Here’s an exciting bit of news. Lake Eyre in South Australia is filling and the Lake Eyre Yacht Club’s sailing regatta started on 5 July. So what, you may ask! Well, Lake Eyre is in the middle of one of the driest deserts in the world. It virtually never rains there and most of the time, the ‘lake’ is one huge dry salt pan.
But just a few times per century, the rainfall many kilometres away is heavy enough to fill the dry river beds of Cooper Creek, Finke River, Georgina River and Diamantina River. These ‘rivers’ drain about one sixth of the whole of Australia (about the size of Germany, France, Italy combined) – but a sixth where rainfall is normally very low. But this season’s rains have been exceptionally high; the rivers are flowing – and the lake is filling.
When the lake does fill, it teems with life. Fish eggs that have lain buried in the salt for years hatch. Sea birds fly in nearly 1000 kilometres from the Southern Ocean. And it’s then that the enthusiasts come to play.
What’s this got to do with economics? Well economics is about scarcity and choice. Many of the choices we make are not simple buying and selling choices. Many clubs and other organisations thrive on the enthusiasm of their members. They’re not there to make money but certainly add to people’s ‘utility’. And enthusiasm, and hope, is what the members of the Lake Eyre Yacht Club have in abundance. Let’s hope they get lots of utility from sailing in the desert over the coming weeks.
Articles
Outback Sailors 10 News (6/7/10)
Floods and boat race brings life to desert lake ABC News (7/7/10)
Flightseeing Lake Eyre Stuff.co.nz, James Shrimpton (25/5/10)
Gone (not fishing) flying over Lake Eyre Australian Daily Telegraph, Maralyn Parker (6/6/10)
The Lake Eyre Yacht Club Lounge of the Lab Lemming, Chuck Magee (21/3/10)
Lake Eyre Regatta ExplorOz, The Landy blog (14/6/10)
Boom follows boom in the Lake Eyre Basin ABC Western Queensland, Julia Harris (23/3/10)
Entries flood in for rare outback regatta ABC News (23/6/10)
Yacht club sails into history with a desert regatta The Age (7/7/10)
Chasing water to Lake Eyre ABC Rural, Caitlyn Gribbin (6/7/10)
Lake Eyre brims with life ABC News, Paul Lockyer (15/6/10)
Yachting regatta in Australian desert for first time in 20 years Telegraph, Bonnie Malkin (7/7/10)
Plain sailing for desert regatta Gulf Times (7/7/10)
Information sites
Lake Eyre Yacht Club
Current Lake Status Lake Eyre Yacht Club
Lake Eyre Wikipedia
Lake Eyre Rita’s Outback Guide
Questions
- What attitude do the members of Lake Eyre Yacht Club have towards risk and uncertainty?
- How would you set about estimating the consumer surplus that members are likely to gain from attending the regatta and sailing on the lake?
- How price elastic would you expect the demand for and supply of services to be, such as ferry crossings and accommodation?
- What business opportunities are likely to be associated with sailing on the lake? Would it be ‘rational’ to set up such a business?
The annual Agricultural Outlook for the next ten years has just been published jointly by the OECD and the UN Food and Agriculture Organization (FAO). Click here and here for audio presentations of the report by the FAO’s Jacques Diouf and the OECD’s Angel Gurría.
The report argues that world recovery will raise agricultural prices. This will be partly the direct result of higher demand and partly the result of higher prices of agricultural inputs, such as fertilisers and fuel. But prices will not rise back to the peak levels of 2007/8. These higher prices, however, would have a positive effect on world food output, especially in the BRICs (Brazil, Russia, India and China). This, in turn, would limit the price rises.
So is this good news for food producers and consumers? The following articles look at the issues
Articles
Economic upturn, energy to lift farm prices-FAO/OECD Reuters, Gus Trompiz (15/6/10)
Higher average farm prices expected, food security concerns persist, say OECD and FAO FAO Media Centre (15/6/10)
Food commodity prices to rise Financial Times, Javier Blas (15/6/10)
Price increases fuel fears of food ‘crises’ Financial Times, Javier Blas (15/6/10)
Emerging economies ‘to enjoy food production boom’ BBC News (15/6/10)
Rising crop prices can be ‘good news’ for farmers: UN/OECD MSN News, Malaysia (15/6/10)
Food prices to rise by up to 40% over next decade, UN report warns Guardian (15/6/10)
Wheat, oils and dairy prices to stay up 40% for next decade, FAO BakeryAndSnacks.com, Jess Halliday (15/6/10)
Food prices could soar up by 40 per cent in next decade, UN report warns UN News Centre (15/6/10)
Report and data
OECD-FAO Agricultural Outlook 2010-2019: portal page OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Highlights OECD and FAO
OECD-FAO Agricultural Outlook 2010-2019: Database OECD and FAO
Commodity prices Index Mundi
Questions
- Explain what is likely to happen to food prices. What are the explanations given in the report?
- Represent the analysis on a supply and demand diagram (or diagrams).
- What is the relevance of (a) income elasticity of demand, (b) price elasticity of demand, (c) cross-price elasticity of demand, (d) price elasticity of supply, in explaining the likely future movements of food prices and why some food prices are likely to rise faster than others?
- What factors are likely to impact on the production of food in developing countries?
Russia is now ranked alongside Zimbabwe on the worldwide corruption index, despite the fact that the Russian authorities have been doing their best to tackle it. The Russian bribery ‘industry’ is worth some $300 billion per year and those who can be bought include several government officials.
The Russian economy is in much need of foreign investment, but the growing world of bribery is deterring international businesses from investing in Russia. Not only will they face the costs of building and running the business, but they are also likely to face substantial costs in trying to get the paperwork through, as IKEA found. Having said that they would never resort to bribery, IKEA had to pay $4 million for investment in local infrastructure and donate a further $1 million for local government projects just to get the 300+ permits they needed to begin construction. This then led to further bribes and a number of lawsuits. For some companies, the delays caused by not paying a bribe may actually cost more than the bribe itself.
The following webcast and articles look at the case of IKEA and the push by foreign businesses to avoid the clutches of Russian bribery.
Webcast
Russian bribes culture hits international business BBC News (14/5/10)
Articles
Foreign firms pledge not to give bribes in Russia BBC News (21/4/10)
IKEA masters rules of Russian business The Moscow Times (14/5/10)
Russians are spending twice as much on bribes Prime Time Russia (13/5/10)
Data Source
Corruption Perceptions Index 2009 Transparency International 2009
Questions
- Why is Russia in need of significant foreign investment? How would it help the economy?
- Can we classify IKEA (or any other company that uses bribery) as a risk-lover? Explain your answer.
- If a foreign firm wants to invest in Russia, which type of expansion do you think would be the easiest and the least open to bribery?
- IKEA began building without the necessary permits, but then ‘the bureaucrats took advantage of the situation’. Was IKEA operating under conditions of risk or uncertainty?
- In the article ‘IKEA masters rules of business’, Lennart Dahlgren said: “If we had waited to receive them all, we would have lost years”. What economic concept is being referred to?
- To what extent is government intervention and international co-operation needed to tackle corruption in Russia?
At the start of the new decade, many commentators are getting out their crystal balls to take a look into the future. Below you will find a selection of their predictions, including six extracts from The Economist’s ‘The World in 2010’.
In 2009, the world economy shrank for the first time since 1945. Will it now bounce back, or will global recovery be slow, or will there be a ‘double-dip recession’ with output falling once more before sustained recovery eventally sets in? And what about particular economies? How will the UK fare compared with other countries? How will the USA and the eurozone perform? Will China and India be the powerhouses of global recovery?
Then there is the whole question of the financial sector. Is it now fixed? Will businesses and consumers have sufficient access to credit – is the credit crunch over? Has toxic debt been expunged from the banking system? Do banks now have sufficient capital?
And what about debt? Even though private-sector debt is falling in many countries as households and businesses scale back borrowing and as banks have imposed tighter lending criteria, public-sector debt is soaring around the world. Will financial markets continue to support these growing levels of sovereign debt? Will central banks have to continue with quantitative easing in order to support these levels of debt and to keep interest rates down?
Economic Outlook: 2010 may narrow gap Financial Times, Chris Flood (27/12/09)
CIPD Annual Barometer Forecast: UK economy to shed a further 250,000 jobs before unemployment peaks at 2.8 million in 2010 Chartered Institute of Personnel and Development (CIPD) (21/12/09)
Unemployment ‘set to peak in 2010’ Guardian (29/12/09)
Unemployment ‘will peak at 2.8m’ in 2010 BBC News (29/12/09)
What employment prospects lie ahead in 2010? BBC News, Shanaz Musafer (3/1/10)
Money printing scheme is working, Bank of England says Times Online, Gráinne Gilmore and Francesca Steele (1/1/10)
Bank optimism rises as credit to business eases Guardian, Ashley Seager (31/12/09)
The world in 2010: China continues its unstoppable economic charge Independent, Alistair Dawber (2/1/10)
The US slowly emerges from the gloom of 2009 Independent, Alistair Dawber (2/1/10)
Year dominated by weak dollar Financial Times, Anjli Raval (2/1/10)
A year when tipsters took a tumble Times Online, David Wighton (1/1/10)
PMEAC pegs growth at 8% in ’10-11 Times of India (2/1/10)
China and the other Brics will rebuild a new world economic order The Observer, Ashley Seager (3/1/10)
Five countries that crashed and burned in the credit crunch face a hard road to recovery The Observer, Heather Stewart, Ashley Seager, David Teather, Richard Wachman and Zoe Wood (3/1/10)
HSBC goes out on a limb and predicts growth beyond dreams of Chancellor Times Online, Gráinne Gilmore (2/1/10)
Uncertainty dogs sterling Financial Times, Peter Garnham (2/1/10)
A tough year to forecast as recovery hangs in the balance Scotsman, George Kerevan (30/12/09)
Unstable equilibrium in 2010 BBC News blogs, Peston’s Picks (30/12/09)
Intriguing economic questions for 2010 BBC News blogs, Stephanomics (23/12/09)
The hard slog ahead The Economist (13/11/09)
In the wake of a crisis The Economist (13/11/09)
Now for the long term The Economist, Matthew Bishop (13/11/09)
Recessionomics The Economist, Anatole Kaletsky (13/11/09)
The World in 2010: From the editor The Economist, Michael Pilkington (13/11/09)
The hard slog ahead The Economist (13/11/09)
For forecasts of various economies and regions see
World Economic Outlook (OECD)
European Economic Forecast – autumn 2009 (European Commission)
Tables set A and Tables set B from World Economic Outlook (IMF)
Questions
- What is likely to happen to the major economies of the world in 2010?
- How much reliance should be placed on macroeconomic forecasts for the medium term (1 or 2 years)?
- For what reasons might the UK economy fare (a) better or (b) worse than forecast?
- Why has unemployment risen less in the UK, and many other countries too, during the current recession compared to previous recessions? Does the flexibility of labour markets affect the amount that unemployment rises during a period of declining aggregate demand?
- Why may the world face a ‘long hard slog’ in recovering from recession?
- Why is the world in 2010 ‘balanced precariously’ and why are there huge uncertainties? (See Robert Peston’s blog.)
- Why are China and India likely to see much faster rates of economic growth than the USA, the EU and Japan?
- What is likely to happen to stock markets over the coming 12 months? What will be the main factors influencing the demand for and supply of shares?
- What fiscal and monetary policies are most appropriate during the coming 12 months?
Should economists have foreseen the credit crunch? A few were warning of an overheated world economy with excessive credit and risk taking. Most economists prior to 2007/8, however, were predicting a continuation of steady economic growth. Inflation targeting, fiscal rules and increasingly flexible markets were the ingredients of this continuing prosperity. And then the crash happened!
So why did so few people see the downturn coming? Were the models used by economists fundamentally flawed, or was it simply a question of poor assumptions or poor data? Do we need a new way of modelling the economy, or is it simply a question of updating theories from the past? Should, for example, models become much more Keynesian? Should we abandon the new classical approach of assuming that markets are essentially good at pricing in risk and that herd behaviour will not be seriously destabilising?
The following podcast looks at these issues. “Aditya Chakrabortty’s joined in the studio by the Guardian’s economics editor Larry Elliott, as well as Roger Bootle, the managing director of Capital Economics, and political economist and John Maynard Keynes biographer Robert Skidelsky. Also in the podcast, we hear from Nobel prize-winning economist, Elinor Ostrom, Freakonomics author Steven Levitt, and UN advisor and developmental economist Daniel Gay.”
The Business: A crisis of economics Guardian podcast (25/11/09)
See also the following news items from the Sloman Economics news site:
Keynes is dead; long live Keynes (3/10/09)
Learning from history (3/10/09)
Macroeconomics – Crisis or what? (6/8/09)
The changing battle grounds of economics (27/7/09)
Repeat of the Great Depression – or learning the lessons from the past? (23/6/09)
Animal spirits (30/4/09)
Keynes – do we need him more than ever? (26/10/08)
Questions
- Why did most economists fail to predict the credit crunch and subsequent recession? Was it a problem with the models that were used or the data that was put into these models, or both?
- What was the Washington consensus? To what extent did this consensus contribute to the current recession?
- What is meant by systemic risk? How does this influence the usefulness of ‘micro’ financial models?
- What particular market failures were responsible for the credit crunch?
- What is meant by ‘rational behaviour’? Is it reasonable to assume that people are rational?
- Is macroeconomics too theoretical or too mathematical (or both)? If you think it is, how can macroeconomics be reformed to improve its explanatory and predictive power?
- Does a ‘really good economist’ need to have a good grounding in a range of social sciences and in economic history?