You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.
Of those discussing the issue, one certainly needs no introduction: Joseph Stiglitz, a prominent economist, author and commentator on economics, in particular on inequality. He was joined by Steve Hilton, who has worked for David Cameron for many years in providing advice on a range of issues, including inequality and strategy and has written on existing institutions and their effectiveness. The final panellist was Masha Gessen, who has written extensively on Russia and in particular on the journey of the infamous Boston Bomber.
Though the discussion covers a variety of areas relevant to economics, one key area that is addressed is inequality and the policies that are being used to address the causes and the symptoms. You can access the 45-minute discussion at the link below.
Joseph Stiglitz and Steve Hilton on inequality BBC Radio 4 (18/5/15)
Questions
- How would you measure inequality?
- Why is it important to distinguish between the causes and symptoms of poverty when designing government policy?
- To what extent do you believe that education is an essential requirement for growth and development?
- Why has inequality grown in some of the most developed nations?
- How is it possible that inequality in the developed world has grown, while global inequality has fallen?
- Why does the report argue that the reforms they suggest would help boost growth?
- Do you agree that existing institutions are not suitable for society today?
A new group of economies, known as MINT, are seen as strong current and future emerging markets. We’ve had the BRICS (Brazil, Russia, India, China and South Africa) and now we have the MINTs (Mexico, Indonesia, Nigeria and Turkey).
In 2014, Nigeria became Africa’s fastest growing nation. A large part of Nigeria’s success has to do with growth in some of its key industries.
Nigerian’s reliance on the oil and gas industry created an attractive economy for further development and it now has high growth in a diverse range of sectors, including mobile phones, champagne, private jets and ‘Nollywood’. Despite the uncertainty and political unrest caused by Boko Haram, Nigeria is attracting a significant amount of Foreign Direct Investment (FDI) in a range of sectors, indicating its growing diversity and attractiveness to some of the world’s largest multinational companies.
Boko Haram has certainly had a dampening effect on Nigeria’s growth, as has the lower oil price, but this may create opportunities for further diversification. Furthermore there are concerns about how the wealth of the nation is concentrated, given that poverty is still prevalent across the country. However, Nigeria is certainly emerging as a success story of Africa and surely the question that will be asked is will other African nations follow suit?
The following article from BBC News considers the Nigerian economy.
Nigeria’s ‘champagne’ economy bucks Boko Haram effect BBC News, Vishala Sri-Pathma (27/3/15)
Questions
- Is a falling oil price necessarily bad for the Nigerian economy?
- Explain why Boko Haram is likely to have a dampening effect on economic growth in Nigeria.
- Do you think other African nations will be able to replicate the success of Nigeria? Which factors may prevent this?
- If the number of millionaires is increasing significantly, but poverty is persisting, does this tell us anything about what is happening to inequality in Nigeria?
- Is is possible to reduce inequality in Nigeria while maintaining economic growth? Might it even be posible for greater equality to be a driver of economic growth?
- The Nigerian currency is weakening. What has caused this and why may this be a cause for concern?
With an election approaching in the UK, uncertainty is a term we will hear frequently over the next few weeks. Until we know which party or parties will be in power and hence which policies will be implemented, planning anything is difficult. This is just one of the factors that has caused the British pound sterling to fall last week by 2% to an almost five year low against the dollar.
In the last election, uncertainty also prevailed and continued even after the election before the Coalition was formed. Given how close this election appears to be at present, another Coalition may have to be formed and this is adding to the current election uncertainty. A currency strategist at Standard Bank said:
“A $1.40 level for sterling/dollar is certainly not out of reach if the election aftermath turns ugly”
With such uncertainty, investors are refraining from putting their money into the UK and this has contributed towards the deprecation of the British pound against the dollar.
Another factor adding to this downward pressure on the pound is the latest data on industrial output. Although economic growth figures for the UK in 2014 were very positive, there are some suggestions that 2015 will not be as good as expected, though still a strong performance. The first quarter data will not be available until just before the election, but data from the ONS on industrial output shows very minimal growth at just 0.1% from January to February. Chris Williams at Markit said:
“Clearly this all bodes ill for economic growth in the opening quarter of the year. It’s now looking like the economy slowed, and possibly quite markedly, compared to the 0.6% expansion seen in the closing quarter of 2014 … The trend should improve in March, however, according to survey data.”
These two factors have combined to push the pound down, with investors preferring to hold their money in dollars, despite the weak US unemployment data. However, it is not only against the dollar that we must consider sterling’s performance. Against the euro, it has performed better, rising by 1.5%. Whether this is positive for the UK or very negative for the Eurozone is another question. The following articles consider the performance of the British pound.
Sterling falls to five-year low Financial Times, Neil Dennis (10/4/15)
Sterling plummets to five year low as economic slowdown looms The Telegraph, Mehreen Khan (10/4/15)
Pound at five-year low against dollar on weak output BBC News (10/4/15)
Sterling falls after Bank of England’s Haldane says even chances of rate cut or rise Reuters (10/4/15)
Pound falls to five-year low as volatility jumps before election Bloomberg, Anooja Debnath and David Goodman (11/4/15)
Pound falls to a five-year low against the dollar as polls suggest election will create economic uncertainty Mail Online, Matt Chorley (10/4/15)
Questions
- Draw a diagram illustrating the way in which the $/£ exchange rate is determined.
- Explain why the election is causing economic uncertainty in the UK.
- How would uncertainty affect the demand and supply of sterling and hence the exchange rate?
- US job data is worse than expected. Shouldn’t this have caused the dollar to depreciate against the pound and not appreciate?
- Industrial output data for the UK economy is lower than expected. What has caused this?
- Why does slower growth in industrial output cause the exchange rate to depreciate?
- In order to keep the UK’s inflation rate on target, Haldane has said that we could expect a cut or rise in interest rates and policy should be prepared for both. How has this affected the exchange rate?
- Are there any advantages of having a lower pound?
Real GDP depends on two things: output per hour worked and the number of hours worked. On the surface, the UK economy is currently doing relatively well, with growth in 2014 of 2.8%. After several years of poor economic growth following the financial crisis of 2007/8, growth of 2.8% represents a return to the long-run average for the 20 years prior to the crisis.
But growth since 2010 has been entirely due to an increase in hours worked. On the one hand, this is good, as it has meant an increase in employment. In this respect, the UK is doing better than other major economies. But productivity has not grown and on this front, the UK is doing worse than other countries.
The first chart shows UK output per hour worked (click here for a PowerPoint). It is based on figures released by the ONS on 1 April 2015. Average annual growth in output per hour worked was 2.3% from 2000 to 2008. Since then, productivity growth has stalled and output per hour is now lower than at the peak in 2008.
The green line projects from 2008 what output per hour would have been if its growth had remained at 2.3%. It shows that by the end of 2014 output per hour would have been nearly 18% higher if productivity growth had been maintained.
The second chart compares UK productivity growth with other countries (click here for a PowerPoint). Up to 2008, UK productivity was rising slightly faster than in the other five countries illustrated. Since then, it has performed worse than the other five countries, especially since 2011.
Productivity growth increases potential GDP. It also increases actual GDP if the productivity increase is not offset by a fall in hours worked. A rise in hours worked without a rise in productivity, however, even though it results in an increase in actual output, does not increase potential output. If real GDP growth is to be sustained over the long term, there must be an increase in productivity and not just in hours worked.
The articles below examines this poor productivity performance and looks at reasons why it has been so bad.
Articles
UK’s sluggish productivity worsened in late 2014 – ONS Reuters (1/4/15)
UK productivity growth is weakest since second world war, says ONS The Guardian, Larry Elliott (1/4/15)
UK productivity weakness worsening, says ONS Financial Times, Chris Giles (1/4/15)
Is the UK’s sluggish productivity a problem? Financial Times comment (1/4/15)
UK manufacturing hits eight-month high but productivity slump raises fears over sustainability of economic recovery This is Money, Camilla Canocchi (1/4/15)
Weak UK productivity unprecedented, ONS says BBC News (1/4/15)
Weep for falling productivity Robert Peston (1/4/15)
UK’s Falling Productivity Prevented A Massive Rise In Unemployment Forbes, Tim Worstall (2/4/15)
Data
Labour Productivity, Q4 2014 ONS (1/4/15)
AMECO database European Commission, Economic and Financial Affairs
Questions
- How can productivity be measured? What are the advantages and disadvantages of using specific measures?
- Draw a diagram to show the effects on equilibrium national income of (a) a productivity increase, but offset by a fall in the number of hours worked; (b) a productivity increase with hours worked remaining the same; (c) a rise in hours worked with no increase in productivity. Assume that actual output depends on aggregate demand.
- Is poor productivity growth good for employment? Explain.
- Why is productivity in the UK lower now than in 2008?
- What policies can be pursued to increase productivity in the UK?
In the developed countries of 2015, extreme poverty is (or should be) a thing of the past. With well-developed welfare states and hence safety nets, no-one should be living in deep poverty. However, that is not the case across the rest of the world, where extreme poverty is still a common thing – though much reduced compared to a decade ago.
In the article linked below, Linda Yueh of the BBC asks whether it is possible to end global poverty. Looking at some of the key data, we are certainly moving in the right direction, with the poverty rate in the developing world halving since 1981. Projections suggest that ending global poverty by 2030 is possible, though it will require significant investment and commitment. The World Bank data indicates that 50 million people would need to be brought out of poverty every year. Economists, on the other hand, suggest that the poverty rate may have fallen to around 8% – still progress, but perhaps a more realistic target?
How we measure poverty is clearly important here, as the higher the threshold income required to be ‘out of poverty’, the longer it will take and the more people will currently be in poverty. It is also important to consider things like changes in the population as although more people may be brought out of poverty, if an even greater number of people are being born in a country, then it is entirely possible that poverty actually increases in absolute terms.
A key thing to bear in mind when it comes to reducing poverty is that there is no ‘one size fits all’ policy. What works in one country is not necessarily going to work in another country. Policies will have to be targeted to the needs of the population and this means more time and resources. The numbers are definitely moving in the right direction, but whether they are going quickly enough to meet the 2030 target is another story. The BBC News article is linked below, as are some interesting documents and items from the World Bank and United Nations.
Is it possible to end global poverty? BBC News, Linda Yueh (27/3/15)
Poverty will only end by 2030 if growth is shared World Bank, Espen Beer Prydz (19/11/14)
Far greater effort needed to eradicate extreme poverty in world’s poorest nations United Nations News Centre (23/10/14)
Ending Poverty and Sharing Prosperity World Bank Group and International Monetary Fund, Global Monitoring Report 2014/2015 2015
Questions
- What is poverty and how to we measure it?
- If the growth rate of the world is high, does this mean that poverty is falling?
- What factors have explained the success of China in reducing poverty? Why might similar policies be ineffective in Africa? What types of policies would you recommend to reduce global poverty in Sub-Saharan Africa?
- Does Aid or Debt Forgiveness from developed countries help poorer nations or could it create a moral hazard?
- How important is economic growth in eliminating global poverty?
- How important are the Millennium Development Goals in driving efforts to eradicate global poverty?
- What are the 3 elements that the Global Monitoring Report focuses on to make growth inclusive and sustainable? In each case, explain how the elements would contribute towards global efforts to end poverty.
You may be used to these types of blogs by now … On my commute to work on the 18th May, I listened to Start the Week on BBC radio 4 and happened upon a fascinating discussion on inequality.
