To mark the 20th anniversary of the fall of the Berlin wall, the BBC World Service commissioned a survey across 27 countries to gather people’s views about capitalism and whether it is working well. The findings are striking. Only 11% felt that it is working well. “Most thought regulation and reform of the capitalist system were necessary. There were also sharp divisions around the world on whether the end of the Soviet Union was a good thing.”
The following articles look at the detailed findings of the poll and consider its implications for the functioning and reform of the world economy.
Global poll: Wide dissatisfaction with capitalism 20 years after fall of Berlin Wall BBC Press Office (9/11/09)
Free market flawed, says survey BBC News, James Robbins (9/11/09)
Wide dissatisfaction with capitalism, years after fall of Berlin Wall Dawn.com (Pakistan) (9/11/09)
Capitalism confronted with growing doubts Global Times (China) (11/11/09)
The fall of the Berlin wall – Pt 1 (video), The fall of the Berlin wall – Pt 2 (video), Al Jazeera (on YouTube), Riz Khan (9/11/09)
Column : Why Berlin was a win for all of us Financial Express (India), Lord Desai (Emeritus Professor, London School of Economics) (9/11/09)
The real lesson of 1989 is that nothing is ever settled Guardian, Seumas Milne (12/11/09)
The Wall fell and hope rose – for a while Otago Times (New Zealand), Andrew Rawnsley (10/11/09)
New name for a new economy? BBC News, Stephanomics (13/11/09)
Questions
- What are the alternatives to free-market capitalism?
- Do you agree that “however flawed free-market capitalism is, it is still the best of all systems”? Explain your answer.
- In what ways does free-market captialism fail to provide the optimum allocation and distribution of resources?
- What forms can government intervention take to influence markets?
Northern Rock seems to have had a fixed place in the news for the past year or so. Unfortunately, the advertising it’s been getting hasn’t been positive. The usual picture was one of a Northern Rock branch and a few hundred people queuing outside, ready to withdraw their savings.
In the financial crisis, the banking sector has been at the forefront of economic policy and billions of pounds of public money have been invested in banks simply to keep them afloat and encourage them to keep lending. But now the government, in a measure approved by the European Commission, is considering selliing part of Northern Rock, by splitting it into a ‘good bank’, which will be returned to the private sector, and a ‘bad bank’, which will have to remain nationalised. This bad bank would gradually run down its assets and eventually be liquidated. Similar plans are being considered for the part-nationalised Royal Bank of Scotland and Lloyds Banking Group.
Northern Rock’s loan book will be cut from £100bn pre-crisis to just £20bn to ensure that a bank which enjoyed state support should not have “an unfair competitive advantage”. Savers with Northern Rock will find themselves in the ‘good’ bank, while mortgage customers with arrears and those who are regarded as risky, will be seen as ‘bad’ bank clients.
The buyers of these banks remain unknown. Tesco was considered to be a possible buyer of Northern Rock but has pulled out, with plans to build a new full-service bank itself. Established banks, such as Barclays, will not be allowed to make a purchase and the FSA has stated that standards will not be dropped to allow new competitors to enter the market, especially given that much of the banking crisis is due to poor standards and insufficient regulation. National Australia Bank, the owners of Yorkshire and Clydesdale, is a possible buyer, as too is Virgin Money, even though it would require new finance and possibly new partners. Some potential bidders may be ruled out by competition considerations. So let the games begin!
The following articles look at the banking situation and the possible developments.
Where Gordon Brown feared to tread, Kroes is ready to trample Telegraph, Alistair Osborne (28/10/09)
Lloyds eyes capital raising plans BBC News (29/10/09)
Tesco rules out Northern Rock takeover Guardian, Julia Finch (28/10/09)
EU approves Northern Rock split BBC News (28/10/09)
The Business Podcast: The break-up of Northern Rock Guardian (28/10/09)
Lloyds Banking share price could scupper offer SME Web, Roberta Murray (29/10/09)
Roll up, roll up, for the great bank sell off Independent, Richard Northedge (8/11/09)
Treasury says Northern Rock may lose savers as Government pulls out The Times, Francis Elliott and Suzy Jagger (5/11/09)
Union fears for 25,000 jobs as EU insists Lloyds and RBS must shed branches Guardian, Jill Treanor (3/11/09)
Decision time for Lloyds shareholders BBC News, Money Talk, Justin Urquhart Stewart (11/11/09)
The Business podcast: The break-up of Northern Rock Guardian (28/10/09)
Details of the European Commission ruling on the restructuring of Northern Rock can be found at:
State aid: Commission approves restructuring package for Northern Rock
Questions
- What started all the trouble at Northern Rock?
- What are the arguments (a) for and (b) against the break up of Northern Rock and the other banks that received state aid? Do you think the right decision has been made?
- The BBC News article ‘Lloyds eyes capital raising plans’ refers to 43% of Lloyds being owned by the tax payer. What does this mean and how has it happened?
- Why do you think Tesco has decided not to put in a bid to take over Northern Rock?
- Consider the potential bidders for these new ‘good’ and ‘bad’ banks. In each case, consider the (a) advantages and (b) disadvantages. Then, explain the type of take-over or merger this would be and whether there could be any competition considerations.
- One of the aims of recent developments in the banking sector is to increase competition. Why is this so important and how will it affect consumers and businesses?
The following article by Will Hutton looks at the relative efficiency of private- and public-sector organisations. The public sector is typically characterised as inefficient and providing a poorer level of service and poorer quality products than the private sector. After all, the private sector is driven by the profit motive, where providing a good service would seem to be a key ingredient in making more profit.
Yet when you look around you, this portrayal can be seen as far too simplistic. On the one hand, much of the public sector has been forced to be efficient, following many years of tight budgets. At the same time, many in the public sector are keen to deliver a good service, not only because that is required by their employers, but because they are motivated by a sense of public duty and professionalism. On the other hand, there are many market failings in large parts of the private sector, where monopoly power, asymmetric information and externalities are rife. Read the article and see if you agree with Will Hutton’s analysis.
These money-grubbing companies make the public sector look good Observer (1/11/09)
Questions
- What are the incentives to encourage either private-sector companies or public-sector organisations (a) to be efficient in the sense of cutting out waste (X-efficiency); (b) to be allocatively efficient; and (c) to provide a high quality of service to customers / clients / patients / students, etc.?
- What market failures may prevent private-sector companies from achieving (a) to (c) above?
- What organisational failures may prevent public-sector organisations from achieving (a) to (c) above?
- How is Goodhart’s Law relevant to the setting of performance targets in both the private and public sectors?
The following video and audio podcasts look at resistance by the US oil and coal industries to measures to curb the consumption of oil and coal. Despite the clearly estabilised link between burning fossil fuels and global warming, many in the two industries reject, or at least question, the evidence. After all, it is in their commerical interests to promote the consumption of fossil fuels!
Elsewhere in the USA, interesting scientific developments are taking place to combat global warming. One measure is the production of ‘green oil’ produced from algae. Growing the algae absorbs carbon from the atmosphere.
In few areas are economic arguments so intertwined with political ones. The podcasts look at some of the issues.
Energy policy divides in the US BBC News, David Shukman (2/11/09)
America’s energy policy dilemma BBC News, David Shukman (2/11/09)
Texas takes on green energy BBC News, Roger Harrabin (1/06/09)
Ethical Man: Green revolution in Texas BBC Newsnight, Justin Rowlatt (11/3/09)
Climate plans part of wider battle over American freedom Ethical Man (Justin Rowlatt) blog (BBC) (3/11/09)
Obama urges climate change effort BBC News (3/11/09)
Al Gore on tackling global warming BBC Newsnight (4/11/09)
Al Gore on beating the ‘oil habit’ BBC Today Programme (4/11/09)
Questions
- To what extent will the free market result in a shift to greener energy sources? Why will any shifts towards greener fuels still not result in the socially or environmentally optimum use of fossil and ‘green’ fuels without government intervention?
- What policies could governments adopt to internatlise the externalities involved in burning fossil fuels?
- How suitable are cap-and-trade policies (tradable permits) for tackling global warming? What conditions are necessary for such policies to be effective?
- Why is tackling climate change politically difficult for (a) individual countries and (b) the world as a whole? How is game theory relevant to your analysis?
According to Sir Liam Donaldson, England’s Chief Medical Officer, swine flu is on its way back. However, vaccinations are now available to the most vulnerable people, including front-line medical staff, people with chronic health problems and pregnant women. But, what about every-day workers? Surely, these are people that need protecting too, as they are the ones who contribute to the economy. How do you prioritise?
A key question is how much swine flu has actually cost the UK economy. Here, we’re not just concerned with the cost of the vaccines, but also the opportunity cost of that money, the lost output from illness, the human suffering – both of the victims and of their relatives and friends – and, of course, the impact on business and the economy. Some of the countries worst hit by the outbreak of swine flu have faced particular problems, such as protectionist trade policies and a significant fall in business through tourism.
So, will the vaccine prove cost effective for the government, or is it more about the moral obligation to provide it? These articles look at some of the recent developments in the worst pandemic in years.
Mexico economy squeezed by swine flu BBC News (30/4/09)
Swine flu vaccine on its way to GPs Grimsby Telegraph (21/10/09)
Exclusive – WTO protectionism report to feature swine flu bans Reuters (12/6/09)
Flu bill ‘may hit fire plans’ Teletext (27/10/09)
Swine flu vaccination under way BBC News (21/10/09)
Swine flu costs have put dent in profits, Amerigroup says Pilot Online, Tom Shean (27/10/09)
Swine flu gives Pharmaceutical Companies a New Edge Top News, Tangaroa Snell (26/10/09)
Economic cost of swine flu could be around $3 trillion to $4.4 trillion Today’s Zaman (Turkey) (2/11/09)
Swine flu mass vaccination programme launched Guardian (21/10/09)
Full list of swine flu cases, country by country Guardian (updated daily)
Doctors plan mass swine flu jabs for under-18s Times Online (1/11/09)
Questions
- What is the opportunity cost of swine flu? How could you illustrate this on a diagram?
- Vaccines are going to those at risk first. Why is this particularly relevant in terms of the economic problem?
- What is protectionism and what are the main forms? Discuss the advantages and disadvantages of protectionist policies in the context of swine flu.
- If the government had to decide whether or not a swine flu vaccine was worth producing, how could they have done this? Outline the process by which costs and benefits can be weighed up. Are there any drawbacks to this method?
- How have businesses been affected by swine flu? Think about those who have benefited as well as those that have lost.