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Posts Tagged ‘privatisation’

Should Britain’s railways be renationalised?

The linked articles below look at the state of the railways in Britain and whether renationalisation would be the best way of securing more investment, better services and lower fares.

Rail travel and rail freight involve significant positive externalities, as people and goods transported by rail reduce road congestion, accidents and traffic pollution. In a purely private rail system with no government support, these externalities would not be taken into account and there would be a socially sub-optimal use of the railways. If all government support for the railways were withdrawn, this would almost certainly result in rail closures, as was the case in the 1960s, following the publication of the Beeching Report in 1963.

Also the returns on rail investment are generally long term. Such investment may not, therefore, be attractive to private rail operators seeking shorter-term returns.

These are strong arguments for government intervention to support the railways. But there is considerable disagreement over the best means of doing so.

One option is full nationalisation. This would include both the infrastructure (track, signalling, stations, bridges, tunnels and marshalling yards) and the trains (the trains themselves – both passenger and freight – and their operation).

At present, the infrastructure (except for most stations) is owned, operated, developed and maintained by Network Rail, which is a non-departmental public company (NDPB) or ‘Quango’ (Quasi-autonomous non-governmental organisation, such as NHS trusts, the Forestry Commission or the Office for Students. It has no shareholders and reinvests its profits in the rail infrastructure. Like other NDPBs, it has an arm’s-length relationship with the government. Network Rail is answerable to the government via the Department for Transport. This part of the system, therefore, is nationalised – if the term ‘nationalised organisations’ includes NDPBs and not just full public corporations such as the BBC, the Bank of England and Post Office Ltd.

Train operating companies, however, except in Northern Ireland, are privately owned under a franchise system, with each franchise covering specific routes. Each of the 17 passenger franchises is awarded under a competitive tendering system for a specific period of time, typically seven years, but with some for longer. Some companies operate more than one franchise.

Companies awarded a profitable franchise are required to pay the government for operating it. Companies awarded a loss-making franchise are given subsidies by the government to operate it. In awarding franchises, the government looks at the level of payments the bidders are offering or the subsidies they are requiring.

But this system has come in for increasing criticism, with rising real fares, overcrowding on many trains and poor service quality. The Labour Party is committed to taking franchises into public ownership as they come up for renewal. Indeed, there is considerable public support for nationalising the train operating companies.

The main issue is which system would best address the issues of externalities, efficiency, quality of service, fares and investment. Ultimately it depends on the will of the government. Under either system the government plays a major part in determining the level of financial support, operating criteria and the level of investment. For this reason, many argue that the system of ownership is less important than the level and type of support given by the government and how it requires the railways to be run.

Articles
The case for re-nationalising Britain’s railways The Conversation, Nicole Badstuber (27/8/15)
Lessons from the Beeching cuts in reviving Britain’s railwa The Conversataion, Andrew Edwards (7/12/17)
Britain’s railways were nationalised 70 years ago – let’s not do it again The Conversation, Jonathan Cowie (1/1/18)
FactCheck Q&A: Should we nationalise the railways? Channel 4 News, Martin Williiams (18/5/17)
Britain’s railways need careful expansion, not nationalisation Financial Times, Julian Glover (5/1/18)
Right or wrong, Labour is offering a solution to the legitimacy crisis of our privatised railways Independent. Ben Chu (2/1/18)
Whether or not nationalisation is the answer, there are serious questions about the health of Britain’s railways Independent. Editorial (2/1/18)
Why Nationalising The Railways Is The Biggest Misdirect In Politics Huffington Post, Chris Whiting (5/1/18)

Questions

  1. What categories of market failure would exist in a purely private rail system with no government intervention?
  2. What types of savings could be made by nationalising train operating companies?
  3. The franchise system is one of contestable monopolies. In what ways are they contestable and what benefits does the system bring? Are there any costs from the contestable nature of the system?
  4. Is it feasible to have franchises that allow more than one train operator to run on most routes, thereby providing some degree of continuing competition?
  5. How are rail fares determined in Britain?
  6. Would nationalising the train operating companies be costly to the taxpayer? Explain.
  7. What determines the optimal length of a franchise under the current system?
  8. What role does leasing play in investment in rolling stock?
  9. What are the arguments for and against the government’s decision in November 2017 to allow the Virgin/Stagecoach partnership to pull out of the East Coast franchise three years early because it found the agreed payments to the government too onerous?
  10. Could the current system be amended in any way to meet the criticisms that it does not adequately take into account the positive externalities of rail transport and the need for substantial investment, while also encouraging excessive risk taking by bidding companies at the tendering stage?
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A cap on rail fares

Over the past few decades, numerous areas within the British economy have been partly or fully privatized and one such case is British Rail. Why is this relevant now? We’re once again looking at the potential increase in rail fares across the country and the impact this will have on commuters and households. So, have the promises of privatisation – namely lower fares – actually materialised?

Comparing the increase in rail fares with that of the RPI makes for interesting reading. Data obtained back in January 2013 shows that since 1995, when the last set of British Rail fares were published, the RPI has been 66%, according to data from Barry Doe and this compares unfavourably with the increase in a single ticket from London to Manchester which had increased by over 200%. However, it compares favourably with a season ticket, which had only increased by 65%. In the last couple of years, increased in rail fares have been capped by the government to increase by no more than the rate of inflation. As such, customers are likely to be somewhat insulated from the increases that were expected, which could have ranged between 3 and 5%.

This announcement has been met with mixed reviews, with many in support of such caps and the benefit this will bring to working households, including Passenger Focus, the rail customer watchdog. Its Passenger Director, David Sidebottom said:

The capping of rail fare rises by inflation will be welcome news to passengers in England, especially those who rely on the train for work, as will the ban on train companies increasing some fares by more than the average. It is something we have been pushing for, for several years now and we are pleased that the Government has recognised the need to act to relieve the burden on passengers.

However, others have criticised the increases in rail fares, given the cost of living crisis and the potential 9% pay rise for MPs. The acting General Secretary of the RMT transport union commented:

The announcement from George Osborne does not stack up to a freeze for millions of people whose incomes are stagnant due to years of austerity. To try and dress this up as benefiting working people is pure fraud on the part of the Government … Tomorrow, RMT will be out at stations across the north where some off-peak fares will double overnight.

Commuters in different parts of the country do face different prices and with some changes in peak travel times in the Northern part of the country, it is expected that some customers will see significant hikes in prices. Peak travel prices being higher is no surprise and there are justifiable reasons for this, but would such changes in peak times in the North have occurred had we still been under British Rail? Privatisation should bring more competition, lower prices and government revenue at the point of sale. Perhaps you might want to look in more detail at the actual to see whether or not you think the benefits of privatisation have actually emerged. The following articles consider the latest announcement regarding rail fares.

Rail fares to increase by 2.5% in January after Osborne caps price rises at no more than inflation Mail Online, Tom McTague (7/9/14)
Have train fares gone up or down since British Rail? BBC News, Tom Castella (22/1/13)
Rail fares to match inflation rate for another 12 months The Guardian (7/9/14)
Britain caps rail fares at inflation Reuters (7/9/14)
Regulated rail fares to increase by 3.5% in 2015 BBC News (19/8/14)
Northern commuters face big rise in fares for evening travel The Guardian, Gwyn Topham (7/9/14)
Commuter rail fares frozen again, says George Osborne BBC News (7/8/14)
Rail fares, the third payroll tax Financial Times, Jonathan Eley (22/8/14)

Questions

  1. What are the general advantages and disadvantages of privatisation, whether it is of British Rail or British Gas?
  2. Why is it that season tickets have increased by less than the RPI, but single tickets have increased by more?
  3. What are the conditions needed to allow train companies to charge a higher price at peak travel times?
  4. Are higher prices at peak times an example of price discrimination? Explain why or why not.
  5. In the Financial Times article, it is suggested that rail fares are like a payroll tax. What is a payroll tax and why are rail fares related to this? Does it suggest that the current method of setting rail fares is equitable?
  6. Based on the arguments contained in the articles, do you think the cap on rail fares is sufficient?
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Postman Pat

Calls for an independent Scotland have focused on a variety of economic issues. These have included taxation, government spending, currency, fiscal policy and monetary policy. However, the BBC News article below looks at another factor which may be affected by a ‘yes’ vote – the price of stamps.

Having just returned from 10 days in the Highlands, I certainly agree with the BBC article that it would be an expensive business to deliver to the remotest parts of Scotland and would definitely require ‘trains, planes, ferries, Land Rovers and vans’ and, in an extreme case, a fishing boat.

So is the price we pay for postage to less rural areas of the UK used to subsidise the higher costs of delivery to the remotest parts of Scotland and, in particular, to the small islands off the Scottish coastline? What would a ‘yes’ vote mean for the cost of stamps in Scotland and in the remainder of the UK? The following articles consider this rather odd question.

Why postage should be cheaper in UK if Scots vote ‘Yes’ BBC News, Brian Milligan (19/4/14)
Tories warn over post service costs The Courier (6/4/14)

Questions

  1. What happened when the Royal Mail was privatised?
  2. What are the benefits and costs of privatisation?
  3. Using a cost and revenue diagram, explain how the different costs of delivery between urban parts of the UK and the remotest parts of Scotland should be reflected in different prices of postage.
  4. If the price of postage is the same for delivery everywhere in the UK, use your diagram to explain how this happens.
  5. What does your diagram suggest will happen to the price of postage stamps if a ‘subsidy’ is no longer available?
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Margaret Thatcher: seeking a calm assessment

Much has been written on Margaret Thatcher following her death at the age of 87 on April 8. But getting a calm assessment of both her time in office and her legacy is not easy. And it’s clear why: she created both stronger loyalty and stronger opposition than any other UK Prime Minister.

As economists, however, we should try to be as dispassionate as possible in assessing the effects of policies. There is always a normative question of the relative desirability of different economic outcomes – and you will have your own views on the relative importance of objectives such as economic growth, greater equality and greater social cohesion – but to determine cause and effect, or at least correlation, requires a careful examination of the evidence. Also, drawing lessons for future policy requires a careful modelling of the economy and the effects of changing economic variables.

The following articles have been selected from the hundreds that have appeared in the press in the past few days. Whilst they cannot be claimed to be totally ‘objective’, taken together they give a good overview of her economic policies and her economic legacy.

You may well have been surprised by the amount of coverage of her death and at the fervour of her supporters and critics. But this bears witness to the huge effect she had on both the political scene and on the UK economy – for good or bad.

Articles
Margaret Thatcher’s timeline: From Grantham to the House of Lords, via Arthur Scargill and the Falklands War Independent (8/4/13)
Overhauls Are Still Felt, Debated Decades Later Wall Street Journal, Charles Forelle (9/4/13)
Margaret Thatcher’s Four Ages of Monetary Policy EconoMonitor, David Smith (10/4/13)
How Mrs Thatcher smashed the Keynesian consensus The Economist (9/4/13)
Margaret Thatcher: The economy now and then BBC News, Stephanie Flanders (10/4/13)
Did Margaret Thatcher transform Britain’s economy for better or worse? The Guardian, Larry Elliott (8/4/13)
A look back at Margaret Thatcher’s economic record Washington Post, Dylan Matthews (8/4/13)
Margaret Thatcher’s legacy for business and economics—the world weighs in Quartz, Gwynn Guilford (8/4/13)

Data
Economic Data freely available online The Economics Network, see especially sites 1, 2, 3, 6 and 9

Questions

  1. Summarise the macroeconomic policies followed by the Thatcher government from 1979 to 1990.
  2. Chart economic growth, unemployment and inflation over Margaret Thatcher’s time in office. How does the performance of each of these indicators compare with the period from 1990 to 2007 and from 2008 to the present day?
  3. What is meant by ‘monetarism’? Did the Thatcher government follow pure monetarist policies?
  4. What is meant by the ‘Big Bang’ as applied to the financial sector in 1986? Assess the long-term consequences of the Big Bang.
  5. What elements of ‘Thatcherism’ were retained by the Labour government from 1997 to 2010?
  6. To what extent can the current Coalition government be described as ‘Thatcherite’?
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The road ahead

The Office for Budget Responsibility has said that the UK Treasury will face a shortfall of £13bn in motoring taxes within a decade. Although car usage continues to rise putting increasing pressure on the road infrastructure, the greener and more fuel efficient cars being produced are driving down the tax revenues generated from motoring.

A report by the IFS has put forward the case for replacing the existing system of taxes on cars and fuel by a new road charging system. If no such change occurs, the IFS has forecast that with more electric cars and hence lower revenues raised from fuel and vehicle excise duties, the shortfall facing the Treasury would require an increase in fuel duty of some 50%. Instead of this, the solution could be to charge individuals for every mile of road they use, with the ‘price’ varying depending on the degree of congestion. For example, at peak times the price would be higher, where as for those in the countryside where roads are traditionally much quieter, charges would be lower. The IFS said:

‘Such a move would generate substantial economic efficiency gains from reduced congestion, reduce the tax levied on the majority of miles driven, leave many (particularly rural) motorists better off, and provide a stable long-term footing for motoring taxes without necessarily raising net additional revenue from drivers.’

Government policy across the world has been increasingly focused on climate change, with targets for emissions reductions being somewhat ambitious. However, many car manufactures who were told to reduce emissions significantly are on the way to meeting these targets and this success is a key factor contributing towards this new road ‘crisis’ that could soon be facing the government. The following articles consider the possibility of a road charging scheme.

Report
The road ahead for motoring taxes? Institute of Fiscal Studies (link to full report at the bottom of the page) (May 2012)

Articles
Compelling case for UK road charging, IFS study says BBC News (15/5/12)
Fears tax shortfall may lead to road tolls Sky News (15/5/12)
Who’s going to pay to update Britain’s infrastructure? Guardian Business Blog (15/5/12)
Motoring taxes: a future headache for the Chancellor Channel 4 News (15/5/12)
For whom the toll bills – less traffic hurts M6 toll road owner Guardian, Ian Griffiths and Dan Milmo (14/5/12)
Charge motorists per mile, says IFS Independent, Nigel Morris (15/5/12)
Green cars to drive down tax receipts Financial Times, Mark Odell and John Reed (15/5/12)

Questions

  1. Illustrate the effect of a tax being imposed on petrol. What happens to the equilibrium price and quantity?
  2. Despite fuel duty pushing up the price of petrol, why has there been such a small decline in the quantity of petrol individuals use?
  3. Evaluate the case for and against a road charging scheme.
  4. Why are tax revenues from motoring expected to decline over the next decade?
  5. Climate change has become an increasingly important focus of government policy. To what extent is the current road ‘crisis’ a positive sign that policies to tackle climate change are working?
  6. If a road charging scheme went ahead and prices were varied depending on traffic, time etc, what name would you give to this strategy?
  7. Why would it be possible to charge a higher price at peak times and a lower price for cars using country roads?
  8. Is there an argument for privatising the road network? Is it even possible?
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Stamp ‘profiteering’

46p – that buys you a First Class stamp. However, the price will now rise to 60p and the price of a Second Class stamp will increase to 50p from 36p, as Ofcom lifts some price caps. These significant price rises have seen shortages of stamps emerging across the country. As people anticipate the price rise, individuals and businesses are buying up stamps while they remain relatively cheap.

The problem is that this has started to result in a stamp shortage, so much so that the Royal Mail has now begun rationing retailers’ supply of stamps, capping each retailers’ supply this month to 20% of its annual allocation. A Royal Mail spokesman said:

“We are more than happy for retailers to receive the normal commercial return they obtain on stamps and no more than that … That is why we have put in place a prudent allocation policy to safeguard Royal Mail’s revenues and ensure there are more than enough stamps for people to buy both now and in the future.”

With postage volumes falling, as individuals turn to other methods of communication, Royal Mail says that this price rise is essential to keep this universal service going. Revenues have been low and the Royal Mail has been loss-making for some time.

However, while the price rise may help the Royal Mail, many businesses may suffer in its place. One optician, who sends out approximately 5,000 reminders to patients each year intends to bulk-buy 10,000 stamps in the hopes of saving some £1,400 when prices of stamps rise. An IT worker bought 20 books of 12 first-class stamps and said ‘If I could afford it, I would buy a lot more’. Many are unhappy at the ‘shameless profiteering at the public’s expense’, but whatever your opinion about the price rise, it does make for an interesting case of demand and supply. The following articles consider this stamp shortage.

Man’s 10,000 stamp panic: stampede for stamps leaves a 1st class mess as Royal Mail introduces rationing ahead of 30% price rise Mail Online, Colin Fernandez and John Stevens (15/4/12)
Stamps rationed by Royal Mail in run up to price rise (including video) BBC News (13/4/12)
Stamp rationing could hit pensioners Telegraph, James Hall (14/3/12)
Stamp sales limited ahead of price hike Sky News (13/4/12)
How stamp collecting came unstuck Guardian, Hunter Davies (13/4/12)
Royal Mail limits supply of stamps ahead of price rise Telegraph, James Hall and Andrew Hough (12/4/12)
’Profiteering’ Royal Mail limits supply of stamps before price rise Guardian, David Batty (13/4/12)
Royal Mail’s stamp price rises come into force BBC News (30/4/12)
How businesses will be affected by Royal Mail’s changing prices BBC News, Catherine Burns (28/4/12)

Questions

  1. If people expect prices to rise, what will happen to the demand curve? Illustrate this idea on a demand and supply diagram?
  2. If suppliers anticipate a price rise, what would their best strategy be?
  3. On a demand and supply diagram, illustrate the shortage of stamps that has emerged. If left to the free market, what should happen to the price of stamps?
  4. Why could pensioners and those in rural areas be the most adversely affected by this shortage and price rise?
  5. Why could ‘children and new collectors’ be priced out of the market?
  6. Why will small businesses be affected by this price hike? How could their customers be affected?
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A private healthcare system?

In the UK, we have a dominant public healthcare sector and a small private sector. In the blog Is an education monopoly efficient? we looked at the idea of an education monopoly and why that may create inefficiencies in the system in comparison with competitive private markets. Does the same argument hold for the market for healthcare? The NHS is largely a state monopoly, although market forces are used in certain areas, which does bring some benefits of competition. However, was the NHS to be privatized, would we see further efficiency gains? As we stated in the previously mentioned blog: ‘the more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price.’

Privatisation of the NHS has always been regarded with skepticism – of all the British welfare state institutions, the NHS is the most symbolic. However, we have recently seen a takeover of a NHS hospital by a private firm. It’s not privatisation, but it is a step towards a more privately run healthcare system.

Hinchingbrooke hospital in Cambridge is only small, but has a history of large debts – £40m and yet only a turnover of about £105m. This new strategy will still see the NHS owning the hospitals, but the private firm becoming liable for the hospital’s debts and essentially taking over the running of it. However, Circle aims to repay all the debts within 10 years and make a profit. There are many skeptics of this bold new approach, suggesting that Circle’s numbers don’t add up, especially with the flat NHS spending we’re going to see. However, the firm does have a positive track record in terms of making efficiency savings and whilst success will undoubtedly be a good thing – it may bring up some pertinent questions for the way in which the NHS is and should be run.

Hinchingbrooke hospital deal shakes up NHS Financial Times, Nicholas Timmins (10/11/11)
Failing NHS hospital is taken over by private firm for the first time in history Mail Online, Jenny Hope (11/11/11)
Andrew Lansley’s NHS is all about private sector hype Guardian, John Lister (11/11/11)
Circle clinches hospital management deal Reuters, Tim Castle (11/11/11)
Will profits come before patients in a hospital run by a private company? Independent, Oliver Wright (11/11/11)
Hospital group’s liabilities capped at £7m Financial Times, Sarah Neville and Gill Plimmer (10/11/11)
First privately run NHS hospital ‘is accident waiting to happen’ Guardian, Randeep Ramesh (10/11/11)
Government rejects hospital privatisation claims BBC News, Democracy Live (10/11/11)

Questions

  1. What are the benefits of competition?
  2. What are the market failures within the healthcare market? To what extent do you think that public sector provision (in the form of the NHS) is the most effective type of intervention?
  3. Is this just the first step towards privatisation of healthcare?
  4. Do you think private ownership of hospitals with significant debts is a good strategy?
  5. Why do you think Unison have argued that Circle’s takeover is ‘an accident waiting to happen’?
  6. Does privatisation mean that profits will be more important than patient care?
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Is an education monopoly efficient?

There has always been relatively widespread agreement that the best method to produce and finance education is via the government. Education is such a key service, with huge positive externalities, but information is far from perfect. If left to the individual, many would perhaps choose not to send their children to school. Whether it be because they lack the necessary information, they don’t value education or they need the money their child could earn by going out to work – perhaps they put the welfare of the whole family unit above the welfare of one child. However, with such large external benefits, the government intervenes by making education compulsory and goes a step further in many countries and provides and finances it too.

However, is this the right way to provide education? People like choice and the ability to exercise their consumer sovereignty. The more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price. We see this every day when we buy most goods. Many car salesrooms to visit – all the dealerships trying to offer us a better deal. Innovation in all industries – one phone is developed, only to be trumped by a slightly better one. This is only one of the many benefits of competition. Yet, education sectors are largely monopolies, run by the government. Many countries have a small private sector and there is substantial evidence to suggest that education standards in it are significantly higher. Research from Harvard University academics, covering 220,000 teenagers, suggests that competition from private schools improves achievement for all students. Martin West said:

“The more competition the state schools face for students, the stronger their incentive to perform at high levels…Our results suggest that students in state-run schools profit nearly as much from increased private school competition as do a nation’s students as a whole.”

The study concluded that an increase in the percentage of private school pupils made the education system more competitive and therefore more efficient, with an overall improvement in education standards. With so much evidence in favour of competition in other markets in addition to the above study, what makes education so different?

Or is it different? Should there be more competition in this sector – many economists, including Milton Friedman, say yes. He proposed a voucher scheme, whereby parents were given a voucher to cover the cost of sending their child to school. However, the parents could decide which school they sent their child to – a private one or a state run school. This meant that schools were in direct competition with each other to attract parents, their children and hence their money. Voucher schemes have been trialed in several places, most prominently in Sweden, where the independent sector has significantly expanded and results have improved. Is this a good policy? Should it be expanded and implemented in countries such as the UK and US? The following articles consider this.

Articles
School Competition rescues kids: the government’s virtual monopoly over K-12 education has failed Hawaii Reporter, John Stossel (30/10/11)
Private schools boosts national exam results Guardian, Jessica Shepherd (15/9/10)
Can the private sector play a helpful role in education? Osiris (10/8/11)
Voucher critics are misleading the public Tribune Review, TribLive, Joy Pullmann (30/10/11)
Vouchers beat status quo The Times Tribune (29/10/11)
Why are we allowing kids to be held hostage by a government monopoly? Fox News, John Stossel (26/10/11)
Free Schools – freedom to privatise education The Socialist (26/10/11)
Anyone noticed the Tories are ‘nationalising’ schools? Guardian, Mike Baker (17/10/11)

Publications
School Choice works: The case of Sweden Milton & Rose D Friedman Foundation, Frederick Bergstrom and Mikael Sandstrom (December 2002)

Questions

  1. What are the general benefits of competition?
  2. How does competition in the education market improve efficiency and hence exam results? Think about results in the private sector.
  3. What is the idea of a voucher scheme? How do you think it will affect the efficiency of the sector?
  4. What do you think would happen to equity in if a scheme such as the voucher programme was implemented in the UK?
  5. How do you think UK families would react to the introduction of a voucher scheme?
  6. What other policies have been implemented in the UK to create more competition in the education sector? To what extent have they been effective?
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Growing inequality in Russia

Inequality is growing in most countries. This can be illustrated by examining what has been happening to countries’ Gini coefficient. The Gini coefficient measures income inequality, where 0.00 represents perfect equality, with everyone in the country earning the same, and 1.00 represent perfect inequality, with one person earning all the country’s income. (Note that sometimes it is expressed as the ‘Gini index’, with 100 representing perfect inequality). In virtually all countries, the Gini coefficient has been rising. In the OECD countries it has risen by an average of 0.3% per annum over the past 25 years. The OECD average is now 0.31.

But despite the fact that the Gini coefficient has been rising, its value differs markedly from one country to another, as does its rate of change. For example, Finland’s Gini coefficient, at 0.26, is below the average, but it has been rising by 1.2% per annum. By contrast, Turkey’s Gini coefficient, at 0.41, is above the average and yet has been falling by 0.3% per annum.

The most unequal of the developed countries is the USA. According to OECD data, its Gini coefficient is 0.38, well above the values in the UK (0.34), Japan (0.33), Germany (0.30) France (0.29) and Denmark (0.26). What is more, inequality in the USA has been increasing by an average of 0.5% per annum since the mid 1980s.

According to the United Nations’ Human Development Report 2010, the USA’s Gini coefficient is even higher, at 0.41 (see Table 3 of the report). But this is still below that of Russia, with a figure of 0.44, a figure that has markedly worsened over time, along with those of other former Soviet countries. According to the report (page 72):

The worsening is especially marked in countries that were part of the former Soviet Union – which still have relatively low Gini coefficients because they started with low inequality. Transition has eroded employment guarantees and ended extensive state employment. Before the fall of the Berlin Wall, 9 of 10 people in socialist countries were employed by the state, compared with 2 of 10 in Organisation for Economic Co-operation and Development economies. While the privileged elite (the nomenklatura) often attained higher material well-being, the measured differences in income were narrow.

The Gini coefficient for Russia is the same as the average of the 39 developing countries with the lowest level of human development &nbash; and developing countries are generally much less equal than developed ones. Of course, some developing countries have an even higher Gini coefficient: for Angola the figure is 0.59; for Haiti it is 0.60.

The following three webcasts look at aspects of the growing inequality in Russia.

Webcasts
Gap between rich and poor widens in Russia BBC News, Jamie Robertson (29/5/11)
Corruption slows Russian modernisation BBC News, Emma Simpson (29/5/11)
Corruption and poverty in Russia’s far east Al Jazeera (28/2/11)

Articles
Russia’s rich double their wealth, but poor were better off in 1990s Guardian, Tom Parfitt (11/4/11)
Russia’s growing wealth gap BBC News, Jamie Robertson (28/5/11)
A Country of Beggars and Choosers Russia Profile, Svetlana Kononova (16/5/11)
Rich and poor, growing apart The Economist (3/5/11)

Data
Distribution of family income – Gini Index CIA World Factbook (ranked by country in desending order)
Society at a Glance 2011 – OECD Social Indicators OECD: see particularly the Excel file 6. Equity Indicators: Income inequality (click on No if prompted about a linked workbook)
Russia Distribution of family income – Gini index Index Mundi
Chart of the week: inflation stoking inequality in China and India Financial Times, Andrew Whiffin (24/5/11)
List of countries by income equality Wikipedia

Reports
Growing Income Inequality in OECD Countries: What Drives it and How Can Policy Tackle it? OECD Forum on Tackling Inequality (2/5/11)
Human Development Report 2010 United Nations Development Programme

Questions

  1. Explain what is meant by the Gini coefficient. How does it relate to the Lorenz curve? What does a figure of 0.31 mean?
  2. Why has income inequality been growing in most countries of the world? Has the process of globalisation dampened or exacerbated this trend?
  3. What specific factors in Russia can explain the growing inequality?
  4. How is privatisation likely to affect income distribution??
  5. Why is it difficult to quantify the extent of inequality in Russia?
  6. What maxim of taxation has been used in setting income tax rates in Russia?
  7. What role does corruption play in determining the degree of inequality in Russia?
  8. What policy measures, if any, could realistically be adopted in Russia to reduce inequality? What constraints are there on adopting such policies?
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Privatising Royal Mail

What is the future of the Royal Mail? One thing for certain is that it needs an injection of money, which has led the government to consider either privatisation of the Royal Mail or selling it. Over the past years, we have seen continued strikes by the postal service in response to proposed changes in working practices. Mr. Cable commented that:

‘Royal Mail is facing a combination of potentially lethal challenges – falling mail volumes, low investment, not enough efficiency and a dire pension position.’

However, there are concerns that the privatisation or sale of the Royal Mail could lead to higher prices, job losses and further pension problems. The transfer of the Royal Mail to the highest bidder could shift the pension deficit, currently standing at £13.3 billion, to the taxpayer, potentially costing each taxpayer £400. The choice for the public is stark: either lose the right to send a letter anywhere in the UK for the same price or take on postal workers’ pensions.

Expecting massive opposition from the Communication Workers Union (CWU), Ministers are looking to pursue an arrangement similar to that of John Lewis, whereby staff are given shares in the company. This will give the staff an incentive to perform well to improve the performance of the company and hence increase their future dividend. Read the following articles and then try answering the questions that follow.

Royal Mail is to be privatised, government confirms BBC News (10/9/10)
Royal Mail sell-off is confirmed BBC News, Hugh Pym (10/9/10)
Royal Mail privatisation backed Press Association (10/7/10)
Royal Mail sale could cost £400 per home as taxpayers set to fund £13.3 billion pension deficit Mail Online, James Chapman (10/9/10)
Royal Mail pension plan challenged by regulator BBC News, Ian Pollock (30/7/10)
Ministers consider offering 20 per cent of shares in Royal Mail to staff Telegraph, Christopher Hope (10/9/10)
Cable to privatise ‘inefficient’ Royal Mail Independent, Cahal Milmo and Alistair Dawber (11/9/10)
Royal Mail revolution needed, say bankers Telegraph, Louise Armitstead (10/9/10)

Questions

  1. What are the problems that the Royal Mail is facing? Why have they occurred?
  2. What are the arguments for and against privatisation of the Royal Mail?
  3. How might privatisation lead to job losses and higher prices?
  4. What type of business arrangement does John Lewis have? Explain why this may improve overall performance of the company?
  5. If the pension deficit is passed on to the government, why will it cost the taxpayer? Is such an arrangement (a) efficient (b) equitable? Explain your answer.
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