In 2010, Carmen Reinhart and Kenneth Rogoff published a study of growth in times of debt, with controversial results. They concluded that if the debt-to-GDP ratio in an economy exceeded 90%, economic growth would fall significantly with implications for the GDP and public finances. National debt would reach unsustainable levels, and governments would become more likely to default on their bond repayments. In the UK, economists, politicians and the rest of the population watched as their government “hung” in the balance of a coalition – believing that austerity was the only viable option.
Austerity appeared to be a quick-fire solution to the problem: make cuts now, pay off the debt sooner and reach sustainable growth faster. This relied on the correctness of the theory that high levels of sovereign debt damage economic growth, also allegedly supported by the Ricardian equivalence. The Ricardian equivalence argues that when the public sector is downsized, it stimulates the private sector. This would appear to make sense, seeing that a smaller state would allow private enterprise to flourish and the portion of the labour force cut from the public sector would find jobs in the private sector. The increase in private sector employment would increase the productivity of the economy as a whole and promote growth.
It appears to have worked. George Osborne, the current Chancellor of the Exchequer, made the case for his vindication over the economic downturn of the last three years (including a double-dip recession) with figures indicating a growth rebound – a recovery long awaited. Austerity, after three grisly years, had finally delivered.
The inflation rate has stabilised at 2%, exactly in line with the Bank of England’s target. It has provided the UK’s economy with a gradual increase in employment figures; the unemployment rate, in the three months up to October dipped to levels unheard of since early 2009 – an encouraging 7.4%. Having reached the New Year, companies are head-over-heels in confidence and are rushing to hire fresh blood. Credit is more easily available and house prices have begun to rise.
GDP is still 0.4% below the pre-crisis peak, but its growth has been steady and consistent since the first quarter of 2013 – a definite improvement on the economy’s near-stagnation in 2012. The sharp devaluation of the pound before the crisis helped the Bank of England to neutralise upcoming inflationary pressures over the course of the recession. This worked in harmony with the austerity measures, allowing the Chancellor of the Exchequer to eliminate a larger volume of Britain’s debt in a shorter time period. Austerity appears to have jumped through all of the hoops the economy has thrown at it, albeit slightly later than expected. Surely the country could simply stop moaning about it and look forward to the recovery?
The truth of the issue is that they can’t. Closer inspection of the figures presents an alternative story to the one that the Chancellor has produced. Current proportionate spending is low. The general public has received, on average, a 0.9% increase in salary; the inflation rate is marked at 2%. Salary growth has not matched the pace of inflation and this has the equivalent effect of a lower inflation rate without an increase in salary. This directly affects the cost of living by driving it up, and thus consumers will find it more difficult financially to keep up. A greater proportion will have to make cutbacks, and this could have a domino effect on all the industries supplying to the general public. Even among those with a source of income, a large number are driving up the UK saving ratio to above 7% (the average was 4% between 2000 and 2008) for what could only be seen as a precaution against further economic insecurity. As a result of the increase in the cost of living, retail sales have grown by less than 1% per annum since the recession began; some of Britain’s biggest retailers experienced disappointing figures during the course of the Christmas season. The 2011 VAT increase dealt irreparable damage, destroying consumer confidence at the time and the possibility of economic growth. But there is general consensus that the worst steps taken by the coalition government over the past three years were the deep cuts in public infrastructure projects.
The cuts in the public sector expenditure led, as expected, to unemployment in the public sector. However, the expected pick-up in employment on the private sector did not occur. The private sector was instead hit with the knock-on effect from the unemployment, the main craters in it arising from private contractors not receiving government contracts. This led to the contractors having to also cut back and laying off a portion of their workforce. Workers are a resource, so using basic economic theory we can deduce that the overall increase in unemployment of that resource reduced the economy’s productive efficiency, and this had a negative impact on the GDP. The GDP is an indicator of economic performance, explaining the ensuing slump in economic growth. General public purchasing power was reduced, and as a result the food, clothing, electrical, holiday and many more industries were affected by the reduced consumption of their goods. As all industries began to slump, the general public became aggravated and entered a state of social unrest, a key factor that was unaccounted for in the government’s vision of the UK’s growth trajectory. In 2011, social unrest reached its tipping point and, coupled with the anger at the injustice of Mark Duggan’s death, saw people take to England’s streets to demonstrate their anger at the government in the England riots of 2011. The austerity policy is exacerbating the very problem it is trying to solve.
The government shield away from the one thing that could have turned the economy around much quicker – Keynesian macroeconomic management policy. Baron John Maynard Keynes declared in 1937 “the boom, not the slump, is the right time for austerity at the treasury” (Collected Writings). This policy traditionally proposes that the role of the government and central bank is to smooth out fluctuations in GDP growth. During a period of economic boom, contractionary policies should be used to reduce excessive growth in aggregate demand (e.g. increased tax rates, government spending programmes and cutbacks). During a recession period, expansionary policies should be implemented (e.g. lower tax to increase aggregate demand, lower interest rates to motivate borrowing). Government expenditure should also be increased to create jobs directly through increased public employment and indirectly through the multiplier effect. By following Keynes’ expansionary policies and plugging money into the economy, the coalition government could have created a sustainable economic cycle with steady growth that would have reduced our deficit at a greater rate than that of austerity. The invalidation of the Ricardian equivalence in this case shows that it is simply unsupported by data, and thus has falsely led the coalition government into taking much longer than necessary to turn around our economy, at the great expense of the taxpayer.
The correct policy is evidently Keynes’ macroeconomic management policy. Data provided by independent analysts indicates that the UK’s GDP would be around 0.2% lower than the pre-crisis GDP if it had proceeded to stimulate growth rather than hinder it. Professor John Muellbauer of Oxford University predicted “the failure to invest in infrastructure while borrowing costs were at historic lows will haunt the recovery”. How hard will our failings to act when we could have, hit us in the future? The outcome from austerity will be realised within the next two to three years, but for now we can only speculate. We can only look back in hindsight searching for answers to the future.
Contributed by Abayen Ahilan
His birthplace of Fort Smith, Canada is about as distant from the world of high finance as my bank account balance. Yet he has managed to make the strides towards greatness, which has included a bachelor’s degree in economics at Harvard as well as a master’s degree at St Peter’s College, Oxford and a doctorate from Nuffield College, Oxford. Carney worked his way up the ranks through Goldman Sachs moving between London to Tokyo to greater prominence in a 13-year stint before heading his way towards the Canadian Department of Finance and then the Bank of Canada as Deputy Governor and then Governor.
Carney has been credited with shielding Canada from the worst effects financial crisis and has earned praise from the Financial Times and Time magazine as a top figure in the financial world. In 2012, Carney was presented many accolades including “Central Bank Governor of the Year 2012” by Euromoney magazine.
However to say that Canada survived the financial crisis would be a major understatement, they positively thrived through it. Canada’s risk-averse fiscal and regulatory environment meant that their banks were always well capitalised and as a result were poised to take advantage of opportunities that American and European banks could not seize.
The crucial feature of Carney’s tenure as governor remains his decision to cut the overnight rate by 50 basis points in 2008 only a month after his appointment. Wasting time is not something this man is accustomed to and hopefully other interventions will be in place in the near future. This choice was also very monumental because it was ahead of the pack. While the European Central Bank delivered a rate increase in July 2008, Carney anticipated the leveraged-loan crisis would trigger global contagion. He used a nonstandard monetary tool “conditional commitment” to hold the policy rate for at least a year to boost domestic credit conditions and market confidence. Output and employment began to recover from mid-2009 and the Canadian economy outperformed those of tis G7 peers during the crisis. Canada was also the first G7 nation to have both its GDP and employment recover to pre-crisis levels, targets that Britain just don’t seem to be able to hit in the next 5-10 years.
The credentials are everywhere for all to see. Mark Carney has achieved so much and looks like the man to get the UK economy buzzing again. However, an immediate impact is required or else the press will inevitable turn on him as not being good value for the high salary he’s commanded. There is much pressure on him, mostly due to his achievements and at a time when the Government has been trying to claim that recovery is in the air. His first challenge will be dealing with a monetary policy committee (MPC) that is just so accustomed to doing nothing. Lending to firms was negative again last month and given what Capital Economics has called “underwhelming effects” on the Funding for Lending scheme, it is hard to see what the driver for growth is going to be.
The UK economy will be going through a very difficult and delicate process over the next 5 years. Mark Carney is the man who will be in charge of the Bank of England in this period and there is no doubt he will be influential towards whatever the outcome. He has demonstrated his extensive knowledge of the world economy and his ability to take the initiative but is the British economy just a step too far? Or is Carney really the man to lead Britain into its next phase?
Contributed by Jordan Naidu
As Western Capitalist Cruises risk sinking into the depths of the ocean, Eastern Neo- Capitalist Vessels safely sail in pursuit of a eudemonic prosperity. Over the last 18 months, the world has witnessed the Eurozone drown in a debt crisis, worsened by slower economic growth, and America, the world’s largest economy, overwhelmed by unmanageable debt levels complied with diverging political solutions. In stark contrast, China and India’s economic growth has rapidly increased, underlining their major share of demand in the global market. Other Asian economies are gathering momentum, Latin America has been rejuvenated from its ‘lost half-decade’ and Africa has finally convinced others of its potential to become an economic force, albeit in the long run, providing heavy foreign investment. The dynamics of a new economic order is taking shape, which involves a titanic tussle between the old western masters and the emerging world’s apprentices, amidst this financial storm.
Before the 2007-2008 financial crisis, the West have been smug and righteous in their ‘lecturing’ to the East on the importance of political stability, sustainable development and strong macro-economic management strategy to reach the Epicurean riches the West were enjoying. From the governance of multilateral organisations to the innovation of financial service products, the global infrastructure was seen to favour western interests. There were numerous attempts by emerging economies to change this, but, unsurprisingly, those attempts were rejected.
How times have changed. The unprecedented leverage, massive debt creation, and credit freezes punished the West’s arrogance for not compromising with the emerging economies. Financial excesses become the rule rather than the exception, facilitated by financial innovation, the ignorance of lending standards and lack of prudential regulation. Suddenly, “rich” western economies were running large deficits and, in some cases, tipping from net creditor status to net indebtedness, while “poor” countries were running surpluses and accumulating large stocks of external assets, including financial claims on western economies. This fueled large global imbalances and thus, triggered a financial crisis that has rattled this open economic system.
The root of the financial crisis lied in America. Their overconfidence in the housing bubble and ignorance to notice the flaws in the securitisation of sub-prime mortgaging nearly caused the country to lose $5 trillion dollars had the Federal Reserve not taken action. Four years later, after numerous bailouts, stimulus packages and calls for social optimism, pessimism and lower standards of living transcend all American minds. Americans are unhappy, and becoming more so, about their country’s prospects and politicians’ efforts to improve them. This malaise of policy decision making partly reflects the sluggishness of the recovery. However, in recent months, unemployment has been falling, share prices are close to a three-year high, house prices are still in the low and the price of petrol has soared to levels not seen since the summer of 2008. Nevertheless, a recent poll, done by the Economist, suggests that Americans have long term worries: stagnating living standards and a dark future in an economy slow to create jobs, saddled with big government deficits and faced with substantial economic and political threat from China. Tellingly, a majority now regard China, not America, as the world’s leading economy.
Western Europe, mainly the Eurozone, also suffered deeply in the recent financial crisis. Eurozone seems likely to disintegrate unless it can resolve the current debt crisis and prevent the implosion of the single currency. Fears of insolvencies amongst PIGS, especially Greece, have created political and social tensions. Somehow the Eurozone must allow Italy and Spain to receive bailouts financed by the European Central Bank with a structural and fiscal compromise. By doing such, confidence should return to European markets. Higher confidence means financial markets are willing to lend to Eurozone governments and banks who, in turn, start lending more which increases business confidence to invest and obtain profit maximisation and consumer confidence to spend and reach optimal utility. As a result, Europe would then suffer only a light recession, but recover, and slowly but painfully grows its way out of its debt problems. However, Western Europe faces its toughest challenge yet; to revitalise a somewhat sluggish growth, whilst operating under tight austerity cuts, high unemployment and multiplying debt concerns.
China is the biggest winner following the Financial Crash of 2008. China’s GDP Annual Growth rate, on average, is 10%. Despite the year-on-year rise of 8.9 percent was the slowest since mid-2009, China’s fourth-quarter growth figures was still slightly stronger than economists had predicted. China’s centrally directed industrial policy in which the government places huge amounts of capital and labour in certain enterprises has been a huge success. The backbone of China’s economic growth is mainly built cheap labour. However, as China’s wealth and GDP per capita (currently $4,400 compared to the U.S.’s $47,000) continues to increase, labour costs will soon cease to be cheap compared to the labour forces in India, Turkey and across Southeast Asia because the workforce will demand higher wages to keep up with inflationary pressure. If China can carefully manage their economy for future generations, China’s can maximise its own potential for more prosperity and influence on the global economy. However, China’s dependency on State Capitalism works on the grounds that there is political stability. However, if that were to stop, China‘s economy would be in disarray and have serious consequences for the rest of the world.
India’s economic rise is due to the existence of highly influential shadow sectors, private provided infrastructure and family dominant firms providing a strong economic scaffolding to India’s economy. Recently, economic activity rose far more than expected in December, alleviating fears that the economy was unraveling. Yet gross domestic product growth has slowed dramatically and is likely to worsen in the current quarter. Furthermore, India’s deep rooted political problems including corruption scandals and bribes has increased the social and external costs for India, increasing the gap for social optimum equilibrium.
Other Asian economies are also profiting. Singapore, another emerging market, saw their non-oil exports surged 16.4 percent in December 2010, more than four times the consensus forecast in a Reuter’s poll. But economists still think this city-state is slipping into at least a brief recession. However, emerging economies in South Asia face a common theme of corruption and bribery within political parties. They must ensure a reduction in poverty, wage inequality, favouritism to certain enterprises and ensure stable growth is maintained. Or else they face social unrest, inefficient enterprises and an overheating economy.
Latin America has vastly improved compared to 1990s in which it suffered incredulous political elections, self destroying foreign exchange system and restless social uproar. Even during this current global economic slowdown, the improved macroeconomic management has fortified Latin America’s economic resilience. However, that is not enough to keep them on the upward curve. Indeed, Latin America has had sound practices in monetary policy – for example, inflation targeting with flexible exchange rates – with clear benefits. However, in order for Latin America to avoid another ‘lost-half’ decade, its fiscal policy needs to loosen up, such as relaxing industry taxation, and decrease deforestation to provide sustainable growth. This should not be at the expense of prudent fiscal management which helped some Latin American economies weather the crisis.
What about Africa? Africa is 15% of the world’s population but accounts for only 1% of global manufacturing and 1% of global inward investment. However, with scarcity of global resources, Africa will be the next growth centre of the global economy in the coming decades. China has already demonstrated their quick thinking and initiative by heavily investing in countries such as Zambia. If Africa is to have any chance of challenging the economic superpowers and enrich its current deprived living standards, Africa must commit to higher investment in infrastructure, enhance labour’s skill set and attract low-cost manufacturing plants which are looking to re-locate from Asia. As Jakaya Kikwete, president of Tanzania said Africa is ‘starting from very low levels of development’. However, rapid progress can be made: sticking to economic reform programmes, investment in education, transforming agriculture from a position where people ‘live from hand to mouth’, developing infrastructure, boosting manufacturing and integrating both regionally and internationally. Yet it will be a long time that Africa moves away from poverty to prosperity, givien the current state of corruption, crime and political uncertainty in the continent.
This is the year when the whole world ceases, according to Mayans. It is also the year in which politics and economics come under scrutiny when they stand up to these difficult challenges. Western cruises and Eastern vessels are traveling in opposite directions. This could be the year which decides the shift in global power; a new economic order is on the horizon.
Contributed by Wafiq Islam
State capitalism refers broadly to an economic system based on capitalism where large corporations are either wholly or partly owned by the government. The model is not a new phenomenon- for the most part of the 20th century Western economies heavily employed state intervention, such as in Europe, which gave rise to the creation of welfare states. Since the 1970’s however, Western economies have become a lot more liberal- leaders such as Thatcher and Reagan introduced economic policies such as deregulation and privatisation which freed up the market. However, many view the 2007-2008 financial crisis, that engulfed most of the developed world, as the end of the reign of this ‘free-market triumphalism’.
Whilst turbulence amongst liberal economies continues, the GDP growth rates of the state capitalists Brazil, China and Russia have remained stable. A feature that makes this new form of state capitalism stand out is the management of state owned companies. Over the past 20 years, the state capitalist governments have pruned their portfolio of enterprises, but have held back a few businesses in which they wish to heavily invest, in order for them to become national champions on a global scale. The state capitalist governments believe that these SOE’s (state owned enterprises) combine the best features of the state and the market. For example, the benefits of long term planning of the allocation of resources and an efficient relationship with the government are combined with the efficiencies of the market: being listed on the stock exchange and having professionally trained managers in charge. This is opposed to the pre-WW2 state capitalist model where companies were wholly nationalised and were run by inexperienced government bureaucrats.
Another advantage of this model is the fact that revenue is often reinvested into national infrastructure. In Western states however, private companies may not be incentivized to invest in infrastructure unless given government support. Whilst the UK is struggling to find funds for the new high speed railway HS2 to desperately enhance its dilapidating rail network, China has already built 8,123 miles worth of high-speed railway, which according to the BBC, is more than the rest of the world’s high speed rail track combined. This is achievable through the large revenues that the biggest SOE’s turnover.
One may think that these state run companies may suffer from monopolistic laziness, however these companies are far more dynamic than the old style ‘socialist mega-firms’. SOE’s tend to have both an outward vision to expand globally, as well as an inward, domestic vision. As opposed to previous forms of SOE’s which sought to protect themselves from the threat of globalisation, current SOE’s rather embrace globalisation in order to force themselves to continually innovate. Additionally, state capitalist countries have the benefits of being able to bunch their SOE’s horizontally in order to exploit each other’s resources and contacts as they are all ultimately owned by the same institution- the government.
On the other hand, state capitalism is a breeding ground for corruption and cronyism (partially to long-standing friends) which threatens its chances of success. The major countries that employ state capitalism are politically problematic- Russia is an astounding 143rd on the world’s corruption index, whilst China and Brazil are 75th and 73rd respectively. With power in so few hands, it is important that those who are in power are reliable politicians- this certainly cannot be said for Russia.
In addition, there is the question of fairness when it comes to state capitalism. It is a hard feat for any private company to become richer than the state as they will lack vast governmental support and subsidies from which SOE’s greatly benefit. This is likely to stifle lower level entrepreneurship. Xiaonian Xu, an economics professor at the China Europe International Business School comments that “nobody can get in”, when referring to the nature of the state dominated Chinese market. He also expressed further doubts about the economic model, explaining that returns of capital investment on SOE’s would be significantly lower if it weren’t for government subsidies- this suggests there are great inefficiencies within these enterprises. Moreover, due to the oligopolistic nature of the state capitalist market, there is a tendency for SOE’s to overcharge.
There is also the question of foreign investment. Foreign investors may fear that as the majority shareholders of the SOE’s are the government, SOE’s will try and fulfil social policies of the government rather than the business goals of the shareholders. Even more worryingly, there is the fear that government bureaucrats may instantly change policies in the business that could adversely affect them. There is certainly less predictability for third parties in this system as the companies are markedly less transparent than Western firms.
Western economists seem very sceptical about the success of state capitalism- economic historian Niall Ferguson says that: “State capitalism is not China’s solution to the problem; it is China’s problem. The future of the global balance between the West and the rest will depend on whether China solves that problem…” So far, state capitalist methods have been a success story for Brazil, China, Russia and the Arab world. This is evidently shown by four of the biggest global companies being state owned. Regarding long term economic development, there is no real evidence to suggest that this success won’t be sustainable. However, this is dependent on the fact that the governments maintain the right formula, constantly evolve to the global market and don’t become too overbearing upon their respective SOE’s.
Contributed by Kapil Vijh
Wrong. Appearances do matter in the job market. A study, conducted in 1998, by McGill University (Kaczorowski) studied over 1600 people and concluded that people rated to have ‘above average’ looks earned between 2.2-6.1% more than the ‘average’ looks and those with ‘below average’ looks earning up to 13% less than average. Whilst the percentages may be larger than expected, is it really that much of a surprise? German study (Pfiefer 2011) pointed out that aside from conscious and subconscious discrimination by the employer, attractive people are advantaged. In areas such as retail, customers may be willing to pay more to receive a good or service from an attractive person than someone less attractive. However, physical attractiveness is correlated with intelligence, which indicates that it may not be pure discrimination. Having collected a large sample, an American study concluded that people rated ‘very attractive’ had an IQ of 6.5 points higher than people rated ‘very unattractive’.
In terms of earnings, tall people are head and shoulders above the rest. In Britain, if you are white and male, an inch difference is matched by a 1.7% increase in earnings in Britain; 1.8% in the USA. In both countries, the smallest quarter earns 10% less than the tallest quarter. However, the University of Pennsylvania study concluded that the differential in height aged 16 is more important than the differential as an adult, which seemingly rules out any perception of employer bias. The study concluded that tall 16-year-olds are more well-off in later life because they are more likely to participate in social activities, such as sport, thus gaining invaluable social skills, whilst their shorter counterparts may be stigmatised and thus, have lower social skills and self esteem.
To succeed, you may want to change your surname, according to a deed poll, to Aaronson. A study by Einav and Yariv (at Stanford and Caltech respectively) concluded that in economics-related academia, those with surnames near the beginning of the alphabet were more successful in gaining professorships at leading universities and becoming a fellow of the Econometric Society. They attributed this to the alphabetical listing of authors’ credits in academic papers. Giving credence to that line of argument is due to the fact that no such discrimination occurs in psychology, in which authors are listed roughly according to their contribution. Yet, there are other factors especially among older generations when it was far more common for a teacher to seat a class alphabetically. It is argued that as those with surnames near the beginning of the alphabet sat near the front of the class and received more attention from teachers, they pulled ahead of their classmates with surnames lower in the alphabet. A small, but very interesting phenomenon is that of “aptonyms”, those who are in professions that are related to either their name, such as the sprinter Usain Bolt, poet William Wordsworth or Bernard who Madoff with everyone’s investment money.
These three unexpected factors determining success are by no means the only ones. As well as the now famous 10,000 hours of preparation to excel at a pursuit, Canadian author Malcolm Gladwell argued in his book Outliers: The Story of Success that those born nearer the start of the (calendar or school) year have an advantage over their later born peers at sport as older people are physically more mature and more likely to receive specialist coaching at an earlier age.
There may be more such determinants of future success. Academic qualifications and relevant skills and experiences are clearly important when applying for a highly-paid job. But even leaving intelligence aside, your success in life may be dependent on factors that you cannot control, and factors which you may think have no influence at all.
Contributed by Oliver Garner
Whilst Western Capitalism has been heavily attacked on its austerity measures, political indecision and heavy burdened debt problems, India’s rise has shown some glimmer of reassurance that Capitalism is not all but gone. The venture may not adhere to the conventional capitalist American model or China’s state-capitalist economy. Nevertheless, their 2nd quarterly GDP growth rate of 8.20% – their weakest over the six quarters, yet better than expected – shows that entrepreneurial spirit of risk taking factors, coupled with shrewd innovation, can reap the rewards that Westerns had so long ago had. Despite this Epicurean economic success, their success has drawn costs which highlight their underlying Aristotelian welfare failures, such as huge inequality divides and poverty. Hence, Milton Friedman’s phrase, “There is no such thing as Free Lunch”.
The main positive outcome of India’s venture is economic growth which is driven by three factors. First is the private, informal, sector which employs the majority of Indians, which have “value added”, creating Indian capitalism at its most concentrated. In 2007, a government survey of almost 200,000 services firms, formal and informal, concluded that the top 0.2% of them accounted for almost 40% of output, and firms in commercial hubs of Mumbai and Bangalore collectively accounted for about half of output. The willingness to take on informal labour incentivises labour itself to work hard and provide for their family. An industrious labour tends to increase productivity, and thus increase firms’ profit.
Secondly, about 70% of the stock market’s value sits in the BSE 100 index of the largest firms, the smallest of which is worth just under $1 billion. These firms have a return on equity that has declined in recent years but remains solidly in its firm mid-adolescence, making Indian firms more profitable than many of their Asian counterparts. In addition, debt levels are low and growth has been solid, with profits rising since 2001 to $64 billion.
The final factor is ownership. Until 1991, when liberalisation began, Indian businesses that had not been nationalised were family affairs that survived in micro-management. Firms responded by branching out into any activity where they could find space to innovate, while facing little competition in their main businesses. Many firms benefited from close links with the Congress Party, which formed India’s first post-independence government and still dominates the ruling coalition today. By the time the economic crisis hit liberalisation in 1991, though, most businesses were mainly exasperated.
The pattern of ownership in the second period, between liberalisation in 1991 and 2003, was far more unstable, as traditional family groups were exposed to fierce domestic and foreign competition, and the prices of everything from machinery to India’s currency were freed up. Of the largest 20 listed on the stockmarket in 1990, only five remain in a recognisable form in the top 20 private firms today, ranked by market value. The big textiles firms that dominated the scene in 1990 diminished over the next decade and some of the renowned families behind them such as the Mafatlals dropped from the upper ranks of capitalist clans. Indian businesses, in their first decade of freedom, acted like Shiva to destroy, and acted like Brahma to create. Indeed, as the economy took off in 2003, economists thought that the oligarchic form of capitalism might be wiped out altogether and perhaps even be replaced by an American-esque freewheeling approach.
To conclude on India’s organisation of firms, there is a logical thinking underneath. It makes sense for businesses to spread out because the Indian state is still weak. Infrastructure is so insufficient that even private firms must often build their own. Courts are slow and sometimes corrupt, so contracts are hard to enforce and banks and businesspeople are inclined to stick with firms they trust. Established well renowned business houses can use their power to expand into new areas, sometimes at the expense of newcomers. Fewer new firms have broken into the big league since 2003 and those that have done so have tended to be good at persuading the politicians.
Yet India has its problems. The 31st October 2011 marked the first Formula One Grand Prix held in India – an image in striking contrast to one where calves rest upon untended rubbish heaps, lying near to distasteful £300 million racetrack, itself fringed by a 60-acre golf and spa resort. Consider these two perspectives: on one hand, a perception of redemption is being driven by this grand prix as a source of public self-confidence, of restoring public faith in Indian efficiency with an ‘on-time, on-budget’ showpiece just one year after Delhi’s chaotic Commonwealth Games. On the other hand, India’s poverty is not going away: it is unanswered and still remains a pressing issue in India. To extrapolate this further, one could say that India’s hunger and focus to build a self righteous image has made it ignorant to such humanitarian matters.
Poverty, as noted, is a big issue. In 2010, 20% of inhabitants in rural areas and 22% of inhabitants in urban areas lived below the poverty line. With population growth up to 1.2 billion, however, it is proving increasingly difficult to reduce the number of poor at a rapid pace. So despite India bringing down its poverty rate, more than 300 million people remained in poverty. However, Indian Planning Commission recently recommended placing India’s poverty line at 32 rupees (65c/40p) a day. Tushar Vashisht and Matthew Cherian conducted an experiment on living on this minimum amount. According to 26-year-olds, the plan would have damaging long-term effects for poorer people. Such a daily budget would lead to malnutrition in terms weight loss, fatigue and skewed blood sugar levels. Adding to that, the commission’s calculations overlooked mobile costs as well as not adjusting it to inflation. Hence, this plan is flawed and must be rectified before empowered.
In the final analysis, India’s Neo-Capitalist Venture is innovative and rewarding. For instance, the existence of major shadow sectors, private-provided infrastructure and family dominant firms certainly provided a strong scaffolding of India’s plc. It is evident that India is building a westernised image of prosperity with subtle spices of Indian values. However, outside its scaffolding a large pile of unsolved social problems has built up. For example, loose regulation has led to a series of corruption scandals, overlooking poverty has questioned India’s spending policy and increasingly wider inequality has made the poorest of the population stare into false hope. Nevertheless, India’s style has given hope and belief that Capitalism, unlike Soviet Socialism, will not break down without some resistance.
Contributed by Wafiq Islam
Saturday 22rd October – Meeting of EU Finance Ministers – Brussels
After more than 10 hours of negotiations, EU finance ministers reached a partial deal in resolving the Greek debt crisis. They agreed to force EU banks to raise €100bn in capital to help Greece’s debt should a wider deal be reached to prevent the worsening of Greece’s situation. This was celebrated by George Osborne, Chancellor of the Exchequer as ‘real progress’. Real progress, I’m not sure. There are still many rifts to settle and many deals needed to save Greece and ultimately, the single currency. Osborne admits “We’ve had enough of short-term measures, sticking plaster that just gets us through the next few weeks … the crisis of the eurozone is a real danger to all of Europe’s economies, including Britain.”
The main area of friction between nations revolves around how much they should be prepared to pay for any bailout. Most economists and governments view a bailout as necessary to preserve jobs in an interdependent economy but each government knows that their taxpayers will ultimately be footing the bill. Thus, each government will not pay more than what is absolutely necessary to give themselves a chance of being re-elected. For example, with an election scheduled for 2013 and with her CDU party floundering in the polls, Angela Merkel has promised to not contribute more than €211bn to any bailout fund (the popular perception in Germany is put well in a headline of the Bild tabloid – ‘A Greek, an Italian and a Portuguese go into a bar and order some drinks. Who pays? The Germans of course!’) Despite this difficult situation, Germany has taken the principled move in blocking France’s proposal of turning the EFSF (European Financial Stability Facility – the ‘bailout fund’ into a bank so it could borrow from the European Central Bank on the grounds that it would threaten the ECB’s impartiality. This left many key decisions for the meeting on Wednesday but, in the mean time, there was a meeting of EU leaders where President Sarkozy attacked David Cameron, saying that “You don’t like the euro so why do you want to be in our meetings?” Also, Britain’s future in the EU was being debated …
Monday 24th October – House of Commons
In his 17 months in office, one of the laws that the coalition has enacted was that if at least 100,000 people had signed an e-petition, it would be debated in parliament. The first example of this came on Monday with the motion as follows ‘That this House calls upon the government to introduce a Bill in the next session of Parliament to provide for the holding of a national referendum on whether the United Kingdom should (a) remain a member of the European Union on the current terms; (b) leave the European Union; or (c) re-negotiate the terms of its membership in order to create a new relationship based on trade and co-operation.’ Of the 27 nations in the EU, Britain is probably the most Eurosceptic. There seems to be the view that unelected bureaucrats from Brussels decide on unpopular and unnecessary laws which undermines British sovereignty and independence, whilst the British taxpayer is footing the bill at an alarming rate. Of course, there are more issues at hand than Britain’s future in Europe. A Guardian/ICM poll showed that 70% of Britons wanted a referendum and politicians not granting one would make it look as though they are out of touch with the people. Foreign Secretary William Hague defended a three-line whip and a no vote by saying that a referendum ‘would not anyone looking for a job’.
Although referendums are an example of direct democracy which is to be encouraged, the example of the AV vote does not exactly inspire confidence in a referendum. Then, we had the no campaign winning because their half-truths were more convincing than the yes campaign’s. It is inevitable that we will have government and business on the “in” side and tabloid newspapers such as the Sun, Mail and Express on the “out” side with both sides’ campaigns running high on emotion. This can only result in the propagation of misinformation on both sides. We have recently rejected the preferential voting system and it would be highly possible that the winner would have less than 50% of the vote. Other reasons for not having a referendum include the economic turmoil which is the likely result of the EU’s 3rd largest economy threatening to leave at such an uncertain time or the replacement of the thousands of jobs lost. People are rightfully angry when their democracy is undermined by EU regulation. The referendum lock of any further powers handed over the Brussels is a most welcome step. They argue that Britain has too large an economy to sit on the sidelines like Switzerland and its national interest is not served by weakening its hand at the negotiation table by threatening to leave altogether. However, it is also not served by remaining tied to the EU when countries in it are failing. It is entirely plausible for Britain to prosper outside of the EU. Being outside of the EU does not necessarily mean isolationism. After all, free trade with the EU could still happen if we negotiated an agreement with them. The motion as it was failed by 483 votes to 111. A referendum on our future in the EU is in theory a good step. But the referendum question posed was the wrong one. Even if it were the right one and we embark on a referendum, we need to ensure that the populace know enough information to make an informed choice one way or the other.
Wednesday 26th October – Meeting of EU Leaders– Brussels
The leaders of the EU countries again met to attempt to find a solution to the debt crisis which is engulfing Europe. They agreed to recapitalise struggling European banks through national governments or the EFSF. David Cameron lauded this as “progress” that has “not been watered down”. Progress seems to be the buzzword when it comes to politicians talking about solving problems. It is the kind of reassurance that we are nearer to a solution than we were when we started, not that we are near to the solution.
After Greece, it was Italy who looks like the country on the verge of default. Leader Silvio Berlusconi sent a letter to the summit. In it, he promised to enact a range of reforms from raising the retirement age to 67 in 2026, raise €5bn from asset sales and have a plan for growth ready in three weeks. He also met European Council president Herman van Rompuy and head of the EU Commission José Manuel Barroso to discuss methods to boost the Italian economy and to reduce its deficit. But no-one trusts Berlusconi. From his position of control of the Italian media, he has led a country mired in corruption and on the brink of financial meltdown. He is generally considered to be a figure a ridicule; his reputation not helped by a series of sex scandals. At Sunday’s talks, Merkel and Sarkozy were caught smirking during his speech at the press conference. He has to appease his more radical Northern League coalition partners so he didn’t go far to reform pensions. Opposition parties mocked his proposals as a “book of dreams” and contain “nothing serious”. Catastrophic mismanagement has got Italy into this crisis and, as a guarantor of EFSF; this mismanagement has put any rescue passage in a perilous position.
On the same day, Germany’s parliament agreed to raise the bailout fund to €1tn. There is still disagreement about if and where they will get the money from but on Thursday, China agreed to contribute to the EFSF. As enough money is unlikely to come from other sources, that can be seen as a welcome and necessary intervention. But China is likely to want political concessions which will only strengthen its position; a worrying sign for the rest of the world, especially given it already holds $1tn of US overseas debt.
Over a month ago, Chancellor George Osborne claimed there was only six weeks left to save the euro. These six weeks elapses at the G-20 meeting of major economies at Cannes this Tuesday and Wednesday, although this was never meant as a meeting specifically concerned with the single currency. It looks like a plan is already in place though, which means financial Armageddon has been temporarily averted, but there is no guarantee of permanent stability yet.
3 Weeks later
The Italian debt crisis has escalated further leading to a vote on austerity measures in their parliament. This passed, paving the way for the resignation of Silvio Berlusconi. An interim administration led by economist Mario Monti has replaced Berlusconi’s government.
Contributed by Oliver Garner