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

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014

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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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