South Sudan: Political Instability & War

This is the third and final post out of the mini series of three, focusing on the concept of Political Instability and War, within South-Sudan-the world’s newest state, riddled with civil war since 2012 resulting in major injustices and challenges for its economy.

Introduction:

South Sudan is an LIDC where war and conflict is rife, due to ethnic tensions between tribes. The nature of war is such that many South Sudanese people have this idea of war encoded in their DNA. They have no other skills or purpose due to a lack of employment opportunities meaning it is almost inevitable that they join a military group. Over the last decade this has taken a damaging toll on the economy and way of life. There are many issues associated with the existence of a ‘war economy’; rationing, lack of public investment in infrastructure and corruption on multiple levels are but just a few. South Sudan also has weak development of markets and a lasting level of insecurity, which hinders investment. It is unclear whether corruption causes poverty, or whether poverty results in corruption. Either way, corruption is ubiquitous from underhanded exchanges and trading weapons on the black market to large scale, government corruption (diversion of invested funds etc.). Another aspect of injustice is the leakage of assets abroad by the wealthy and others. Essentially this is where money and flows of capital leave the country hence the term ‘leakage’ resulting in a loss in GDP and growth opportunities for the home country, thus exacerbating the challenges.

 

The issues of existing in a ‘War Economy’:

  • Soaring Prices. Without incoming dollars to sustain central bank reserves, the currency is now in meltdown. Inflation was reported to peak at 300%, making the cost of living unaffordable for many citizens. In comparison the UK’s target for inflation is 2.0%.
  • Dependence on aid and a lack of diversification/expansion of the economy. Sudan controls the oil pipeline and has the power to set high tariffs. New investment in South Sudan’s oil sector has been severely diminished by the escalation of the civil conflict since 2013.
  • The scarcity of hard currency, particularly the US dollar, is a big problem; along with the sharp fall in the value of the South Sudanese pound. The official rate is 2.96 pounds for a dollar; on the black market it hovers around 14. As a result, life is increasingly expensive because South Sudan relies heavily on imports.
  • Before the war, South Sudan earned most of its money from selling oil. It accounted for 98% of government revenues. But since then production has halved because some oil fields have been taken over by the rebel forces or damaged.
  • South Sudan still offers businesses and workers in Juba from neighbouring countries – including Eritrea, Ethiopian, Kenya and Uganda the hope of getting rich quick, as there is far less competition than in their home countries
  • As well as attacks and kidnappings targeting foreign aid workers there have been several abductions of oil workers throughout 2017 with ransoms being demanded.
  • The South Sudanese economy shrankby 13.1% in 2016 and, according to the IMF, was expected to contract 6.3% in 2017.
  • The security environment in South Sudan will remain unstablein the medium term and the threat of kidnapping to foreign travellers will also consequently remain severe

 

The Issue of Corruption:

  • Corruption permeates all sectors of the economyand all levels of the state apparatus and manifests itself through various forms, including grand corruption amongst government officials.
  • South Sudanese leadership has been described as “shameless looters who are living in luxury while showing breath-taking indifference to their people”.
  • South Sudan was ranked 175 of 176 countries in the 2016 Transparency International’s annual corruption perceptions index (CPI), worse than Iraq, Pakistan and Bangladesh.
  • Within a year of independence, President Salva Kiir declared officials had already stolen horrifying amounts from the fledgling state. An estimated $4bn is unaccounted for or, simply put, stolenby former and current officials, as well as corrupt individuals with close ties to government officials. Most of these funds have been taken out of the country and deposited in foreign accounts. Some have purchased properties, often paid for in cash.

 

The Leakage of Assets Abroad (by wealthy and others):

  • The newest country in the world is in dire need of committed, educated nation builders. Many of its most wealthy citizens park everything from their assets to their families and themselves outside the country.
  • Many are even proud that South Sudan is one of the few African countries that, on balance, sends millions of dollars out to its diaspora, rather than relying on remittances sent in from abroad. Business people transfer money out to their families, especially for school fees.
  • An investigation by Avaaz, an online campaign group, indicates South Sudan’s top leaders move considerable property and banking assets outside their own country, into east Africa, the Middle East and Europe.While South Sudan goes up in flames, the families of the elite enjoy a luxurious lifestyle outside the country subsidised by endemic corruption of state coffers.
  • In Kenya’s capital Nairobi, South Sudanese number plates are commonplace on the four-wheel drives that circulate the leafy suburb of Lavington.

Kenya: Migration

This is the second post out of the mini series of three, focusing on the concept of Migration within Kenya-an LIDC, which has limited influence and restricted ability to respond to change within the global migration system.

 

Introduction

Kenya is a multi-ethnic, multi-cultural and multi-religious country, home to one of the largest refugee populations in Africa and some of the world’s oldest refugee camps. On going policy developments are shaping migration, and Kenya’s role and strategic location in East Africa highlights political evolutions that continue to structure migration systems in Kenya. Kenya gained independence from the UK on 12th December 1963. It has a population close to 47 million that is set to reach 80 million by 2050. Kenya’s economy is the largest by Gross Domestic Product (GDP) in East and Central Africa and it is a major hub for finance, communication and transportation services. Kenya is the 107th largest export economy in the world and it exports products such as: tea, horticultural products, coffee, petroleum products, fish, and cement. Kenya has a well-established economic set up, which has the potential to grow further, although corruption is hampering its economy as well as exacerbating issues such as violence and political instability meaning Kenya is also one of the most dangerous countries in the world.

 

Current Patterns of Emigration and Immigration

Immigration

  • The vast majority of immigrants in Kenya are from other African countries and, of these, the majority are from East African countries or partner states. There are fewer numbers of immigrants from Asia, Europe, and the Americas. The overall size of the international migrant population has increased between 1990 and 2013, but is still only around 2 per cent of the entire population. Refugees account for approximately one third of the international migrant population.
  • The role of Al Shabaab in Somalia has encouraged people to migrate to Kenya for increased stability and safety, although many lack formal documentation, thus making them illegal immigrants.
  • Nairobi is the most important city in East Africa for trade and financial services thus attracts a number of non-refugee immigrants.
  • The Dadaab refugee complex is one of the oldest and most established refugee camps in the world. It has a population of around 250,000 refugees and asylum seekers and consists of four camps. 96.21% of the total population is from Somalia, a war torn, conflict riddled and poverty stricken country which has forced many people to move to Kenya.
  • The first camp was established in 1991, when refugees fleeing the civil war in Somalia started to cross the border into Kenya. A second influx occurred in 2011, when 130,000 refugees arrived, fleeing drought and famine in southern Somalia.
  • Kenya also hosts refugees from conflicts in Sudan, Rwanda, and Burundi.

Emigration

  • Migration from Kenya has often been linked with the pursuit of higher education abroad, and the return of such skills and experience to the so-called business of “building the nation.”
  • The emigration of Kenyans in large numbers is a relatively recent phenomenon. During the first two decades after independence in 1963, few Kenyans emigrated and lived abroad due to high transportation costs. However with the rise of globalisation and cheaper airfares, this has changed.
  • The main driver of emigration appears to be access to employment opportunities. Top destinations include the United Kingdom, the United States of America, and other African countries such as Uganda and Tanzania; however, Kenyans can be found in most regions of the world, including Asia, the Middle East, Latin America, the Caribbean, and Oceania.
  • Departures of citizens exceed arrivals of foreigners, meaning that Kenya has a negative net emigration rate. As of 2014 this was -0.22 per 1,000 persons. The skilled emigration rate is an estimated 35 per cent, raising concerns about loss of skilled personnel in key sectors. The health sector is a particular concern, with estimates of the emigration on rate of health professionals reaching as high as 51 per cent.
  • The United Kingdom has become a top destination for Kenyan migrants, and totalled more than 151,000 people in 2015.
  • In recent times migration to the Middle East for employment appears to be trending upwards, particularly to Saudi Arabia and this bilateral corridor is likely to be of great significance in the years to come.

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Migration Policies  

  • In 2007, the government sought to curb recruitment malpractices by enacting the Labor Institutions Act, which regulates cross-border recruitment by private employment agencies, including the registration requirements, agents’ obligations, and penalties for violations.
  • In 2009, Kenya drafted an overall migration policy, followed the next year by a national labour migration policy. These policies encompass the deployment of Kenyan workers, their labour rights and protections while abroad.
  • In 2015, Kenya implemented a diaspora policy focused on harnessing the potential of its nationals abroad to contribute to the country’s economic development. The policy seeks to facilitate remittance inflows.
  • Despite these mechanisms proposed to enhance the protection of workers abroad, Kenya has not developed a comprehensive strategy to address reported labour abuses, particularly in the Gulf Cooperation Council (GCC) region. Kenya has not created the same protection infrastructure as key migrant-sending Asian countries, such as an official labour and welfare office, safe shelter houses, and other protection initiatives.
  • Kenya has increasingly been faced with a dilemma: how to prioritize its economic interests through bilateral trade relations while also guaranteeing protection for its citizens abroad, whose well-being often rests with key trading partners. While Kenya’s labour protection policy for workers abroad remains limited, its economic diplomacy in the GCC region has intensified with the pursuit of various trade partnerships. In 2011, Kenya and the United Arab Emirates signed an agreement to increase bilateral trade. The agreement seeks to prevent double taxation on businesses, finalize agreements on customs support, and promote and protect investments. In 2014, Kenya signed a major agreement with Qatar to increase bilateral maritime cooperation by creating a direct shipping route between Mombasa and Doha.
  • Given a bilateral deal signed by both countries in 2015 to recruit 100,000 Kenyans for jobs in the United Arab Emirates, Kenyan flows are expected to increase in the coming years.

Human trafficking

  • While there is limited data on human trafficking in the country, two main trafficking routes have been identified: the north-eastern route, which transits Garissa on the Kenya-Somalia border; and the western route between Kenya and Uganda at the Busia-Malaba border point. A trend of migration on and trafficking from Kenya to the Middle East has been noted, where Kenyans are at risk of exploitation on in domestic servitude, massage parlours or brothels, or being forced into manual labour.
  • Children and girls are particularly vulnerable to trafficking into sex tourism. Human trafficking in Kenya is said to have a value of USD 40 million on the black market.

 

Interdependence 

  • Kenya-Britain: This bilateral corridor represents economic migrants who are looking to improve their employment prospects as well as gain a better quality of life and standard of living. For similar reasons there are also many links to America
  • China-Kenya: Over the last decade, China has played a significant role in the Kenyan economy through investment in roads, and other infrastructure. This has resulted in many Chinese locating to Kenya in order to work and manage large-scale projects.
  • Kenya-UAE Bilateral Corridor: In recent years, temporary labor migration from Kenya to the Gulf Cooperation Council (GCC) countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates (UAE) has increased significantly. Seeking to fill labor shortages in sectors such as construction and other service-based jobs ahead of the UAE Expo in 2020 and the Qatar World Cup in 2022, some Gulf countries and employers have turned to Kenya as a fresh source of inexpensive labor—particularly as Asian countries impose restrictions on sending workers to the region. For Kenyans, rising unemployment and instability at home, combined with the difficulty of gaining entry to Western countries and the GCC region’s economic growth and proximity, have piqued the interest of would-be migrants.
  • In contrast, semi- and low-skilled workers have dominated Kenyan migration to the Gulf. Driven by a lack of opportunities at home, Kenyans are recruited as domestic workers, construction laborers, cleaners, hospitality servers, security officers, and taxi drivers. Migrants in these industries are often vulnerable to illegal and/or unethical recruitment practices, labor exploitation, and deskilling (occupational downward mobility). In particular, Kenyan domestic workers, who began arriving significantly in the Gulf countries after Ethiopia temporarily banned the deployment of its domestic workers in 2013, are often misled with fake job offers to lure them to migrate.
  • In response to a high rate of reported labor abuses among Kenyan workers in the region, particularly domestic workers, Kenya imposed a ban on labour migration to the GCC countries in 2012; it then overturned the ban in November 2013. While the ban was in place, some would-be migrants paid corrupt officials in order to secure employment in the Gulf countries. Some observers argue the government lifted the ban in response to the strong lobbying effort made by recruitment agency associations in Kenya.

 

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Opportunities and Challenges

  • Chinese Investment in infrastructure in Kenya has been criticised as being like modern day colonialism and a repeat of China’s role in Nigeria. They went into Nigeria, an oil rich nation and made a deal that they would receive a fixed price for oil for the next 30 years, in exchange for roads and railways. However they shipped their own cheap labour (mainly Chinese prisoners), which did not create as many employment opportunities for locals. The Chinese left a legacy and were trying to show their global dominance. That being said countries such as Kenya would certainly benefit in the long run from this infrastructure as it leads to further investment and economic prosperity.
  • Kenya vision 2030-this long-term national development policy aims to transform Kenya into a ‘newly industrialising, middle income country’ by 2030 and provide a high quality, clean and secure environment to all its citizens. It comprises of three main pillars: economic, social and political. The economic pillar aims to achieve an average economic growth rate of 10% per annum until 2030. The political pillar aims to tackle issue within the government including corruption, and the democratic system. Finally the social pillar is to increase the standard of living and conditions for all Kenyans.

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Conclusion

  • Kenya benefits from its emigrants as they send back remittances which help support the GDP of the country and if citizens return after having acquired new skills this can be particularly useful in reducing poverty and improving the economy. However Kenya also has political issues of its own as seen with the recent presidential elections and many citizens have not returned, resulting in skill shortages and a negative net migration. Further, emigrants in the UAE are facing poor conditions and are receiving much lower wages than they were promised, thus reducing the value of remittances and making exploitation more likely.
  • Immigration can be good if workers are skilled or if countries like China are building infrastructure; however refugees from Somalia have few skills and often locate in camps or slums, thus contributing very little to the economy and instead increasing social tensions between different ethnicities.

Mali: Tribalism

Hello readers, welcome back to my blog. Last time you may remember me discussing globalisation and how the world in which we live has become ‘smaller’ and more concentrated via a nexus of connections. I also pointed out some of the downsides of globalisation as well as recent news events e.g. Trump’s implementation of protectionist policies which suggest that we could be entering a period of ‘de-globalisation’. My next three posts will be a little different to usual. I will be focusing on three African Low Income Developing Countries (LIDC’s) and writing a case study about each where the topic will be different each time.

My aim is to provide some background information about these countries economically but also to investigate countries that are of interest to me. The first post in this series will be based on the issue of tribalism in Mali; the second about the various waves of migration in Kenya and some of the policies that have been implemented; and the final post in this mini series will be about the world’s newest state: South-Sudan and how it has fallen into a deep civil war & political unrest resulting in detrimental socio-economic costs. The post on Kenya will be more detailed as Kenya is where my parents were born and I have travelled to the country on numerous occasions, witnessing first-hand some of the setbacks to the economy such as corruption and crippling poverty.

Introduction

There are significant socio-economic and environmental contrasts in Mali. The north is a vast are of desert and semi-desert in which the Tuareg are the most dominant ethnic group. The south has the most economic activity as well as the capital, Bamako, located on the Niger. Gold, cotton and agricultural exportsgenerate income but overall this is a very poor, landlocked country, which depends heavily on foreign aid and migrant remittances.

 

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The Nature of Tribalism in Mali

In responses to a military coup d’état in 2012, Malian interim authorities requested assistance of France to ‘defend Mali’s sovereignty and restore its territorial integrity’. The challenges can be explained by the following:

  • International boundaries delineated by European colonial powers in the early 20thcenturyhad little regard for tribal lands, resulting in arbitrary division of the Tuareg ethnic group.
  • The Tuareg declared independence for Awazad, an area of northeast Mali over which they claim territorial and cultural rights.
  • There was fighting in the north to control routes for both legal trade and illicit smugglingg. Tilemsi Valley.
  • There has been ineffective state governance of the north, which has been marginalized and neglected from Bamako.
  • There is not just a centre-periphery divide in Mali; in addition to the Tuareg there are many other significant ethnic groups, e.g. the Songhai in the Gao area.

 

Global Governance Strategies

Global and regional institutions have intervened to resolve the sovereignty and territorial integrity issues. Their ultimate aim is to sustain the global system of sovereign nation-states.

  • UN mission in Mali (MINUSMA)aims to support the political process and stabilize Mali, ensure security, protect civilians, assist re-establishment of state authority and promote human rights.
  • ECOWAS and the African Unionhave been involved in mediation and returning power to civilian administration.
  • Success of the combined effects of global governance are evident in the 2015 peace dealbetween the Mali Government and Tuareg, providing some degree of autonomy for the North (locally elected leaders, greater representation of northern populations in national institutions and greater state budget for the north)
  • NGO’s provide assistance to local communitiessuch as: reproductive health, food insecurity, poverty alleviation, education, water, hygiene and sanitation.
  • Despite MINUSMA forces, it is increasingly difficult work in areas of armed banditsinvolved in smuggling, car jacking, land mines and kidnapping (tourists, NGO workers and diplomats for ransoms).

 

Opportunities for stability and growth vs. challenges of inequality and justice

The effects of global governance have been limited, there is continuing instability and the huge inequalities from which the problems stem, remain a challenge. Nevertheless HDI figures show slow improvement overall (male: 0.455, Female: 0.350). GDP per capita is recovering after it fell in the 2 years after the coup (US$496, 2015). World Bank also supports smallholder farmsby enhancing supply chains for farming and fishery products, for which Mali has a strong comparative advantage, through Agricultural Competitiveness and Diversification Project. Microfinanceinitiatives are promoting development from the grass rootsrather than “top down” projects. That said, like much of Sub-Saharan Africa, many villagers feel abandoned and disconnected due to limited infrastructure and service provision. There are also high levels of drug smuggling, human trafficking and corruption. Women and children are subject to a disproportionate amount of domestic and agricultural work, early marriage, female genital mutilation (FGM), military conscription and unsafe conditions in gold mines.

 

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Globalisation: Friend or Foe?

Hello readers, in this post I will be discussing a well known economic phenomenon, namely Globalisation. I will firstly give a brief definition before moving on to looking at the net effect on employment as well as the impact on the UK economy.

Globalisation can be defined as the increasing interconnectedness and interdependence of countries economical, politically and socially, primarily achieved by the reduction in physical barriers (time-space compression) due to the technological revolutions such as containerisation. This has resulted in increased trade, lower production costs, an increase in cultural awareness and greater connectivity amongst nations. That said the financial crisis of 2008/09 stood testimony to the detrimental effect of having such an interconnected world; how a domestic issue in one country can rapidly ripple across the globe and threaten the entire financial system (see my post on causes of the financial crisis for more information on this). Having said that, with President Trump’s move  towards protectionist policies and countries such as the UK looking to move away from the EU some would argue that we are headed towards a new phase of “de-globalisation”.

 

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The net effect of globalisation on employment:

Globalisation may first have an impact on the number of jobs available in the economy. Closing an enterprise in country A to move it to country B may result in job losses in a particular economic activity of country A. It may also result in job gains for country A as a whole because of higher productivity in the remaining enterprises, higher wages, and higher consumption demand. Globalisation may also affect the structure of jobs, i.e. their distribution across economic activities. Jobs linked to certain economic activities may tend to disappear whereas jobs linked to other, maybe new activities, are created due to changing competitive advantages and patterns of specialisation. The composition of jobs, i.e. the mix of skilled and unskilled jobs in the economy, is also likely to be affected by globalisation. So far, in developed countries, low-skilled workers have been most affected by stagnating revenues and / or increasing unemployment due to competition from developing countries’ workers and also as a result of technological progress.

Globalisation and employment are multidimensional and dynamic and are inextricably linked. The impacts are constantly evolving and for that reason there is not enough research to conclude definitely that globalisation is either good or bad overall. Some believe that globalisation since the 1980s has left economies worse off whilst others suggest that arguing against globalization is like arguing against the laws of gravity i.e. it can’t be stopped and eventually if left to market forces alone (invisible hand theory), the distribution of wealth between rich and poor countries will eventually even out. Globalization has impacted nearly every aspect of modern life.

While there are a few drawbacks to globalization, most economists agree that it carries a net benefit to the world economy, by making markets more efficient, increasing competition, limiting military conflicts, and spreading wealth more equally around the world. There have always been periods of protectionism and nationalism in the past, but globalization continues to be the most widely accepted solution to ensuring consistent economic growth around the world. Although in general, members of the public tend to assume that the costs associated with globalization outweigh the benefits, especially in the short-term, particularly in America, which was why Trump’s and his protectionism ideology was popular amongst lower-middle class Americans. Globalization has impacted nearly every aspect of modern life and continues to be a growing force in the global economy. It focuses heavily on trade and a study by the OECD estimated that a 10-percentage point increase in trade openness translates over time into an increase of around 4% in per capita income in the OECD area. It is not completely clear whether more or less jobs have and will be created with globalisation. What is clear though is that globalisation is compatible with high employment rates, provided the right domestic policies are in place. That said the labour market adjustment is not always smooth because many workers displaced from declining sectors are poorly positioned to move into newly created jobs, which may be located in different regions or require different qualifications.

In the future, if the trend of globalisation continues, and with automation and AI on therise we may see a significant decline in low-skill jobs such as cleaners, shopping assistants and bartenders. That being said as we have seen in the past, this new technology could lead to the next macro economic epoch and result in the emergence of jobs, which do not even exit yet, almost like another industrial revolution.

 

 

Effects of globalisation on the UK economy:

The UK has benefitted from a more globalised world ever since first exports and imports. During the industrial revolution, global ties were important for enabling the UK to import raw materials and exports goods. Recent decades are a continuation of this process of globalisation and we often forget the obvious benefits of a greater choice of imports, lower prices and economies of scale in production. Although textile industries, coal manufacturing and industries have closed down (deindustrialisation) in Northern cities, creating mass unemployment in the 1980s, this has led to the emergence of London being a key financial hub. The UK exports its financial products across the globe and this is one of its largest revenue streams. Although this has caused a ‘North/South Divide”, it is suggested that other cities will follow suite particularly when HS2 is completed.

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Economic Boom and Recession Periods in the UK.

Hello readers, welcome back to my blog. This time I thought I would discuss the idea of economic booms and recessions (‘The Economic Cycle’)-an important concept in Economics with a specific focus on the UK economy. My last post was quite topical and relevant to the UK’s current situation. This post will focus more on the UK’s economic history to provide a background understanding as well as discuss the concept of the boom and bust cycle. I will summarise the information across two tables so that it is easier to interpret and process the information as well as make comparisons.

A diagram showing the Economic Cycle within a typical economy and the stages that it oscillates through:

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Boom period in the UK

An economic boom is a period of rapid economic expansion resulting in higher GDP, lower unemployment and rising asset prices. One example of an economic boom period in the UK was the post world war II economic boom which led to the sustained period of economic growth and near full employment until the late 1970s, where it was inevitably followed by a recession (boom and bust cycle). This growth saw rising real incomes, which in turn led to higher tax revenues and falling debt to GDP ratios.

Causes of Boom Effects of Boom
Rapid global economic growth, especially in Western Europe, caused by recovery of Japan and Germany, low global inflation, increased free trade, with reduction of tariff barriers and relative political and economic stability. Also major technological improvements, such as computers, better petrol engines, and containerization. This led to more jobs being created, falling unemployment and higher real wages. There was also a fast growth in consumption helped by rising real incomes, strong confidence and a surge in house prices and share prices. Government tax revenues increased as people earned and spent more and companies made larger profits – this gave the government money to increase spending in areas such as education, the environment, health and transport. Led to overall improved standard of living (SOL) and quality of life (QOL).
Immigration and rebuilding of infrastructure

UK growth was so rapid, it experienced labour shortages. This led to the mass immigration of the 1950s and 60s to help deal with the labour market shortages. This helped increase the working population and increase real GDP. Also damaged infrastructure from the war was rebuilt.

More people working and generating more income in taxes for the government. Business with a greater labour force could expand to meet the rising demand and increase profits. Rebuilding of infrastructure led to increased spending on raw materials. Although the government spent high amounts of money on this, in turn it led to economic growth. Infrastructure projects also created jobs and more opportunities for people of all abilities.
Improved education

In the post-war period there was a growth in university education and secondary education became more comprehensive.

This created new types of jobs in the services sector, which paid more, leading to higher incomes.
Higher levels of confidence and high ‘animal spirits’, between firms and business A pick up in demand for capital goods as businesses invested more in extra capacity to meet strong demand and to make higher profits (accelerator effect)

 

Worsening of balance of paymentsand trade deficits High demand for imports because the country could not supply all of the goods and services that consumers were buying. Caused the economy to run a larger trade deficit. An increase in inflationary pressures if the economy overheats and has a positive output gap. This is the increase in the general price level, and this affected lower income families, as basic items had increased in price.

 

Recession period in the UK

 

A recession is a period of economic decline resulting in lower GDP, higher unemployment and falling asset prices. It is often defined as two consecutive quarters of negative growth.  An example of a period of economic recession in the UK was in 2008-2009, which was known as the Great Recession. According to the UK Office for National Statistics (ONS) the UK entered a recession in Q2 of 2008, and exited it in Q4 of 2009. It was the deepest UK recession since the war and affected many sectors including banks and investment firms, with many well known and established businesses having to close and declare bankruptcy.

 

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Causes of Recession Effects of Recession
The global financial crisis of 2007-2008 and the subprime mortgagecrisis.

Sub-prime mortgages: these are a type of mortgage characterised as being taken on by a borrower with a low credit rating and often secured on a low value property. Lenders will charge higher interest rates than for conventional mortgages as they seek to compensate for carrying higher risk).

 

The immediate trigger of the crisis in the UK was the bursting of the U.S.A. housing bubble, which peaked in 2004.

As banks in the USA began to give out more loans to potential homeowners, housing prices began to rise. However these were sub-prime mortgages and eventually when the bubble burst and houses prices fell, it resulted in homes being worth less than the mortgage loan, leading to lots of negative equity, creating a negative wealth effect and overall ‘low animal spirits’ providing a financial incentive to enter foreclosure. As the US dollar is the global currency for all commodities and as the US economy impacts the rest of the world as a result of, this caused economic turmoil in the UK too.

UK mortgage lenders also gave out subprime mortgages although did not lend so many bad mortgages and it still had more controls in place than the US. Despite this it caused very serious problems for Northern Rock brank. Northern rock had a high % of risky loans, but also had the highest % of loans financed through reselling in the capital markets (long term investments, and bonds). When the sub-prime crisis hit, Northern Rock could no longer raise enough funds and eventually had to make the humiliating step to asking the Bank of England for emergency funds. Money from the taxpayer was also used to fund this. As a result of this the Bank it caused customers to start to worry and they withdraw their savings (even though savings weren’t directly affected).

Credit Crunch Sudden shortage of funds for lending since the markets had dried up resulted in a decline in loans available.
A fall in purchases of components and raw materials As a result of being unable to borrow, overall confidence in manufacturing and within firms was low and there were high levels of uncertainty, leading less confidence and no further investment.

As there was less demand for materials and products, it created lots of unemployment and fewer job vacancies available for people looking for work. By end 2008 the Manufacturing output had declined by 7%.

The unemployment rate rose to 8.3% (2.68m people) in August 2011, the highest level since 1994.

 

A rise in the number of business failures and businesses announcing lower profits and investment

 

As interest rates had been raised (at 5%) it meant that any loans businesses had were likely to have risen. Together with a contraction in sales because of little consumer confidence and spending led to lower profits and many companies being unable to survive. The whole financial crisis also impacted the value of exports and imports of goods and services hence affecting growth

 

Brexit: Deal or no Deal?

Hello readers, welcome back to my blog. Last time you might remember me discussing some of the common misconceptions with privatisation and how sometimes it may be useful for the government to intervene within certain sectors of the economy. However, I pointed out that nationalisation is by no means a universal policy, rather each industry is unique and often governments need to strike a balance between the two extremes in order to reach the most optimal solution for society, as is the case with many economic problems. In this post I will be discussing something more topical. Brexit. Yes we have all heard it in some context a million times, “Brexit means Brexit”, ‘Hard or Soft”, “no deal”. Featuring in almost every newspaper, tv report or public debate about the welfare of the UK, Brexit seems to have become ubiquitous. Some of you may have already stopped reading this post after seeing the title and not being able to read anything further about this, but if you are still here it’s time to get down to business and actually assess some of the possible outcomes for the UK. Although it has caused a huge deal of concern and confusion among the public, politicians, other countries and even the UK prime minister-Theresa May, the deadline for the UK government to strike a deal with the EU is fast approaching and Britain needs to reach some sort of agreement before a “no deal” means “no deal”. Here’s everything you need to know about the current issues, in particular the impacts of a no deal, why it may be the only option and the potential consequences for the UK, in a nutshell. Please feel free to share any of your own ideas below or contact me about the content discussed at rajveersira@gmail.com

Brexit is an issue which is omnipresent; for an event which started over two years ago it is still considered a ‘recent’ news event, as the deadline to reach a deal between the UK and the EU is imminent. Although triggering article 50 is an extremely complex and multifaceted scenario, I am particularly interested in 3 aspects: The impact of a ‘no-deal Brexit’, the dilemma surrounding the Irish boarder and whether Brexit could be reversed.Screen Shot 2017-08-06 at 14.39.37

Firstly, if the UK was unable to come to any deal with the EU, then trading would revert to WTO rules resulting in tariffs on goods moving in and out of the UK. This includes the millions of German cars that people in Britain purchase every year (imports) as well as the financial products that Britain essentially exports, not to mention that there would also be physical disruptions due to increased custom and border checks resulting in production delays, inefficiency and potentially lower profits. It is some-what ironic that the UK population opted to Brexit considering a major source of income for the country is derived from the export of financial services, mainly within London. It has been estimated that without the contribution from London of such products, the UK’s GDP would be the same size as Spain’s.

If however the UK was able to strike a deal in its favour i.e. tariff free trading (access to the single market) yet without free movement of people (control over its borders) then other EU countries may want to do the same i.e. increased sovereignty without any strings attached. Essentially in game theory terms, this is a ‘zero sum game’ whereby one person’s losses are equal to the other person’s gain. This is where we hear the terms ‘hard’ and ‘soft’. The former referring to a clean break between the UK and EU i.e. no free movement of people and the latter allowing free movement to continue as normal. Since one of the underlying root causes of Brexit was the issue of immigration it is unlikely that Britain would want to remain in the single market. Clearly immigration in the UK has a negative connotation and stigma as it supposedly ‘steals jobs’. This is a huge misconception that was wrongly portrayed by the leave campaign who were myopic in their reasoning and did not consider some of the long term net benefits of migration hence why some argue that due to misinformation there should be a second referendum (more on this later). Although I have discussed the benefits of migration in an earlier post, I will reiterate them here. Firstly, with an ageing population, the UK needs to consider alternative avenues to fund pension schemes. One such way is to boost its tax base from immigrants working in both low and high skilled sectors of the economy. Secondly, migrants are often seen to be more hardworking than their British counterparts and as such they have a higher productivity, which can result in greater profits and efficiencies for firms and businesses. Moreover there are a number of acute skill shortages in the UK, particularly within the NHS and thus closing down the border would have major implications for the millions of  British people that rely on free healthcare. Finally, many people often forget that immigrants can create local and regional multiplier effects. The income that they earn may partly be sent back to their home country (remittances) although a large proportion is used to spend on local goods and services which can create different avenues of income for others and potentially result in the construction of new jobs. We should also consider the fact that previous waves of immigration have been a huge success in areas such as Leicester or London where there is a significant cultural diversity and these places are currently thriving. There are a number of other benefits and thus Britain should consider the impact of pulling up the drawbridge and  preventing like-minded, hardworking, individuals from entering the country. There are also implications for EU nationals currently living in the UK. Many lack the full political understanding of the situation and are concerned about their future regardless of what they may be promised by the UK. As such we could start to see skill shortages and lower tax revenues before Brexit has even occurred.

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The biggest impact of a ‘no deal’ is that both parties would face disruption to trade which is costly but also regressive-wealthy individuals can afford to absorb any shocks to consumer prices but poorer households may struggle to cope with increases in essential goods and services. This means that consumer incomes are essentially being ‘wasted’ on a tariff when they could have been spent on another utility enhancing good i.e. there is an opportunity cost. Moreover imposing tariffs may damage result in retaliation and trade wars between countries leading to higher prices and disruption.

Secondly, I am particularly interested in the dilemma posed by the question of the Irish Border. A return to a hard border may reignite the social and political tension of the past but also lead to customs checks causing massive disruption for the people and businesses on both sides of the border. A possible solution proposed by the EU is to allow Northern Ireland to remain in the EU customs union effectively making the Irish Sea the border, leading to the break up in all but name of the United Kingdom; this is something that no UK government can agree to. A technological solution is being suggested but details about this are still vague. A hard border is not wanted by either the UK or the EU but would be inevitable in a ‘no deal’ Brexit scenario. Both sides know this and its implications but seem powerless to prevent it from happening whilst the deadline looms ever closer. Having said that, an article from the Guardian (written today) points out that the EU is willing to extend the transition period after the UK leaves the bloc, but warned Britain must not renege on previous agreements to prevent a hard border between the Irish Republic and Northern Ireland.

Finally many argue that the people should have a chance to vote on the terms of the deal (once they have actually been formalised and confirmed) or even have the opportunity to reject the proposal and remain in the EU. After all there were many inaccuracies and misunderstandings about the referendum which may have skewed the outcome. In particular, the confusion about the impacts of immigration, the complexities in triggering article 50 and of course the potential for violence in Ireland. One should also consider that fact that the formation of the EU has resulted in the longest period of peace since WW2 and perhaps, economic & political arguments aside we should look beyond this and opt for the option that results in stability rather than ‘experimenting’ in ways to increase the UK’s control and sovereignty. In addition the amount of money that has been spent on this issue and the time that has been invested; has diverted the country’s resources away from focussing on other, arguably more important issues. Thus whilst the UK is trying to negotiate its position, other countries may be focussing on innovation and the roll out of AI or upgrading existing social institutions e.g. healthcare.

However this fundamentally comes down to the principles of democracy and the fact that an outcome which may not be desirable for many has been voted for by the majority and thus should be respected regardless. Going back on this would essentially be breaking a code and undermines the true meaning of living in a society whereby democratic decisions are adhered to.

Below is a short animated video to help clarify some of the issues surrounding Brexit and provide some optimism about the issue; how it could be a potential success. Don’t be too persuaded, its a lot more complex than it seems!

 

Privatisation vs. Nationalisation

Hello readers, welcome back to my blog. This time I will be discussing Privatisation vs Nationalisation, in other words the Thatcherite’s vs the Corbynite’s. As with most economics problems, there is never ‘a one one size fits all policy’ and so there is no straight forward answer as to which is better.

I will be analysing this issue through Corbyns view i.e. pro nationalisation-Why privatisation may not work in practice. Although I do not support one or the other myself since it often depends on the industry or service in question, I do think that there are a number of myths about privatisation that need to be debunked.

We often hear a lot about the merits of privatisation such as how increased competition may result in efficiency gains, namely productive and dynamic efficiency; however, often the only way to solve the problems that really matter to people such as the shortage of homes, the awful trains or the unsatisfactory economic situation-is to break with the consensus that Mrs Thatcher established in the 1980s.

  • Firstly the long-term costs of privatising industries such as the coalmines were estimated to be much more than the cost of employing the miners. When Thatcher shut down the mines, it resulted in mass structural unemployment as workers who had spent their lives in mining had developed few transferable skills (occupational immobility of labour). Not only did this mean that the government had to pay unemployment benefits but it also caused hysteresis, which left workers in a difficult position unable to feed families and defaulting on mortgage payments which worsened levels of relative poverty. Moreover it meant that workers had very low MRPs and were unable to demand higher wages or work in service sector jobs. The negative multiplier effect of this long-term structural unemployment is argued to have had much more profound and lasting effects than the costs of actually financing the industry, such as a reduction in AD leading to further unemployment and further costs for the government, which would worsen the budget deficit and burden future generations with high levels of national debt. This may lead to Ricardian Equivalence (consumers are forward looking and will therefore reduce consumption to save for future tax rises).

 

  • Privatisation can also result in the demise of unions who lose their collective bargaining power on benefits, perks, holidays, and wages as firm would look for new ways to reduce costs and maximise profits. Even in the boom years of the mid-1980s, the unemployment rate remained high-levels not seen since the 1930s and in the late 1980s, unemployment was still over 2 million. Since then there has been growth in north-south divide and regional inequality. Admittedly one could argue that de-industrialisation caused by the global shift in manufacturing and the transform to a more service based economy was inevitable as the UK started to loose it comparative advantage to the new and emerging Asian tigers; however, this does not been that nationalisation should just be abandoned as an economic policy

 

  • One of the biggest criticisms of privatisation is the Natural monopoly argument e.g. Network Rail, as such industries are likely to be underinvested if left to the free market. A natural monopoly occurs when there is no scope for having competition amongst several firms. Privatisation of such industries would just create a private monopoly which might seek to set higher prices which exploit consumers. Therefore it is better to have a public monopoly rather than a private monopoly.

 

  • We should also consider the Public interest. There are many industries that perform an important public service, e.g. health care, education and public transport. In these industries, the profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. American health care system or some of their prisons stand testament to the stark inequality that can arise-42% of ill Americans skipped doctor visits/medication in 2011 because of excessive costs. Furthermore, private companies may choose the market, which is most profitable to operate in leaving less wealthy customers without a service. This could lead to equity concerns-would a private NHS provide enough operations for those on low incomes who tend to need such provisions more. Is there a merit good argument for not privatising at all? Krugman in his blog concludes: There are, no examples of successful health care based on the principles of the free market, for one simple reason: in health care, privatisation just doesn’t work. And people who say that the market is the answer are flying in the face of both theory and overwhelming evidence. By analogy, a major reason for providing universal healthcare, as a public service is that decent medical treatment should not be a privilege reserved for the few. Although some public firms have been shown to be inefficient, as we know from the sad experience of Soviet-style central planning, it is by no means a universal principle.

 

  • Furthermore the government loses out on potential dividends, instead going to wealthy shareholders. For example, train companies in the private sector routinely pay more than £200m a year in dividends to their shareholders. In addition state-owned rail industry could borrow more cheaply from the government than it could if it issued new debt to the bond market.

 

  • Fragmentation of industries. In the UK, rail privatisation led to breaking up the rail network into infrastructure and train operating companies. This led to areas where it was unclear who had responsibility. For example, the Hatfield rail crash was blamed on no one taking responsibility for safety. In addition, the increased competition and choice that may arise from privatisation may not actually improve consumer welfare as too much choice could lead to choice overload.

 

  • Although short-term pressures may motivate the government, this is something private firms may do as well. To please shareholders they may seek to increase short-term profits and avoid investing in long-term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.

 

  • Prices may actually rise after privatisation as the government may have been operating it at a loss to ensure that prices do not become unaffordable for everyday citizens. For example rail fares in the UK after privatisation were allowed to rise above inflation for certain ticket types thus reducing allocative efficiency. This demonstrates that even regulated privatisation is failing to deliver price competition, the primary argument underpinning privatisation.

 

  • Many of the privatized firms were transferred as monopolies into the private sector and this necessitated regulation to avoid market failure and to ensure performance standards were met. This is costly and is susceptible to regulatory capture and thus it makes more sense for the government to manage these industries directly. The recent chaos on Southern Rail underlines how the relentless drive for profits and dividend pay-outs can threaten essential safety, as well as jobs and reliability of service on the railways.

 

  • State-owned companies solely operate in the best interests of the citizens of their state, as ultimately their primary objective is to maximise utility and create a functioning society for all. On the flipside, privately operated firms generally aim to maximise profits at the expense of their customers and exploit market power by raising prices and making huge supernormal profits damaging consumer welfare. Also some institutions are unable to manage their risks properly, thus they get ‘too big to fail’ which leads to an even worse outcome.

 

  • By considering market structures: If the firm is operating in a market close to perfect competition then there may not be an incentive to innovate as there is perfect information and no barriers to entry meaning that cost reducing technology can be copied or employed by other firms and in the long run only normal profits will be made. If the firm is operating in an oligopoly there is a risk of collusion and price fixing, which could reduce consumer surplus. In a monopoly, there may be X inefficiencies as well as allocative inefficiency (price charged above the marginal cost) due to complacency. It is possible that there may be significant price discrimination, which means that peak time commuters for example will be faced with increased fares. This could worsen geographical immobility as workers are less able to travel across the country and could be regressive if such costs make up a large percentage of an individual’s income.

 

  • Problems with private firms also arise from the Divorce of ownership and control and the Principal agent problem: We have heard that privatisation is likely to result in productive efficiency as such firms must answer to shareholders, therefore they may pay increased dividends at the expense of consumers as they opt for a low quality service. We have also heard that the profits made by such firms can be used to invest in R&D to stay ahead of the game and actually improve the industry. However if firms have are concerned with the political stability or long-term future of the economy for example the impact of Brexit, they may delay such projects as there is a risk they may not see a return. Thus we may see a decelerator effect and the so-called ‘creative destruction’ process may not occur as expected. The government however is able to take a more risk seeking approach as it relies on the public purse and such investment decisions are likely to be in line with the country’s political decisions. Moreover private firms may deleverage and pay of debts rather than providing an improved service or reducing costs to the MES level of output.

 

  • Privatisation may also decrease safety standards due to a greater incentive to cut corners, which is of particular concern for industries such as National Air Traffic Services and defense. These are also Public goods and would not be provided at all by the free market due to the free rider problem thus they have to be nationalised without a doubt.

 

  • Privatisation takes time to be successful if it ever does. e.g. opening Royal Mail up to competition didn’t lead to a competitive market overnight-there was customer inertia, brand loyalty, barriers to entry. The process is also costly According to David Hall, an expert in this field at the University of Greenwich, turning the provision of water into private hands costs almost £1bn a year extra. Were it still to be in the public sector, he estimates, that would amount to about 12% off the average household bill.

 

  • Finally public provision can tackle the issues of externalities. For example a private company might want to cut down swathes of forest to grow crops for biofuel, disregarding the long-term environmental impact. Whereas the government will consider the long-tern environmental effect or take into account any other form of market failure.

 

In conclusion, arguments favouring private over public provision typically favour the few at the expense of the many. Moreover there are a number of key issues with privatisation that are often overlooked. Admittedly there are many flaws with public provision and not every industry would be worth taking back into public ownership, instead there should be a balance between the two and it is highly dependent on the type of industry in question.

Stay tuned for my next posts which include: China’s social credit system, AI and recent mergers and acquisitions.