The expansion of the BRIC economies has both advantages and disadvantages for Western countries. Their consistently high growth rates have created a much wider market place for Western firms and a much needed additional source of consumer demand, especially in times of recession. Countries such as China have had double digit growth rates, with others like India experiencing growth rates of just under 10%. But are these impressive growth rates now beginning to fall?
For the last 2 years, the growth rate in the Indian economy has been sub-5%, with growth in the 2013-14 financial year at 4.7%. Though some sectors, including agriculture have experienced buoyant growth, it is other sectors that have been holding this economy back. Manufacturing contracted at an annualised rate of 1.4% over the quarter, while mining contracted by 0.4%. With a growth rate of just under 5%, one might think that this was good – after all many Western economies have only recently entered positive growth. However, the Indian economy has a rapidly growing population and it is estimated that 10 million additional jobs each year must be created. It is this figure that requires such a high growth rate – estimated at around 8%. Thus, the sub-5% growth recorded for 2 years is insufficient to sustain the required job creation.
There are many factors that appear to be holding growth back. High inflation has been a problem for some years and the Indian currency has been relatively weak and volatile. Together, these issues have created an environment of uncertainty and if there’s one thing that investors don’t like, it’s uncertainty. This has therefore led to a lack of investment in the economy, which is a key component of aggregate demand and hence a key source of economic growth. Furthermore, interest rates rose last year, thereby pushing up the cost of borrowing and the rate of credit growth has also slowed. These factors collectively have led to lower foreign investment, domestic investment and spending, which have all contributed towards more subdued growth than in the past. Glenn Levine, a senior economist at Moody’s said:
India’s economy continues to grow well below potential as a combination of supply‐side constraints and the adverse effects of an underperforming government weigh on capital expenditure and hiring … It will be a while before the Indian economy is expanding above 6% again.
However, many economists remain optimistic about the prospects of Asia’s third-largest economy. Inflation appears to be under control and the currency has gained strength. Many believe that more investment supporting government policies will be the kick start the economy needs and this will in turn encourage firms to begin investment. It may be the new leader of this country, Narendra Modo, that will jump start the economy. The Prime Minister is expected to back policies to stimulate growth, who will direct more spending at infrastructure, simplify taxes and introduce policies to attract foreign investment. Adi Godrej, Chairman of the Godrej group said:
As soon as investors see the first signals of growth-supportive policies, you will see a definite turnaround on the ground.
The coming months will be crucial in determining how quickly the Indian economy is likely to see a return to near double digit growth. The new government has indeed promised policies to boost the economy, but the annual budget will confirm whether this promise is likely to be kept. Given the dependence of Indian jobs on a fast growth rate and the dependence of the Western world on the continued growth of the BRICs in creating a wider market for our exports, the fortunes of India are extremely important. The following articles consider this economy.
Indian economy grew at 4.7% in 2013-14 The Times of India (30/5/14)
India’s economic growth disappoints BBC News (30/5/14)
India’s GDP grows 4.7% in fiscal year, missing government forecast Wall Street Journal, Anant Vijay Kala (30/5/14)
India’s economy expands 4.7pct in fiscal year 2013/14 Reuters (30/5/14)
India’s economy still underwhelms CNN Money, Charles Riley, Alanna Petroff (30/5/14)
FY14 GDP growth at 4.7%; India sees worst slowdown in 25 years The Economic Times (30/5/14)
India growth below 5% adds pressure on Modi to spur investment Bloomberg, Unni Krishnan (30/5/14)
Jim Armitage: ‘Modinomics’ in India has helped growth, but not for all Independent, Jim Armitage (17/5/14)
Questions
- Using a diagram, explain how economic growth can be created through (a) demand-side measures and (b) supply-side measures.
- Why would higher interest rates reduce growth?
- Why does high inflation create uncertainty and what impact does this have on business investment?
- India has experienced a weak and volatile currency and this has contributed towards a lack of foreign investment and low growth. Using a diagram, explain why this could be the case.
- What sort of government policies would you recommend for the Indian economy if you had become the new Prime Minister and your primary objective was to boost economic growth?
- Why is the expansion of the BRIC economies, of which India is one, so important for Western economies?
They may not have been happy about it but the executives of Manchester City have finally agreed a settlement with UEFA after it was judged that the club had broken Financial Fair Play (FFP) rules. The club had initially indicated that they might take their case to the Club Financial Control Body’s adjudicatory chamber. For details about FFP, see previous article on the website: What does ‘fair play’ mean for the big teams in Europe?They have also now accepted the sanctions for breaking these rules which appear to be very similar in magnitude to those imposed on Paris St-Germain. UEFA have also judged that seven other clubs have failed to meet their financial requirements.
Why did Manchester City fail the FFP rules when they appeared to be so confident that they would meet them? To understand this requires some discussion of a number of exemptions put in place by UEFA in the implementation of the FFP guidelines.
One of the key aims of FFP is to force the clubs who compete in European competitions to break even. However UEFA allow clubs to make some losses before any sanctions are applied. For the current monitoring period the clubs are allowed to make a cumulative loss of up to €45 million (approximately £37 million) over a two year period from 2011-2013 before any penalties are imposed. This permitted loss is referred to by UEFA as the ‘acceptable deviation’ from breaking even.
Manchester City reported losses in their financial accounts of £97million in 2011-12 and £51.6 million in 2012-13. At first sight this cumulative loss of nearly £149 million over the two year period would suggest that the club failed to meet the FFP regulations by a wide margin i.e. £112 million over the acceptable deviation. However the size of either the profit or loss reported in a club’s final accounts is different from the figure that is used by UEFA when assessing whether the teams have met the FFP criteria. UEFA exclude any costs incurred by the clubs on
– Youth development and community projects
– Building/developing their stadiums
Imagine a situation where after deducting these costs, Manchester City’s losses fell to £75 million in 2011-12 and £35 million in 2012-13. Once again it would still look as if they have failed to meet the FFP guidelines by a large margin. However there is another set of costs that can be excluded if a number of conditions are met. These are the wage costs in 2011-12 of those players who had signed contracts with the club before 1st June 2010. This exemption was introduced by UEFA because a number of clubs complained that they would struggle to meet the rules because of the nature of the players’ contracts. It is quite common for these to be of a 4 or 5 year duration. The teams argued that they were already committed to paying some players very large salaries in 2011-12 because of deals that were agreed long before the FFP rules were introduced. UEFA accepted this argument but only allowed the wage costs to be exempted from the FFP calculations on two conditions:
1. The club could show that the size of its losses were falling over time and that they had a clear strategy in place so that they would be able to comply with FFP regulations in future years.
2. The cumulative loss in excess of the acceptable deviation was caused by losses incurred in the 2011-12 period.
As there is a downward trend in the size of the losses being made by Manchester City they would appear to meet the first condition. It would also be important for them to convince UEFA that they had policies in place to reduce the losses below the permitted levels in the future. In the example above the second criterion is also met as the loss in 2012-13 of £35 million was lower than the acceptable deviation of £37 million. Therefore the reason why the cumulative permitted loss would be broken is because of the impact of the £75 million loss in 2011-12.
However there is another element to the second condition. The club also has to show that the sole reason for the loss in 2011-12 was because of the wage costs they were already committed to – i.e. from the contracts signed before the 1st June 2010. If these wage costs are smaller than the losses reported in that period then they cannot be exempted from the FFP calculations as they can only partly explain the loss.
Reports in the press have suggested that approximately £80 million of Manchester City’s wage bill in 2011-12 was caused by contracts that were signed with players before the 1st June 2010. If this was true then in the example above they would have met the FFP requirements as the £80 million of wages could fully account for the £75 million loss in the 2011-12 season. This would mean that the £80 million could be exempted from the FFP calculation and City would have made a cumulative loss of £35 million which was less than the acceptable deviation of £37 million.
If the wages paid to the players from the contracts signed prior to 1st June 2010 could not fully account for the losses in 2011-12 then they could not be deducted in the FFP calculations. For example imagine if after deducting the costs of youth/community projects and infrastructure spending that Manchester City’s loss had been £85 million in 2011-12 instead of £75 million. The wages bill of £80 million could not fully account for this loss of and hence the £80 million wage bill would be counted in the calculations. The cumulative loss would now be £120 million (£85 million + £35 million) and the acceptable deviation would have been exceeded by £83 million.
Unfortunately for Manchester City this appears to be more or less what happened. As part of the FFP process UEFA also examined deals struck between the club and other organisations in which the owner had an interest. These are referred to by UEFA as Related Party Transactions (RPTs). It would seem that the accountants at UEFA came to the conclusion that some of these RPTs were at above market prices. Interestingly some press reports have indicated that the £35 million a year deal with Etihad was judged to be fine. It was a number of secondary sponsorship deals which were considered to be above fair market values. Once adjustments were made to take account of this it looks as if the re-calculated losses for 2011-12 were greater than the £80 million of wages. With these wage costs not exempted from the calculation, Manchester City have been judged to have missed the FFP conditions by a wide margin.
The following quote is taken from a statement released by the club:
At the heart of the discussions is a fundamental disagreement between the club’s and UEFA’s respective interpretations of the FFP regulations on players purchased before 2010.
The following sanctions have been imposed:
– A £49 million fine to be withheld from UEFA prize money over the next three seasons. (£32 million is suspended and depends on their financial performance in future years)
– A limit on the squad size for the Champions League – 21 instead of 25 players
– Spending limited on transfers this summer to £49 million plus any revenue received in transfer fees from the sale of players
– A freeze on the wage bill of the Champions League squad for the next two seasons
It will be interesting to see if these penalties significantly constrain Manchester City’s ability to compete with the other big teams in Europe next season.
Articles
Manchester City accept world-record £50m fine for breach of Uefa Financial Fair Play rules The Telegraph, (16/5/14)
Manchester City facing £50m fine for breaching Uefa’s Financial Fair Play regulations The Telegraph, (6/5/14)
A beginner’s guide to UEFA’s financial fair play regulations SB Nation, (30/04/14)
Financial Fair Play Explained Financial Fair Play 2012
Man City to act swiftly in transfer market – Khaldoon Al Mubarak BBC Sport, (20/5/14)
Manchester City fined and squad capped for FFP breach BBC Sport, (16/5/14)
Manchester City facing Uefa sanctions over finances BBC Sport, (6/5/14)
Paris St-Germain’s £167m deal fails Uefa financial fair play rules BBC Sport, (1/5/14)
Manchester City and PSG breach Uefa FFP rules BBC Sport, (28/4/14)
Financial Fair Play: What rules have Manchester City broken and what are the likely sanctions? The Mirror, (6/5/14)
We’re innocent! Manchester City on the attack over FFP penalties The Express, (21/5/14)
Man City facing double UEFA punishment for breaching financial fair play rules talkSPORT, (6/5/14) .
Questions
- What are barriers to entry? Give 4 examples.
- What impact do barriers to entry have on a market? Draw a diagram to illustrate your answer.
- To what extent do you think that the UEFA Fair Play Rules act as a barrier to entry?
- What impact do you think the FFP rules will have on the marginal revenue product of the most talented players? Draw a diagram to illustrate your answer.
- Can you think of any methods that a club might use to try and circumvent a rule that attempts to restrict the size of its wage bill.
Some eyebrows were raised when the English Premier League (EPL) recently published the final payments to each of the clubs from the revenue generated by the latest TV deal. The headlines were that Liverpool received the highest individual pay-out of £97,544,336! Cardiff City received the lowest pay-out of £62,082,302. What caught the eye of the headline writers was that the revenue from the lowest pay-out this season (the payment to Cardiff) was greater than the highest pay-out from the previous season (a payment of £60,813,999 to Manchester United).
The 2013-14 season was the first year of the latest 3 year deal for the rights to broadcast EPL games on the television, internet and radio. As part of this deal BSkyB are paying £760 million each year for the rights to broadcast 116 EPL games per season in the UK. BTSport are paying £246 million per year for the rights to broadcast 38 EPL games per season. In addition to selling the rights to broadcast games in the UK, the EPL also separately sells the rights to broadcast games in other countries. For example Cable Thai Holdings paid £205 million for a 3 year deal to show EPL matches in Thailand while NowTV paid £128 million for a similar deal in Hong Kong. In total the EPL earns approximately £1.8 billion per season from the sale of their domestic and international media rights.
The approach taken by the EPL to manage the sale of the broadcasting rights has raised considerable debate amongst economists and policy makers. There are two very different methods that can be used by teams in a league to sell the rights. They are the Individual Sales Model (ISM) and the Collective Sales Model (CSM). In the ISM each club is responsible for marketing and selling the rights to broadcast its home games. The ISM is currently employed by both La Liga in Spain and Primeira Liga in Portugal. In the CSM the rights are sold jointly by the league, federation or national association on behalf of the teams involved. This CSM is currently used by the majority of the football leagues in Europe. The EPL sold the rights for 2013-16 on behalf of the 20 clubs using a sealed bid auction.
Some economists and policy makers have criticised the CSM, claiming that it is an example of a cartel that simply restricts output and leads to higher prices. Each club is considered to be the equivalent of a firm in a traditional industry. The argument is based on a number of observations about the teams. They:
• are each separately owned and submit their own individual set of accounts
• compete with each other to buy inputs (i.e. the players) to produce an output (i.e. a match)
• individually market and set the price for the outputs they produce i.e. the ticket for the games and the prices of the merchandise such as football shirts
If this view of the industry is taken, the league or federation looks rather like a restrictive agreement between independent competitors that creates monopoly market power. As evidence to support this interpretation of the CSM, reference is often made to the details of the contract between the EPL and BSkyB and BTSport. As part of this agreement the number of live matches that can be broadcast is restricted to 154.This represents just over 40% of the maximum total of 380 that could be shown. Teams are effectively prohibited from individually selling the rights to matches that are not selected for broadcast in the collective deal as they must seek permission from the EPL. Over ten years ago the Director General of the Office of Fair Trading commented that:
Within the market the Premier League has a major if not unique position. By selling rights collectively…it is acting as a cartel. The net effect of cartels is to inflate costs and prices. Any other business acting in this way would be subject to competition law and I see no reason why the selling of sport should be treated differently.
The EPL has always defended it actions by claiming that any increase in the number of televised games would have a negative impact on the attendance at matches.
An alternative view focuses on the peculiar or unique characteristics of sports leagues. In particular it is argued that sport is unusual because the level of co-operation required between the teams and a league to produce matches is far greater than that required by firms in other industries to produce output. Agreements have to be made about issues such as the timing and venue of the games as well as the rules under which they will be played. However unlike a traditional cartel arrangement these agreements do not simply control and restrict output. They also improve the entertainment value of the game and hence the quality of the product. Some authors have argued that because of these unique characteristics, the league rather than the individual team should be considered as the equivalent to a firm in a more traditional industry. In this ‘single entity theory’ teams are viewed as divisions of a single organization i.e. the league. The league is treated as a natural monopoly that legally owns the broadcast rights of the clubs rather than a cartel of separate firms. Others have argued that it is more sensible to think of the league as a joint venture between the teams.
Not only are the levels of co-operation required much greater than in traditional industries but it is also argued that competitive balance is important for a successful league. If the same teams always win most of the games then there are concerns that fans will find this boring and it will reduce their willingness to pay to watch matches in either the stadium or on television. It is argued that the CSM makes it easier to distribute the TV money more equally and so helps to maintain competitive balance in a league. The White Paper on Sport published by the European Union in 2007 stated that:
Collective selling can be important for the redistribution of income and can thus be a tool for achieving greater solidarity within sports.
The debate continues about whether the CSM used by the EPL is an example of a restrictive cartel which acts against the public interest or a business practice that helps to improve the quality of the product for the customer.
Premier League clubs earn record-breaking sums thanks to TV bonanza The Telegraph (14/5/14)
Liverpool top earners over season with £99m – and bottom side Cardiff got £64m (so see what your team received in 2013-14 Mail Online (11/5/14)
Cardiff earn more TV cash than champions Man Utd did in 2013 BBC Sport (14/5/14)
Relegated Cardiff Earn More TV Revenue than Man Utd Tribal Football (14/5/14)
TV Bonanza for Premier League Clubs Pars Herald (18/5/14)
Season of woe hits home in money league Express & Star (15/5/14) .
Questions
- What is a natural monopoly? Draw a diagram to illustrate your answer.
- What is a cartel? Find three real-world examples of cartel agreements.
- It was explained in the article how the EPL sells the rights to broadcast just over 40% of the total number of matches played per season. Draw a diagram to illustrate and explain how this might be an example of a cartel agreement that restricts output and results in higher prices.
- The EPL defends its decision to restrict the number of games that can be televised in its domestic deal by claiming that any increase would have a negative impact on attendance at the matches. To what extent do you think that watching a live game on the television is a substitute for watching it in the stadium? Draw a demand and supply diagram to illustrate a situation where they are strong substitutes. Explain how the concept of cross price elasticity could be applied to this example.
- Outline how a sealed bid auction works. What are the advantages of using a sealed bid auction as opposed to other types of auction.
- Can you think of any other economics arguments that could be used to defend the use of the CSM for the sale of the broadcast rights?
We have had a minimum wage in the UK for well over a decade and one its key purposes was to boost the pay of the lowest paid workers and in doing so reduce the inequality gap. Rising inequality has been a concern for many countries across the world and not even the nations with the most comprehensive welfare states have been immune.
Switzerland, known for its banking sector, has been very democratic in its approach to pay, holding three referenda in recent years to give the Swiss public the chance to decide on pay. Imposing restrictions on the bonuses available to the bosses of the largest companies was backed in the first referendum, but in this latest vote, the world’s highest minimum wage has been rejected. The proposed wage is the equivalent of £15 per hour and it is the hourly wage which proponents argue is the wage
needed to ensure workers can afford to ‘live a decent life’. However, prices in Switzerland are considerably higher than those in the UK and this wage translates to around £8.33 per hour in purchasing power parity terms, according to the OECD. In the UK, much debate has surrounded the question of a living wage and the impact that a significant increase in the NMW would have on firms. The concern in Switzerland has been of a similar nature.
With a higher wage, costs of production will inevitably rise and this is likely to lead to firms taking on fewer workers and perhaps moving towards a different mix of factors of production. With less workers being employed, unemployment would be likely to increase and it may be that the higher costs of production are passed onto consumers in the form of a higher price. One problem is that as prices rise, the real wage falls. Therefore, while advocates of this high minimum wage suggest that it would help to reduce the gap between rich and poor, the critics suggest that it may lead to higher unemployment and would actually harm the lowest paid workers. It appears that the Swiss population agreed with the critics, when 76% voted against the proposal. Cristina Gaggini, who is the Director of the Geneva Office of the Swiss Business Association said:
I think [it would have been] an own goal, for workers as well as for small companies in Switzerland … Studies show that a minimum wage can lead to much more unemployment and poverty than it helps people … And for very small companies it would be very problematic to afford such a high salary.
The proposal was made by Swiss Unions, given the high cost of living in Switzerland’s suggest cities. It was rejected by the Swiss Business Federation and government and this was then echoed by the overwhelming majority in the referendum. Switzerland has been found to be the most expensive place to live in the world and the wages paid are insufficient to provide a decent life, with many claiming benefits to support their earnings. The debate over the minimum wage and the living wage will continue in countries across the world, but for now the Swiss people have had their say. The following articles consider this issue.
Switzerland rejects world’s highest minimum wage BBC News (18/5/14)
Swiss voters reject plan to establish world’s highest minimum wage The Guardian, Julia Kollewe (18/5/14)
Swiss voters reject setting world’s highest minimum wage Wall Street Journal, Neil Maclucas (18/5/14)
Swiss voters reject world’s highest minimum wage, block fighter jets Reuters, Caroline Copley (18/5/14)
Switzerland votes on world’s highest minimum wage at £15 per hour Independent, Loulla-Mae Eleftheriou-Smith (18/5/14)
Swiss reject highest minimum wage in world Financial Times, James Shotter (18/5/14)
Swiss reject world’s highest minimum wage, jet purchase Bloomberg, Catherine Bosley (18/5/14)
Questions
- Using a demand and supply diagram, illustrate the impact of a national minimum wage being imposed.
- Using the diagram above, explain the impact on unemployment and evaluate the factors that determine the amount of unemployment created.
- Given what you know about the proposed Swiss minimum wage, how much of an impact on unemployment do you think there would be?
- Draw a diagram to show the effect on a firm’s costs of production of the national minimum wage. Explain how such costs may affect the prices consumers pay for goods and services.
- How is it possible that a higher minimum wage could actually lead to more inequality within a country?
- Is there a chance that a minimum wage could lead to inflation? What type would it be?
The latest preliminary GDP estimates for 2014 Q1 suggest that the economy’s output (real GDP) expanded by 0.8 per cent following on the back of a 0.7 per cent increase in 2013 Q4. Growth was observed in three of the four main industrial sectors: 0.9% in services, 0.8% in production and 0.3% in construction. In contrast, output decreased by 0.7% in agriculture. The total output of the economy is now just 0.6 per cent below its 2008 Q1 peak with the output of the service sector now 2.0 per cent higher.
Data on growth need to be set in the context of the inherent volatility of economies and in this case in the context of 2008/9 recession. Then, output fall by some 7.2 per cent. UK output peaked in 2008 Q1 (£392.786 billion at 2010 prices). There then followed 6 quarters during which output declined.
Output declined again in 2010 Q4 (-0.2% growth), in 2011 Q4 (-0.1% growth), in 2012 Q2 (-0.4%) and in 2012 Q4 (-0.2%). A double-dip recession was only narrowly avoided with growth recorded at zero on 2012 Q1. The latest ONS numbers show the economy grew by 0.8 per cent in 2013 Q2 (to £381.318 billion at 2010 prices), by 0.8 per cent in 2013 Q3 (to £384.533 billion at 2010 prices), by 0.7 per cent in 2013 Q4 (to £387.138 billion at 2010 prices) and by 0.8 per cent in 2014 Q1 (to £390.235 billion at 2010 prices). Compared with 2013 Q1, the output of the UK economy in 2014 Q1 is 3.1 per cent higher.
Chart 1 helps to put the recent growth numbers into an historical context. It shows the quarterly change in real GDP since the 1980s. We can see the 5-quarter recession that commenced in 1980 Q1 when output shrunk by 4.6 per cent, the 5-quarter recession that commenced in 1990 Q3 when output shrank by 2.4 per cent and the 6-quarter recession that commenced in 2008 Q2 when output shrank by 7.2 per cent. (Click here to download the chart to PowerPoint.)
Chart 2 scratches a little below the surface by looking at output by the 4 principal industrial types. The interesting finding is that the output of the service sector has now risen above its 2008 Q1 peak. In 2014 Q1, service sector output was 2.0 per cent higher than 2008 Q1. The fact that total output remains 0.6 per cent lower can be explained by the lop-sided industrial recovery. Output in agriculture, forestry and fisheries remains 7.1 per cent lower, production (including manufacturing) 11.5 per cent lower and construction 12.2 per cent lower. (Click here to dowload the chart to Powerpoint.)
Data
Preliminary Estimate of GDP – Time Series Dataset Q1 2014 Office for National StatisticsGross Domestic Product Preliminary Estimate, Q1 2014 Office for National Statistics
Articles
UK GDP ‘close to pre-crisis level’ says NIESR BBC News (9/5/14)
UK ‘great recession’ almost over, says thinktank Guardian, Katie Allen (9/5/14)
UK economy tops its pre-crash high point, says NIESR Telegraph, Szu Ping Chan (9/5/14)
UK economy grew by 0.8% in first three months of 2014 Guardian, Katie Allen and Angela Monaghan (29/4/14)
Manufacturing is GDP star performer BBC News, Robert Peston (29/4/14).
Questions
- What is the difference between nominal and real GDP? Which of these helps to track changes in economic output?
- Looking at Chart 1 above, summarise the key patterns in real GDP since the 1980s.
- What is a recession? What is a double-dip recession?
- What are some of the problems with the traditional definition of a recession?
- Can a recession occur if nominal GDP is actually rising? Explain your answer.
- What factors lead to economic growth being so variable?
- What factors might explain the very different patterns seen since the late 2000s in the volume of output of the 4 main industrial sectors?
- Produce a short briefing paper exploring the prospects for economic growth in the UK over the next 12 to 18 months.
- Explain the arguments for and against using GDP as a measure of a country’s economic well-being.
- Analyse the role that the financial system might play in contributing to or alleviating the business cycle.
The expansion of the BRIC economies has both advantages and disadvantages for Western countries. Their consistently high growth rates have created a much wider market place for Western firms and a much needed additional source of consumer demand, especially in times of recession. Countries such as China have had double digit growth rates, with others like India experiencing growth rates of just under 10%. But are these impressive growth rates now beginning to fall?
