Finance ministers and central bank officials of the G20 countries are meeting in Sydney from 20 to 23 February. Business leaders from these countries are also attending and have separate meetings.
Amongst the usual discussions at such meetings about how to achieve greater global economic stability and faster and sustained economic growth, there are other more specific agenda issues. At the Sydney meeting these include a roundtable discussion to identify practical solutions to lift infrastructure investment. They also include discussions on how to clamp down on tax avoidance through means such as transfer pricing.
The G20 meetings of finance and business leaders take place annually. There are also annual summits of heads of government (the next being in Brisbane in November 2014).
The G20 was formed in 1999 to extend the work of the G8 developed countries to include other major developed and developing countries plus the EU. In 2008/9 it played a significant role in helping devise policies to tackle the banking crisis and combat the subsequent recession. At the time there was a common purpose, which made devising common policies easier.
Since then, the importance of the G20 has waned. Partly this is because of the divergent problems and issues between members and hence the difficulty of reaching agreements. Partly it is because, to be effective, it needs to remain small but, to be inclusive, it needs to extend beyond the current 20 members. Indeed there has been considerable resentment from many countries outside the G20 that their views are not being represented. Some representatives from non-G20 countries attend meetings on an informal basis.
The following articles discuss the role of the G20 and whether it is fit for purpose.
Articles
Janet Yellen vs. the world: The issues at the G20 finance summit Globe and Mail (Canada), Iain Marlow (20/2/14)
Turning ideas into action at the G20 Business Spectator (Australia), Mike Callaghan (21/2/14)
Boosting infrastructure investment can prove G20’s value to the world The Conversation, Andrew Elek (20/2/14)
Can the G20 ever realise its potential? The Conversation, Mark Beeson (21/2/14)
G20 has failed to fulfil its promise of collaboration amid hostility The Guardian, Larry Elliott (20/2/14)
Official G20 site
G20 Priorities G20
Australia 2014 G20
News G20
Questions
- Which countries are members of the G20? Compile a list of those countries you feel ought to be members of such an organisation.
- What are the arguments for and against increasing the membership of the G20 (or decreasing it)?
- Why is Janet Yellen, Chair of the US Federal Reserve, likely to be at odds with leaders from other G20 countries, especially those from developing countries?
- Why have the tensions between G20 members increased in recent months?
- Discuss possible reforms to the IMF and the G20’s role in promoting such reforms.
- What insights can game theory provide in understanding the difficulties in reaching binding agreements at G20 meetings? Are these difficulties greater at G20 than at G8 meetings?
- Should the G20 be scrapped?
Facebook has announced that it’s purchasing the messaging company WhatsApp. It is paying $19 billion in cash and shares, a sum that dwarfs other acquisitions of start-up companies in the app market. But what are the reasons for the acquisition and how will it affect users?
WhatsApp was founded less than five years ago and has seen massive growth and now has some 450 million active users, 70% of whom use it daily. This compares with Twitter’s 240 million users. An average of one million new users are signing up to WhatsApp each day. As the Wall Street Journal article, linked below, states:
Even by the get-big-fast standards of Silicon Valley, WhatsApp’s story is remarkable. The company, founded in 2009 by Ukrainian Jan Koum and American Brian Acton, reached 450 million users faster than any company in history, wrote Jim Goetz, a partner at investor Sequoia Capital.
Facebook had fewer than 150 million users after its fourth year, one third that of WhatsApp in the same time period.
Yet, despite its large user base, WhatsApp has just 55 employees, including 32 engineers.
For the user, WhatsApp offers a cheap service (free for the first year and just a 99¢ annual fee thereafter). 
There are no charges for sending or receiving text, pictures and videos. It operates on all mobile systems and carries no ads. It also offers privacy – once sent, messages are deleted from the company’s servers and are thus not available to government and other agencies trying to track people.
With 450 million current active users, this means that revenue next year will not be much in excess of $450 million. Thus it would seem that unless Facebook changes WhatsApp’s charging system or allows advertising (which it says it won’t) or sees massive further growth, there must have been reasons other than simple extra revenue for the acquisition.
Other possible reasons are investigated in the videos and articles below. One is to restrict competition which threatens Facebook’s own share of the messaging market: competition that has seen young people move away from Facebook, which they see is becoming more of a social media platform for families and all generations, not just for the young.
Videos and podcasts
Facebook pays billions for WhatsApp Messenger smartphone service Deutsche Welle, Manuel Özcerkes (19/2/14)
Facebook’s WhatsApp buy no bargain Reuters, Peter Thal Larsen (20/2/14)
Facebook Agrees To Buy WhatsApp For $19bn Sky News, Greg Milam (20/2/14)
Facebook Eliminates Competitor With WhatsApp Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Why WhatsApp Makes Perfect Sense for Facebook Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Facebook buying WhatsApp for $19bn BBC News, Mike Butcher (20/2/14)
Is Facebook’s acquisition of WhatsApp a desperate move? CNBC News, Rob Enderle (19/2/14)
Facebook’s $19bn WhatsApp deal ‘unjustifiable’ BBC Today Programme, Larry Magid (20/2/14)
Articles
Facebook to buy WhatsApp for $19 billion in deal shocker ReutersGerry Shih and Sarah McBride (20/2/14)
Facebook to Pay $19 Billion for WhatsApp Wall Street Journal, Reed Albergotti, Douglas MacMillan and Evelyn M. Rusli (19/2/14)
Facebook to buy WhatsApp for $19bn The Telegraph, Katherine Rushton (19/2/14)
Facebook buys WhatsApp: Mark Zuckerberg explains why The Telegraph (19/2/14)
WhatsApp deal: for Mark Zuckerberg $19bn is cheap to nullify the threat posed by messaging application The Telegraph, Katherine Rushton (20/2/14)
Why did Facebook buy WhatsApp? TechRadar, Matt Swider (20/2/14)
What is WhatsApp? What has Facebook got for $19bn? The Guardian, Alex Hern (20/2/14)
Facebook to buy messaging app WhatsApp for $19bn BBC News (20/2/14)
WhatsApp – is it worth it? BBC News, Rory Cellan-Jones (20/2/14)
Facebook buys WhatsApp: what the analysts say The Telegraph (19/2/14)
Facebook ‘dead and buried’ as teenagers switch to WhatsApp and Snapchat – because they don’t want mum and dad to see their embarrassing pictures Mail Online (27/12/13)
Facebook and WhatsApp: Getting the messages The Economist (22/2/14)
Questions
- Are Facebook and WhatsApp substitutes or complements, or neither?
- What does Facebook stand to gain from the acquisition of WhatsApp? Is the deal a largely defensive one for Facebook?
- Has Facebook paid too much for WhatsApp? What information would help you answer this question?
- Would it be a good idea for Facebook to build in the WhatsApp functionality into the main Facebook platform or would it be better to keep the two products separate by keeping WhatsApp as a self contained company?
- What effects will the acquisition have on competition in the social media and messaging market? Is this good for the user?
- Will the deal attract the attention of Federal competition regulators in the USA? If so, why; if not, why not?
- What are the implications for Google and Twitter?
- Find out and explain what happened to the Facebook share price after the acquisition was announced.
With the publication of the February 2014 Inflation Report the Bank of England has adjusted its forward guidance to the markets.
As we saw in Part 1 of this blog, the economy should soon fall below the 7% unemployment threshold adopted in the original forward guidance issued last August. But the Bank feels that there is still too much slack in the economy to raise interest rates when unemployment does fall below 7%.
The Bank has thus issued a new vaguer form of forward guidance.
The MPC’s view is that the economy currently has spare capacity equivalent to about 1%–1½% of GDP, concentrated in the labour market. Around half of that slack reflects the difference between the current unemployment rate of 7.1% and an estimate of its
medium-term equilibrium rate of 6%–6½%. The remaining slack largely reflects a judgement that employees would like to work more hours than is currently the case. Companies appear to be operating at close to normal levels of capacity, although this is subject to some uncertainty.
The existence of spare capacity in the economy is both wasteful and increases the risk that inflation will undershoot the target in the medium term. Moreover, recent developments in inflation mean that the near-term trade-off between keeping inflation close to the target and supporting output and employment is more favourable than at the time the MPC announced its guidance last August: CPI inflation has fallen back to the 2% target more quickly than anticipated and, with domestic costs well contained, is expected to remain at, or a little below, the target for the next few years. The MPC therefore judges that there remains scope to absorb spare capacity further before raising Bank Rate.
Just what will determine the timing and pace of tightening? The Bank identifies three factors: the sustainability of the recovery; the extent to which supply responds to demand; and the evolution of cost and price pressures. But there is considerable uncertainty about all of these.
Thus although this updated forward guidance suggests that interest rates will not be raised for some time to come, even when unemployment falls below 7%, it is not at all clear when a rise in Bank Rate is likely to be, and then how quickly and by how much Bank Rate will be raised over subsequent months. Partly this is because of the inevitable uncertainty about future developments in the economy, but partly this is because it is not clear just how the MPC will interpret developments.
So is this new vaguer forward guidance helpful? The following articles address this question.
Articles
Bank of England Governor Carney’s statement on forward guidance Reuters (12/2/14)
Why has Mark Carney tweaked forward guidance? The Telegraph, Denise Roland (12/2/14)
Interest rates: Carney rips up ‘forward guidance’ policy Channel 4 News (12/2/14)
Forward guidance version 2: will the public believe it? The Guardian, Larry Elliott (12/2/14)
Mark Carney adjusts Bank interest rate policy BBC News (12/2/14)
Mark Carney’s almost promise on rates BBC News, Robert Peston (12/2/14)
Did the Bank of England’s Forward Guidance work? Independent, Ben Chu (2/2/14)
Forward Guidance 2.0: Is Carney just digging with a larger shovel? Market Watch, The Tell (12/2/14)
The U.K. Economy: Five Key Takeaways Wall Street Journal, Alen Mattich (12/2/14)
Bank of England pages
Inflation Report, February 2014 Bank of England (12/2/14)
Monetary Policy Bank of England
MPC Remit Letters Bank of England
Forward Guidance Bank of England
Questions
- Summarize the new forward guidance given by the Bank of England.
- Why is credibility an important requirement for policy?
- What data would you need to have in order to identify the degree of economic slack in the economy?
- Why is it difficult to obtain such data – at least in a reliable form?
- What is meant by the ‘output gap’? Would it be a good idea to target the output gap?
- Is it possible to target the rate of inflation and one or more other indicators at the same time? Explain.
Although the Monetary Policy Committee (MPC) of the Bank of England is independent in setting interest rates, until recently it still had to follow a precise remit set by the government. This was to target inflation of 2% (±1%), with interest rates set to meet this target in 24 months’ time. But things have changed since the new Governor, Mark Carney, took up office in July 2013. And now things are not so clear cut.
The Bank announced that it would keep Bank Rate at the current historically low level of 0.5% at least until unemployment had fallen to 7%, subject to various conditions. More generally, the Bank stated that:
The MPC intends at a minimum to maintain the present highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to price stability or financial stability.
This ‘forward guidance’ was designed to provide more information about future policy and thereby more certainty for businesses and households to plan.
But unemployment has fallen rapidly in recent months. It fell from a 7.7% average for the three months May to July 2013 to 7.1% for the latest available three months (September to November 2013). 
And yet there is still considerable slack in the economy.
It now, therefore, looks highly unlikely that the MPC will raise Bank Rate as soon as unemployment falls below 7%. This then raises the question of how useful the 7% target has been and whether, if anything, it has created further uncertainty about future MPC decisions.
The following still appears on the Bank of England website:
The MPC intends at a minimum to maintain the present highly stimulative stance of monetary policy until economic slack has been substantially reduced, provided this does not entail material risks to price stability or financial stability.
But this raises two questions: (a) how do you measure ‘economic slack’ and (b) what constitutes a substantial reduction?
So what should the Bank do now? What, if any, forward guidance should it offer to the markets? Will that forward guidance be credible? After all, credibility among businesses and households is an important condition for any policy stance. According to Larry Elliott in the first article below, there are five options.
Articles
Bank of England’s method of setting interest rates needs reviewing The Guardian, Larry Elliott (9/2/14)
Mark Carney set to adjust Bank interest rate policy BBC News (12/2/14)
Forward guidance: dead and alive BBC News, Robert Peston (11/2/14)
What “forward guidance” is, and how it (theoretically) works The Economist (11/2/14)
BOE’s forward guidance 2.0: Cheap talk, or big change? Market Watch (11/2/14)
Bank of England pages
Monetary Policy Bank of England
MPC Remit Letters Bank of England
Forward Guidance Bank of England
Questions
- What data would you need to have in order to identify the degree of economic slack in the economy?
- Why is it difficult to obtain such data – at least in a reliable form?
- Why might the issuing of the forward guidance last July have itself contributed to the fall in unemployment?
- Why is it difficult to obtain such data – at least in a reliable form?
- Why is credibility an important requirement for policy?
- Why may LFS unemployment be a poor guide to the degree of slack in the economy?
- Discuss the relative merits of each of the five policy options identified by Larry Elliott.
Microsoft’s Office suite is the market leader in the multi-billion dollar office software market. Although an oligopoly, thanks to strong network economies Microsoft has a virtual monopoly in many parts of the market. Network economies occur when it saves money and/or time for people to use the same product (software, in this case), especially within an organisation, such as a company or a government.
Despite the rise of open-source software, such as Apache’s OpenOffice and Google Docs, Microsoft’s Office products, such as Word, Excel and PowerPoint, still dominate the market. But are things about to change?
The UK government has announced that it will seek to abandon reliance on Microsoft Office in the public sector. Provided there are common standards within and across departments, it will encourage departments to use a range of software products, using free or low-cost alternatives to Microsoft products where possible. This should save hundreds of millions of pounds.
Will other governments around the world and other organisations follow suit? There is a lot of money to be saved on software costs. But will switching to alternatives impose costs of its own and will these outweigh the costs saved?
UK government to abandon Microsoft “oligopoly” for open source software Digital Spy, Mayer Nissim (29/1/14)
No, the government isn’t dumping Office, but it does want to start seeing other people ZDNet, Nick Heath (29/1/14)
UK government once again threatens to ditch Microsoft Office The Verge, Tom Warren (29/1/14)
UK government to abandon Microsoft Office in favour of open-source software PCR, Matthew Jarvis (29/1/14)
UK government plans switch from Microsoft Office to open source The Guardian (29/1/14)
Open source push ‘could save taxpayer millions’ The Telegraph, Matthew Sparkes (30/1/14)
Will Google Docs kill off Microsoft Office? CNN Money, Adrian Covert (13/11/13)
Questions
- Why has Microsoft retained a virtual monopoly of the office software market? How relevant are network economies to the decision of organisations and individuals not to switch?
- Identify other examples of network economies and how they impact on competition.
- How do competitors to Microsoft attempt to overcome the resistance of people to switching to their office software?
- What methods does Microsoft use to try to retain its position of market dominance?
- How does Apple compete with Microsoft in the office software market?
- What factors are likely to determine the success of Google Docs in capturing significant market share from Microsoft Office?
Finance ministers and central bank officials of the G20 countries are meeting in Sydney from 20 to 23 February. Business leaders from these countries are also attending and have separate meetings.
