector borrowing rates will increase as the result of the government borrowing, we might also see businesses choosing to look overseas to fund their operation where the borrowing rates are more favourable and thus exposing them to the volatile rupee.

However, in my opinion, the problems that India is currently facing whether internal or external should only affect India's economy in the short term. If India's government could streamline their spending and introduce new measures to make more efficient use of their human capital and natural resources, there is a good chance India's economy can match or exceed its previous high.

No 214 NATURAL GAS RESERVES

By Thanh Thien Nguyen


IN MY OPINION, economics and environment is quite interesting. It is familiar to our lives and many people care about the environment they are living in. In this article, I will talk about a recent issue which is related to energy.

According to the Economist: demand for natural gas has increased .Gas can be used for many purposes: transportation, power generation (such as gas turbine is used to generate electricity), domestic use (cooking and heating), fertilizers, or aviation …. However, there may not be enough supply in industry.

To solve this problem, some countries have started a new invention which can be substituted for natural gas. That is unconventional gas which occupies 45% of the world’s gas. They are shale gas, tight gas and coal-bed methane. The unconventional gas helps full fill the gap of the conventional one which can not be supplied as quickly as needed. It can be found in China, America or other gas- importing countries while Russia and the Middle East have the largest stock of conventional gas. As can be seen from the graph, China had the largest reserve for renewable gas. Russia had the highest rate but mainly was conventional gas.

 One of the advantages of making this new kind of gas is that it creates new jobs and hence reduces the unemployment rate. It can be a substitute for coal which releases large amount of pollution when being used.

The diagram above shows the increasing demand for gas in the next 30 years in different regions and types of natural gas. Gas has lower emissions. However, green energy sources still need to be improved.

There is also fear that the resources of unconventional gas will run out and the process of extracting them can pollute the environment (as chemicals are needed). Moreover, there is negative health impact for people and cattle living near gas exploration areas (chemicals released, methane contaminates water, and some think the process could lead to earthquakes)

(according to  CNN). The cost of producing is considered higher than the one of natural gas. France and Bulgaria have banned producing for environmental reasons. Greens in America and Australia are also rallying against the industry. The clip below is Australian news which shows the influence of unconventional gas on the health effect.

                                     

No 213: UCL Conference. Global Economic Outlook. Part 2.

A FORECAST of future economic situation considering whether there might be a new global economic crisis was an important part of the speech held by Dr. Linda Yueh. 
This possible forecast was based on summing up different aspects of economic growth.

In our view, one of the most interesting data was a comparison of nowadays’ recession with recessions during different economic situations the humanity has already experienced.

The graph clearly illustrates that the pattern the world economy is following during current recession is between crises of 1991 and the Great Depression. It can seem not as bad as it could be, however, if during the first year of the recession its speed was the same as Latin American crisis (which would have meant that economy could have been relatively easy to be restored), nowadays the speed of the recession is closer to the Great Depression rates. This means that in order to restore global economy with the lowest costs, fast measures should be taken to not allow the economy fall as it did during the Great Depression.

These worries can be supported by another graph shown by Dr. Yueh.

This illustrates the output gap during the last 30 years. We can compare the output gap of European countries in the begging of the 90ies when Europe was experiencing exchange crisis mentioned in the previous graph and the figure for these countries nowadays.

As can be seen, European countries shown in the graph had mostly positive output gap. The United Kingdom had a negative one, however the figure was not so significant as it was slightly above -1 per cent, compared to -6 per cent that it had in 2010. Other countries had their gap lower than -5 per cent in 2010. 

However, in 2009 all the figures stopped dropping and the whole pattern had flattened a little.

by Galeeva Dariya