Showing posts with label economy. Show all posts
Showing posts with label economy. Show all posts

Monday, 13 June 2016

The Wonderful World of Potternomics


'Welcome' said Hagrid, 'to Diagon Alley.'




Economic systems are fascinating. They come in all shapes and sizes, from classic liberal democracy to more notorious historical ne'er-do-wells such as communism, empire (mercantilism) and autarky. The world of fiction is also replete with them; think Star Wars, The Lord of the Rings, Prachett's Discworld or even simpler constructs such as The Borrowers. In numerous ways, depending on the preferences of the author, they can offer up a whole range of similarities or differences to our own economic experiences. In turn, these fictional 'case studies' offer a unique opportunity for us to explore the world of economics in new and interesting ways.

And what better place to compare and contrast fictional economic concepts than the wizarding world depicted in J.K Rowling’s Harry Potter series? Not only is it a modern childhood classic, but part of its charm as a story is that many aspects of both the protagonists’ personal lives and the realm they inhabit are directly comparable to our own, with enough unique differences to complete the fantasy effect in our imaginations.


Potternomics - The Basics 

I’m assuming anyone reading up to this point probably has a passing interest in the Harry Potter franchise, and a grasp of the at times convoluted but essentially simple plot. From this point on, then, we’ll start looking at the various different actors and institutions that populate the ‘Potterverse’ (a bit of fan-vocab, but useful), and hopefully uncover some interesting economics that we can compare to our own societies.

So what sort of things in the wizarding world could interest economists? Well, from pretty much the moment Harry walks through the wall (a magic wall, naturally) at the Leaky Cauldron, we are presented with a wonderful array of economic participants in Diagon Alley and beyond.

At the firm level, we have commercial enterprises (Ollivander’s wand shop, Flourish and Blotts’ bookshop), financial institutions (Gringotts), a central government (the Ministry of Magic) and an established education system (no need to reference here!). At the individual level, we have wizards, goblins and elves as the three main economic participants. The latter two are distinctly subordinate in status to wizards, with goblins fulfilling the ‘negative’ role of moneylenders at Gringotts, and elves as a type of servant underclass. Whilst it is clear that Rowling uses these social strata to discuss moral and ethical dimensions, and to encourage her readers to contemplate these subjects, the economic aspects of such stratification are also of interest. Why, for example, do the wizards feel the need to maintain such an economically discriminatory system?

In addition to economic participants and institutions, we also have a fascinating collection of economic items; commodity money in the form of gold Galleons (and their sub-units, the Sickle and Knut); magic itself as a productivity-enhancer akin to technology; a developed legal structure that has frightening inconsistencies, and much more. This is an intellectual dream for economists of all stripes, encompassing microeconomic theories of individual preferences to macro level institutional policies.


Diagon Alley and beyond...

Over the next four posts, I’ll be looking at a number of areas in the Potterverse that I think are of particular interest to economists in the real world today. We’ll assess the role of Gringotts as a financial institution, and the wizarding preference for commodity money over a paper equivalent. We’ll look at social stratification in the wizarding world, and assess why wealth differences still persist despite the universal provision of standardized education. Then we’ll turn to the role of institutions, and ponder their effectiveness in serving the wizarding population. Finally, we’ll conclude with a magical case study; ‘Voldemort – from orphanage to oligarch’. How did he make it, how did he gain support, how did he game the system and what lessons might there be in this tale for economic management in the real world today.

Who knows, if we learn a thing or two about our own societies in the process…well that may be what JK intended all along! So get your broomstick, and see you outside Gringotts!


Saturday, 16 April 2016

Mythbusters: Brexit Edition

People have been clouded by scaremongering that has prevented us from getting to the real debate of Britain's EU membership, says Matt Walton. Today, he seeks to set the record straight on this key issue.


The debate surrounding the economic implications of Britain leaving the EU has so far been dominated by both sides trying to outdo each other in terms of scaremongering. “Brexit could cost £100bn and nearly 1m jobs” say the EU-funded CBI one week. “EU policies threaten to cost Britain £9,265” says the IEA the next. It is perhaps no wonder that many voters feel a little bit unsure about who to trust. The announcement this week that the government would spend £9.3 million on a pro-EU leaflet to every household meant that they had another organisation to add to that list of scaremongers. In this piece, I will attempt to draw together the economic arguments for Britain to leave the EU while rebutting some of the outlandish claims of the ‘In’ side. Before starting, however, I have a slight admission: My main motivation for wanting to leave the EU is not economic, but rather democratic. I fundamentally believe that we must leave so that we can hold those who make our laws accountable. However, given that this is an economics blog site, I will focus on the potential economic benefits which this country could enjoy.

Naturally most of the economic arguments surrounding the debate concern Britain’s trading relationship with the EU if we vote to leave. Trade is what the EU is all about after all, isn’t it? Campaigners on the Remain side have said that Britain would struggle to negotiate a favourable trading arrangement if we leave. That Britain is a relatively insignificant market for the EU and it would therefore be the EU which dictates the conditions of the deal, not the UK. This is incredibly misleading. Firstly, on the day that we vote to leave the EU, we become the EU’s largest export market for goods. Moreover, we currently export goods and services to the EU to the value of £228.9 billion per year whereas we import £290.6 billion of their goods and services (2014 figures). This means that we have a trade deficit with the EU of £61.7 billion. At a time when the EU struggles to shake off the remnants of the Euro crisis and when growth is still sluggish, can you imagine any desire on the EU’s part to forfeit this huge source of income?

Let’s suppose, however, that Britain does not reach a trade deal with the EU. A worst-case scenario, where the EU member states close ranks and say: “We won’t give you a trade deal, if you’re out you’re out.” Aside from being a particularly unlikely outcome, it’s also not a particularly damaging one for the UK. In this situation, the UK would revert to the rules of the World Trade Organisation (WTO). WTO rules dictate that tariffs on most goods must be between 1% and 3%. Let it be reminded that this is the minimum standard. In other words, almost negligible. The only areas where this is not the case is a) cars and b) agricultural products. 

But any tariffs the EU imposes on Britain will be matched by equivalent UK tariffs on EU products. Who makes wine and cars? Answer: the Germans and the French – the two countries who dictate EU policy more than any others. The German car industry alone, would be at risk of facing reciprocal UK tariffs on the £16 billion market for German cars in the UK. Almost 1/3 of the new cars sold in Britain come from Germany. You can be sure that, if we vote to leave, the heads of BMW, Mercedes, Volkswagen and the rest of the hugely successful German car manufacturers will be in Angela Merkel’s office the next morning saying “We need tariff-free access to the lucrative British market.” It is inconceivable, therefore, that a trade arrangement between the UK and the EU would not be reached.

If countries like Norway and Switzerland can prosper outside
of the EU, why not Britain?
“But”, cry those who want to stay in, “you won’t have access to the Single Market.” This is a valid point as far as the Single Market in terms of goods is concerned, yet our economy is not primarily goods-focused. David Cameron, in a column urging people to vote ‘In’, has claimed that 80% of our economy is made up of services. Though as he well knows, there is currently no Single Market for services. So the Single Market argument which he and others perpetuate cannot be relevant to the UK’s situation. Non-EU Switzerland, which supposedly doesn’t have access to the EU’s services market, exports five times per capita more to the EU than we do. If countries like Norway and Switzerland, two of the world’s richest and happiest nations, can prosper outside of the EU, maintaining friendly relations and trading with the bloc, without being subject to its constant over regulation, why not Britain?

Another argument peddled by the Remain camp is that British jobs would be at risk if we voted to leave. Their favourite figure to use on this comes from a report compiled by the National Institute of Economic and Social Research (NIESR) in 2000 which suggested that around 3 million jobs in the UK are linked to our trade with the EU. The methodology behind this is fairly simple to understand.  The UK’s exports to the EU are equivalent to 13% of our GDP. Thus, claim the researchers, it is logical to assume that 13% (3 million) of British jobs are linked to our trade with the EU. The operative word here is linked, however. The NIESR explicitly acknowledged that "there is no a priori reason to suppose that many of these [jobs], if any, would be lost permanently if Britain were to leave the EU." Plus, if you use the same back-of-the-envelope-type calculations for the EU, you find that between 5 and 6.5 million jobs on the continent are linked to their trade with the UK. Thus a trade deal with the UK would be imperative for job security in both countries.

I want to move away, however, from criticising the arguments of the ‘In’ side. Instead, let me spell out a more positive vision for Britain’s economy after we leave. After the 2 year negotiation period set out in the Lisbon treaty, and Britain is freed from the EU’s Common External Tariff, we will have access to world prices. These are typically 8% lower than prices in the EU. As a nation with a particular preponderance for imported goods, this will be a noticeable shift. The move from EU prices to world prices will mean that the cost of food and household goods will fall. Furthermore, this means that British firms will have access to cheaper factor inputs. The only result of cheaper inputs is that we, as a nation, become more globally competitive.

A departure from the EU’s protectionist external tariff wall will not just help the UK though. Currently African farmers, some of the most impoverished businesspeople on the planet face EU tariffs of 7.5% on roasted coffee and 30% on processed cocoa products, two of the continent’s major exports. Think what the removal of this barrier, at least on the UK’s part, will do for those same farmers. Tariff-free access to the UK market, the 5th biggest economy on the planet, can only make them richer.
 

One of the most frustrating things which I am hearing as the referendum approaches is that people “don’t know the facts” or that “they haven’t been told enough about it” – the inevitable result of media and government hysteria most likely. You each have, at your fingertips, possibly the most useful research tool in the history of humanity: the internet. If you are undecided or wanting more information about the referendum, it can be as simple as watching a YouTube video, reading a newspaper column or watching Question Time on Thursday evenings. 

If you want to find out more about the case for Leave, I would recommend listening to Dan Hannan or Tony Benn, or perhaps even reading Michael Gove’s piece on why he is voting to leave. From the Remain side, David Cameron and Alan Johnson are the ones making the case most prominently. 

Ultimately, however, it will be your choice on June 23rd. The outcome will fundamentally alter the course of British politics. 

Whether we vote to leave or stay, there is uncertainty. Yet it is my strongly-held belief that leaving the EU is not a ‘leap into the dark’ but rather a ‘step into the light’, towards a more prosperous, more democratic United Kingdom.

What is your opinion on this issue? Should Britain stay in the EU or vote to leave? Put your opinions in the comments below!

Saturday, 9 April 2016

The State of Gaza #3: Economy

The Gazan Economy is 'on the verge of collapse' according to a 2015 World Bank report. In today's article, we look at how this has become the case.



If you've read the previous two articles, where we explored the blockade and the state of welfare in Gaza, it probably won't come as a surprise to you that the Palestinian state's economy is in dire straits. 

With an economy forced to be closed by the blockade, 42% of the population aged under 14, and those many of those who are the age work suffering from health issues, neither the labour supply nor demand market in Gaza is functioning effectively. Gaza is facing not just a record youth unemployment rate, of 60% (Spain, the most commonly cited example of terrible youth unemployment peaked at around 55%), but the highest unemployment rate in the world, at 43%. Greece's unemployment rate of 24% pales in comparison- but, of course, being a larger population and part of Europe, it has received far more attention. 

In contrast to the rest of the world's economic troubles, Gaza has not been massively disturbed by the financial crisis of the past decade as Western countries have- due to its troubled history, financial institutions have played little role in the state economy. The Middle East as a whole, according to Nader Habibi of Brandeis University, was protected a great deal from the crisis due to its lack of integration into global financial markets, and it would be fair to say Gaza was among the least financially integrated in the Middle East. 

The economic struggles of the 1.8m residents of Gaza have instead been caused by, according to the World Bank, "repeated armed conflicts, the blockade and internal divide". 

The blockade, which has heavily restricted the inflow and outflow of goods from Gaza through its Israeli border (a policy supported also by the Egyptian border control), has crippled the state's ability to trade. The blockade has gone through multiple iterations since its first implementation in 2007, when almost all shipments of goods were banned from leaving Gaza. Some agricultural exports were allowed to head from Gaza to Europe, as part of a very specific trade deal with the Netherlands, but all other exports were wiped out. Since then, the Israeli government has very slightly reduced the blockade controls. Currently, they allow limited amounts of agricultural product, textile, furniture and scrap metal to be exported (mostly for sale in Israel), but nevertheless, the number of trucks exiting Gaza today carrying materials for trade is just 10.6% of the number that would leave before the blockade, pre-2007.

Trucks leaving Gaza since 2000. Source: UNOCHA 
The blockade remains devastating. The agricultural sector in Gaza has suffered hugely, in part due to falling demand also. Marketing Director of the Ministry of Agriculture, Tahseen al-Saqqa, told Al Monitor in an interview that "the Strip's agricultural export losses amounted to about $40m a year, since the beginning of the siege in 2006." This wouldn't be such a loss for most countries, but for a state with GDP of just around $3bn, this has been a bad blow to the economy.

Gazan farmers are even unable to export produce to their fellow countrymen in the West Bank. Strawberry exports, for example, were banned in 2015 after Palestinian strawberries were found being sold on the cheap in Israeli markets. 

The blockade has prevented Gazan fruits from reaching
the Palestinian West Bank.
As well as agriculture, industry has suffered hugely. According to the World Bank, the blockade has been responsible for the manufacturing sector shrinking by as much as 60% over the past 8 years. This has been not just because of the lack of materials available to manufacturers in the region, but furthermore due to Israeli attacks on the region. 

The costs of Israel's 2014 summer offensive hit an estimated 500 production facilities in Gaza, wiping an estimated $460m (15%) off the state GDP. This, of course, is on top of the infrastructural damage, and the massive number of human casualties and fatalities that reduced further the labour force.

These economic issues have been compounded by the state of welfare in Gaza.. The lack of education opportunities available to Gazans has limited the region's capacity for economic growth, and the lack of healthcare has meant that the labour force is (physically) weak. The repeated bombing of key infrastructure and housing by Israel has not helped the situation either. 

The answer to the humanitarian and economic problems being faced by today's Gazan people is therefore not just to lift the blockade. This will, of course, provide much needed economic and humanitarian support to people in the region. But more is needed. Action must be taken by the international community to cease Israel's state violence against the Palestinian people and their lands. Almost 60% of the built up regions in Gaza were struck by Israeli bombs and weaponry in the 2014 war, reversing a lot of the progress that was made by the Palestinians in revitalising their economy. These bombs have undoubtedly destroyed far more than anything they may have produced.

It'll take more than opening the blockade to prevent this- Israeli state violence against Gaza is what needs to be brought to an end. If not, it won't just be the Gazan economy which will collapse as the World Bank says, but the Gazan people as a whole.