When you hear about China, it’s often regarding their huge population, their strong growth or their dominance in exports. But, when it comes to baby milk, China is certainly an importer – and a big one at that. For many new parents, getting the ‘real thing’ when it comes to baby formula is absolutely essential.
Chinese baby formula is feared by many new parents, due to the potential for it to contain hormones and dangerous chemicals. This has led them to go to great lengths to ensure they have sufficient supplies of imported baby formula, often only trusting it if it has been hand carried from overseas. However, such is the demand for this safe version of baby milk that the global response has been to place restrictions on it. Essentially, we are seeing a system of rationing emerging.
Hong Kong was the first government to limit the amount bought to two cans of formula per day, with the potential for a fine of over $64,000 and up to two years in prison for those who do not abide by the rules. The UK has now also responded with restrictions on the quantity that can be purchased and other countries may follow suit if the excess demand continues.
According to Sainsburys:
As a short-term measure, retailers including Sainsbury’s are limiting the amount of baby milk powder that people can buy. In this way we aim to ensure a constant supply for our customers and we therefore hope they won’t be inconvenienced.
The Chinese government has reacted to this and is aiming to restore confidence in the food industry, but as yet there has been little positive effect and until there are 100% guarantees of food safety the surge in demand for baby formula from abroad is likely to continue.
This policy of rationing is clearly not only going to affect Chinese parents looking to import baby formula, but is already having an impact on domestic residents. Parents living in the UK are feeling the rationing effects and are also being restricted in terms of how many cans of formula they can buy per day. For many families this isn’t a problem, but for those with multiple children and for whom a trip to the supermarket is not a simple task, the restrictions on baby milk purchases is likely to become a problem. The following articles consider this topic.
Baby milk rationing: Chinese fears spark global restrictions BBC News, Celia Hatton (10/4/13)
Stop rationing information about baby formula milk The Telegraph, Rosie Murray-West (9/4/13)
Baby milk rationed in UK over China export fear BBC News (8/4/13)
Baby Formula rationed in UK over China demand Sky News (9/4/13)
Supermarkets limit sales of baby milk to stop bulk buying to feed China market Independent, Emma Bamford (8/4/13)
Cahinese thirst for formula spurs rationing Financial Times, Amie Tsang and Louise Lucas (7/4/13)
Entrepreneurs milk Chinese thirst for formula Financial Times, Amie Tsang and Louise Lucas (7/4/13)
Baby milk powder rationing introduced by supermarkets The Guardian, Rebecca Smithers (8/4/13)
Questions
- Using a diagram of demand and supply, illustrate how a shortage for a product can emerge. How does the price mechanism usually work to eliminate a shortage?
- What actions can be taken to deal with a shortage?
- How will more stringent regulations by the Chinese government help to restore confidence in Chinese baby milk formula?
- What impact will the imports of baby milk formula into China have on China’s exchange rate and its balance of payments?
- How could this situation be taken advantage of by entrepreneurs? Could it be used as a viable business opportunity?
As part of the Basel III round of banking regulations, representatives of the EU Parliament and member governments have agreed with the European Commission that bankers’ bonuses should be capped. The proposal is to cap them at 100% of annual salary, or 200% with the agreement of shareholders. The full Parliament will vote in May and then it will go to officials from the 27 Member States. Under a system of qualified majority voting, it is expected to be accepted, despite UK resistance.
The main arguments in favour of a cap are that it will reduce the focus of bankers on short-term gains and reduce the incentive to take excessive risks. It will also appease the anger of electorates throughout the EU over bankers getting huge bonuses, especially in the light of the recession, caused in major part by the excesses of bankers.
The main argument against is that it will drive talented top bankers to countries outside the EU. This is a particular worry of the UK government, fearful of the effect on the City of London. There is also the criticism that it will simply drive banks into increasing basic salaries of senior executives to compensate for lower bonuses.
But it is not just the EU considering curbing bankers’ pay. The Swiss have just voted in a referendum to give shareholders the right to veto salaries and bonuses of executives of major companies. Many of these companies are banks or other financial sector organisations.
So just what will be the effect on incentives, banks’ performance and the movement of top bankers to countries without such caps? The following videos and articles explore these issues. As you will see, the topic is highly controversial and politically charged.
Meanwhile, HSBC has revealed its 2012 results. It paid out $1.9bn in fines for money laundering and set aside a further $2.3bn for mis-selling financial products in the UK. But its underlying profits were up 18%. Bonuses were up too. The 16 top executives received an average of $4.9m each. The Chief Executive, Stuart Gulliver, received $14.1m in 2012, 33% up on 2011 (see final article below).
Webcasts and podcasts
EU moves to cap bankers bonuses Euronews on Yahoo News (1/3/13)
EU to Curb Bank Bonuses WSJ Live (28/2/13)
Inside Story – Curbing Europe’s bank bonuses AlJazeera on YouTube (1/3/13)
Will EU bonus cap ‘damage economy’? BBC Radio 4 Today Programme (28/2/13)
Swiss back curbs on executive pay in referendum BBC News (3/3/13)
Has the HSBC scandal impacted on business? BBC News, Jeremy Howell (4/3/13)
Articles
Bonuses: the essential guide The Guardian, Simon Bowers, Jill Treanor, Fiona Walsh, Julia Finch, Patrick Collinson and Ian Traynor (28/2/13)
Q&A: EU banker bonus cap plan BBC News (28/2/13)
Outcry, and a Little Cunning, From Euro Bankers The New York Times, Landon Thomas Jr. (28/2/13)
Bank bonuses may shrink – but watch as the salaries rise The Observer, Rob Taylor (3/3/13)
Don’t cap bank bonuses, scrap them The Guardian, Deborah Hargreaves (28/2/13)
Capping banker bonuses simply avoids facing real bank problems The Telegraph, Mats Persson (2/3/13)
Pro bonus The Economist, Schumpeter column (28/2/13)
‘The most deluded measure to come from Europe since fixing the price of groceries in the Roman Empire’: Boris Johnson attacks EU banker bonus cap Independent, Gavin Cordon , Geoff Meade (28/2/13)
EU agrees to cap bankers’ bonuses BBC News (28/2/13)
Viewpoints: EU banker bonus cap BBC News (28/2/13)
Voters crack down on corporate pay packages swissinfo.ch , Urs Geiser (3/3/13)
Swiss voters seen backing executive pay curbs Reuters, Emma Thomasson (3/3/13)
Swiss referendum backs executive pay curbs BBC News (3/3/13)
Voters in Swiss referendum back curbs on executives’ pay and bonuses The Guardian, Kim Willsher and Phillip Inman (3/3/13)
Swiss vote for corporate pay curbs Financial Times, James Shotter and Alex Barker (3/3/13)
HSBC pays $4.2bn for fines and mis-selling in 2012 BBC News (4/3/13)
Questions
- How does competition, or a lack of it, in the banking industry affect senior bankers’ remuneration?
- What incentives are created by the bonus structure as it is now? Do these incentives result in desirable outcomes?
- How would you redesign the bonus system so that the incentives resulted in beneficial outcomes?
- If bonuses are capped as proposed by the EU, how would you assess the balance of advantages and disadvantages? What additional information would you need to know to make such an assessment?
- How has the relationship between banks and central banks over the past few years created a moral hazard? How could such a moral hazard be eliminated?
Recent figures from the ONS suggest that the UK lags well behind its competitors in terms of labour productivity. In terms of output per hour worked, Germany produces 22% more than the UK, France produces 26% more, the USA produces 27% more, the Netherlands 31% more and Ireland 43% more. The first chart illustrates some of these figures.
(Click here for a PowerPoint of this chart.)
And in the past few years the problem has been getting worse. This is shown in the second chart. This, however, is a relatively recent phenomenon. Until 2006, the gap was narrowing, but since then it has widened. (Click here for a PowerPoint of the second chart.)
What has caused this widening of the gap? Part of the problem is a historical lack of investment in the UK. Between 2005 and 2012, the UK invested on average 15.7% of GDP. The USA invested 16.5%, Germany 17.9% and France 20.1%. And part of the problem has been the cut back in private-sector investment in response to the recession (which has been deeper in the UK) and in public-sector investment as part of the government’s austerity measures.
Part of the problem has been lower levels of inward investment. Inward direct investment to the UK in 2011 was only 24 per cent of that in 2007. In France, Germany, Italy and the USA, the figures were 43, 50, 66 and 105 per cent respectively.
Part of the problem has been the size of the financial sector in the UK. This is considerably larger as a proportion of the economy than in most the UK’s major competitors. And it was this sector most hard hit by the crisis of 2007/8.
With this poor productivity performance, you might expect unemployment to have soared. In fact, the UK has one of the lowest unemployment rates of the developed countries and in recent months it has been falling while other countries have seen their unemployment rates rise.
In fact, low productivity and high employment are compatible. If people produce less than their counterparts abroad, then more people will be needed to produce the same level of output. The problem, of course, is that this only works if wages are kept down. Indeed, wages have fallen in real terms and now stand at the level of 10 years ago.
The problem of falling real wages is that this translates into a lack of demand – especially when people are trying to reduce their debts. Not only does this result in a lack of economic growth, it discourages firms from investing – and investment is one of the prime drivers of future productivity growth!
The following articles explore the problem of low productivity and its relationship with employment and with both short-term and long-term economic growth.
Articles
UK has widest productivity gap since 1993 City A.M., Ben Southwood (14/2/13)
Productivity ‘key to UK’s economic future’ SnowdropKCS (7/2/13)
Low wages and lack of investment – why UK’s productivity has slumped Wales Online, David Williamson (2/3/13)
Recovery in jobs gives a fillip before the news on growth Independent, Russell Lynch (23/1/13)
U.K. Triple-Dipping as Productivity Falls Slate, Matthew Yglesias (25/1/13)
UK productivity puzzle baffles economists BBC News, By Andrew Walker (18/10/12)
Is low productivity a structural problem in the UK? BBC Today Programme, Bridget Rosewell and Andrew Sentance (4/1/13)
We Need to Talk About the Middle Huffington Post, Stewart Wood (14/2/13)
UK Wages Slump to Lowest Level in a Decade – ONS International Business Times, Shane Croucher (13/2/13)
Britain’s low-wage economy serves as a bind on the country The Guardian, Philip Inman (13/2/13)
Real wages fall back to 2003 levels in UK The Guardian, Hilary Osborne (13/2/13)
Data
International Comparisons of Productivity – Final Estimates for 2011 ONS (13/2/13)
International Comparisons of Productivity, datasets ONS (13/2/13)
Changes in real earnings in the UK and London, 2002 to 2012 ONS (13/2/13)
Questions
- Which is a better measure of productivity – output per worker or output per hour worked? Why, do you think, does the USA produce 39% more per worker, but only 27% more per hour worked?
- What policies should the government adopt in order to encourage a growth in productivity?
- If productivity growth increased, what would be the likely effect on employment? Explain.
- Why has unemployment not risen in recent months?
Divided we stand is the title of a new report by the Organisation for Economic Co-operation and Development (OECD). Its sub-title is “Why inequality keeps rising”. The report shows how the gulf between rich and poor has widened in most countries, both developed and developing. As the introduction states:
In the three decades prior to the recent economic downturn, wage gaps widened and household income inequality increased in a large majority of OECD countries. This occurred even when countries were going through a period of sustained economic and employment growth.
The report analyses the major underlying forces behind these developments. Its conclusion is that inequality looks set to continue widening, especially with the worldwide economic slowdown and rise in unemployment. However, the report says that “there is nothing inevitable about growing inequalities. Globalisation and technological changes offer opportunities but also raise challenges that can be tackled with effective and well-targeted policies.”
So just what is the extent of inequality? How has it changed over time? And what can be done to reduce inequality? The webcast produced by the OECD to accompany the report looks at the problem, and the report and articles look at what can be done about it.
Webcast
Record inequality between rich and poor OECD (5/12/11)
Articles
Governments need will to fix growing inequality Times Colonist (Canada), Paul Willcocks (8/12/11)
Capitalism defies the laws of gravity Sydney Morning Herald, (7/12/11)
UK pay gap rises faster than any rich nation – OECD The Telegraph, (5/12/11)
The Income Inequality Boom: It’s Real and It’s Everywhere The Atlantic, Derek Thompson (6/12/11)
Income inequality growing faster in UK than any other rich country, says OECD Guardian, Randeep Ramesh (5/12/11)
OECD inequality report: how do different countries compare? Guardian datablog (5/12/11)
Inequality in Britain: faring badly in an unfair world Guardian (5/12/11)
OECD calls time on trickle-down theory Financial Times, Nicholas Timmins (5/12/11)
Wage inequality ‘getting worse’ in leading economies BBC News, Adam Fleming (5/12/11)
OECD Report and Documents
Governments must tackle record gap between rich and poor, says OECD OECD Press Release (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – Introduction by Angel Gurría, OECD Secretary-General, at Press Conference OECD (5/12/11)
Divided we Stand: Why Inequality Keeps Rising – 4-Page Summary of Report (5/12/11)
An Overview of Growing Income Inequalities in OECD Countries: Main Findings OECD (5/12/11)
Questions
- Why may inequality be seen as a ‘bad thing’ for society as a whole and not just the poor?
- Does it matter for the poor if rich people’s incomes grow at a greater rate than those of the poor so long as the incomes of the poor do indeed grow?
- Explain what is meant by the Gini coefficient. What has happened to the Gini coefficient over the past few years across the world?
- Are there any common explanatory features in the economies of those countries where income inequality is growing rapidly? Similarly, are there any common explanatory features in the economies of those countries where income inequality is not growing, or growing only very slowly?
- What are the causes of rising inequality?
- Identify policies that can be adopted to tackle growing inequality.
- What problems arise from policies to reduce inequality by (a) reducing inequalities in disposable income; (b) providing more free services to all, such as healthcare and education? How might these problems be mitigated?
The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.
Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.
With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.
Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)
Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)
Questions
- Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
- What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
- Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
- Is the ‘50% participation in higher education’ a good policy?
- What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
- Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
- What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
