Sustainable Growth in Dubai

I've been scratching my head recently as i have tried to think of what my next post could be about. Surprisingly, the economy has not been very prominent in the news recently and so i turned my attention to our annual family holiday. This year we will be visiting Dubai which is one of the emirates which makes up the United Arab Emirates (UAE). We have been to Dubai before and struck me was the scale of the economic growth in such a short period of time.

Dubai's growth over a 15 year period

Dubai is now a place of the luxurious and ridiculous, they have not only built an indoor ski slope in a city where outside summer temperatures regularly hit 45 degrees centigrade but they also built the world's tallest  building, The Burj Khalifa, just because they could. I have not even mentioned the number of lavish hotels which have sprung up from the sands of the desert. The shocking thing is that this sort of development has occurred over a 20 year period and i question every time i go whether it is sustainable growth?

For growth to be sustainable it should not affect the living standards of future generations and most people think that growth is unsustainable when it involves the use of fossil fuels and/or it leads to a destruction of the environment.

Dubai has one of the highest carbon footprints per capita in the world and burns half as much gas as Germany per year. With a population of only 6 million compared to Germany's of 80 million, the growth of Dubai doesn't seem sustainable. Maybe, the consumption of fossil fuels is high at present  because of the level of current construction  in Dubai. After all, prior to the global financial crisis in 2008, 90% of all the cranes in the world were found in Dubai. However, i doubt this theory as the cost of petrol is so low out there, people are incentivised to buy and use more, thus increasing their carbon footprint. Dubai has promised to get 7% of its energy requirements from renewable sources by 2020 but with more people using the cheap, petrol guzzling taxis than the more environmentally friendly Dubai Metro, their aims seem ambitious.

The financial crisis of 2008 almost led to the demise of Dubai as foreign investment in the emirate fell, construction had to stop and demand for the lavish homes on man-made islands and hotel rooms vanished. It appeared to be a case of too much construction and too quickly which left a huge dependance on investment from abroad. This left their economy susceptible to external shocks which appears to be one of the drawbacks of globalisation. Now, although construction and inward investment in Dubai has subsequently picked up since then, the authorities are nervously looking over their shoulder at the rest of the world during these hard times.

The sharp rise in the development of Dubai has led to a sharp rise in the level of tourism in the area. The large numbers of western tourists who visit the emirate each year have led to tensions developing between them and the locals. In a conservative, muslim country where alcohol and pork are not permitted, some would argue that the development of Dubai has led to the loss of local cultures and traditions.

Dubai is a clear example of the dangers of fast, uncontrolled growth. It may seem that i have made it seem like an awful, dirty place in which there are constant battles between the tourists and locals. This is not the case, it is a wonderful city which is able to integrate modern luxuries with core traditions. It does however, remain a reminder to us all of the importance of sustainability. Wanting too much, too quickly can lead to negative long term side effects, something which Dubai is currently trying to reduce.

What Caused The August Riots?

So, im out of the country for just over a week and it seems in that time the country has fallen to pieces. Rioting has been seen across the country in London, Manchester and Birmingham as well as many other places. Whilst on holiday, we only received snippets of news and what we couldn't seem to understand was what had caused these riots to occur. When we left the country there was no indication that violence would engulf the nation, leaving people fearing for their lives and possessions.

So, when i got home on wednesday i tried to find out what had caused the riots and stumbled upon this article on the BBC website. http://www.bbc.co.uk/news/magazine-14483149 Now, i believe that some of these explanations are more credible than others, for example, i do not believe that technology and social networking are responsible for the violence, i agree that they facilitated the hooliganism but don't see it as a cause. However, i can now see that the shooting of Mark Duggan by police on Saturday triggered the eruption of violence in Tottenham

I also listened to the Question Time special that was on the radio last night and it became clear that a large emphasis was put an the policing of the situation and also on how the looters were being punished. Being more specific, it appeared that the audience of the show were less than impressed with the numbers of police present at the scenes of the looting, the speed at which the police got to the violence and the punishments being dished out to the criminals. This reminded me of the book Freakonomics in which Steven Levitt and Stephen Dubner unearth what had caused the fall in crime across the US over the 1990's. Now the main crux of their argument was the legalisation of abortions a generation earlier but this has no relevance to this situation. What they also look at are other explanations for the fall in crime rates and they pay particular attention to policing and punishments given out to criminals.

They find a negative correlation (which turns out to be a causation) between the number of police present on the street and the crime rate. This is because when more police are present they are more likely to catch criminals breaking the law, criminals who would tend to reoffend if not caught, than if fewer police were present. Also, by having more police present, potential criminals are less likely to break the law for fear of being caught as they are aware of the increase police numbers. Dubner and Levitt also, find that by having stricter punishments crime tends to fall. This may seem too obvious to need to be said but often it is these things that are overlooked by the authorities. With stricter punishments, fewer criminals will be on the streets as they will be in longer prison sentences but also it will again persuade potential criminals not to break the law.

How does this relate to the explaining the causes of the riots then? Well, with recent spending cuts being enforced across the UK include cuts to the police budget, there was a greater opportunity for people to riot and loot and get away with it as fewer police would be present to catch them, especially if many others were involved. With the country also caught in a long and stuttering recovery with real incomes falling people would also have to resort to stealing to get the latest phones and desirables which at present they can not afford but which seem to be constantly shoved in their faces through television and advertising . The BBC article refers to these two possible explanations as Consumerism and Opportunism.

So, with a country feeling social exclusion all it seemed to take was a flash point moment, the shooting of Mark Duggan, to ignite the anger and frustration of a nation. The riots must be seen as a stark reminder of the bitter mood of the population. Up until now we have seen riots across Europe as countries awaken to the true effects of the economic downturn and we had almost thought that Britain was immune to such violence. It seems now that the country is on a knifepoint, if the economy falters in its recovery more violence could well be expected.

What's worse was some of the suggestions of how to deal with the criminals who committed the senseless violence. Obviously, business owners who have been affected by the looting want to see the offenders pay the price of the damage but some in the audience at Question Time were calling for offenders to lose any benefits they were on and have private property confiscated to pay for the damage. To me and many others this would only cause looters to reoffend as they would experience falling incomes and would see themselves drift further away from the rest of society. It is important  that when dealing with the criminals, the authorities need to have cool tempers to avoid making mistakes.

Doom and Gloom ahead for the UK economy?

Recently released data seems to paint a rather bleak outlook for the UK economy as it tries to build a recovery.  The Office of National Statistics reported this week that the UK economy had only a meager growth of 0.2% in the second quarter of the year. This figure was lower than predicted but many economists actually thought that growth would be negative and that we would be slipping towards another recession. "One off factors" such as the royal wedding and the Japanese tsunami have been blamed for the negligible growth but to me these excuses are rather flimsy. To me it appears obvious that in times of global economic hardship, not enough is being done by the coalition to encourage growth. Yes, exports would have fallen due to the earthquake that devastated Japan and the country did grind to a halt as April appeared to be a bank holiday but can't Cameron and his side kick Clegg realise that their policies are having no effect.

The second piece of bad news came yesterday when Centrica, the owner of British Gas announced profits of £1.3bn in the first 6 months of the year, just as gas and electricity prices are set to rise substantially. With these goods being relatively inelastic, these price increases will tighten the squeeze on families who are already experiencing falling real wages. This will lead to a fall in consumption as individuals look to save what money they can and cost-push inflation as production costs will rise. 

With inflation well above the Bank of England's target of 2%, the possibility of higher cost-push inflation will put pressure on the Monetary Policy Committee to raise interest rates. If interest rates were raised, the fear is this would kill any growth as it would become more expensive to borrow money at a time when banks seem particularly unwilling to lend. 

This seems to indicate a double edged sword situation, if the BoE fails to raise the Bank Rate, inflation may rise out of control which would cause a breakdown in economic transactions as firms we unable to plan for future prices and costs. This begs the question, what do the BoE value more, economic growth or controlled levels inflation? 

Maybe the government help solve the problem. Instead of dodging the real issues that are affecting firms in the UK, they could use their power for good which would in the long run, help them gain the trust of the public. One idea could be to cut the level of National Insurance which employers pay. Although National Insurance is not classified as a tax by the government, it effectively is and so by reducing its rate, this would incentivise firms to hire employees and increase output. This would lead to a sharp increase in growth and would allow the BoE to set about bringing down the level of inflation without a fear of killing growth. Of course if it were this simple, you would like to think that the government would be setting about implementing the changes but surely it is a better idea than them resting on their laurels and seeing what the future brings. I'm sure that if the coalition listened to employers, they would echo what i have said. If the coalition turns a blind eye to the cries from the public, the future of the British economy doesn't look so bright.

Just a couple of points...

I'm back from the wilderness with a couple of points for this week. Nothing too technical just a few ideas and views i have.

I started working for a firm which produces labels and tags last week and seeing the economics of the business in real life stimulated me to doubt economic models which i had learnt at A level. I'll give you an example, at this firm to produce a label there are many steps involved in the production process which means that finding the marginal cost of producing a label is hard to calculate. It is not simply the cost of the materials that make up the marginal cost but also the cost of electricity used and more importantly, the cost of the labour used. Determining the productivity and opportunity cost of the labour force involved in the multi-step  production process makes finding the marginal cost of the products hard to work out. Relating this to economic theory, this causes me to doubt the models of a monopoly and perfect competition. If it is difficult to calculate the costs of producing the output, how can you accurately determine the profit-maximising point?

Secondly, i was listening to radio one this week and they had gone out on the streets to find out what the opinions of the general public were of the on going crisis in the eurozone as it emerged this week that Greece was to receive another bail out package. The general consensus was that people didn't care about the situation in europe as Britain isn't part of the eurozone and so we would be unaffected by the chaos. This really scared me as i know that 40% of Britain's trade is with the eurozone and that British banks own assets within Greece and the rest of Europe. That is why i think economic modules need to be included in the National Curriculum so that people are aware of how an economy works and so misconceptions such as the one described above are avoided. Im not saying that economics needs to become mandatory for children but more along the lines that certain macroeconomic modules should be included in subjects such as geography at GCSE. Already, tourism is included in GCSE geography and so theories on trade could easily be integrated there. It's just an idea but i was frightened by the misconceptions that the general public displayed and feel that if people were more aware of real picture, their choices and behaviour would be different.

Any thoughts anyone?

The economy of Jersey

My School career ended yesterday as i returned from a four day cricket tour with the school 1st XI from jersey. Jersey is a British Crown Dependency and so it is not part of the United Kingdom but is very similar to the UK as the equivalent to the Prime minister, known as the Baliff, is appointed by the British Monarch (i.e the Queen)

As a budding, young economist i was quite keen to look into the economy of Jersey when i got home and in particular, the taxation system of jersey as i had heard that is a popular home to high earners who are keen to avoid paying UK income tax rates.

There are a few key features of the taxation system in Jersey which makes it significantly different to that of the UK.

Firstly, there is no progressive taxation system in Jersey but rather a flat tax for income tax levied at 20%. Many economists, including probably The Amateur Economist, would not agree with this system as they would see it as a less equitable tax which would inevitably penalise the lower earners. They would argue that this would lead to a more unequal distribution of income ( and therefore a higher Gini coefficient) which could propose social difficulties. However, i see a flat tax as an opportunity for workers to maximise their income as the marginal rate of tax is constant and so workers are incentivised to work harder to increase their income.

Secondly, in Jersey there is not VAT imposed on goods. This means that goods are considerably cheaper over in Jersey than in the UK. This has lead to an increase in tourism as residents of the UK and France will pop over to Jersey and purchase luxury items such as watches and jewellery which would be considerably more expensive in the UK with VAT. The lack of VAT on goods has also lead to an increase in exports of goods from Jersey as the goods are cheaper than domestically produced ones. If countries wanted to stop this inflow of Jersey goods than protectionist techniques such as a tariff could be imposed. In recent years the government of Jersey has brought in a Goods and Services tax which is similar to that of VAT but is levied at a much lower rate and still therefore allows Jersey goods to be cheaper than those in the UK.

Finally, all Jersey businesses exempt those in the financial sector do not have to pay corporation tax (a tax on profits) and so once again firms are incentivised to maximise their profits. The firms in the financial sector pay a flat corporation tax of 10% and this is still a relatively low rate of tax.

So, the tax system of Jersey seems to be a much more free market approach than that of the UK as enterprise seems to be rewarded via lower income and corporation tax. This means however, that the role of the state in Jersey is much less as there is lower tax revenue and so support for the lower earners is reduced. This may lead to a much higher disparity in living standards on the island and i saw this to a certain degree when i visited. It appeared that the Jersey locals were performing the lower paid jobs whilst the immigrants who had moved to the island to benefit from the tax breaks were living the life of luxury. 

A levels over... didn't think so

Its funny, i finally finished my A levels last week and know that i will never use any of the knowledge that i learnt for them. What i can be sure though, is that i will use the economic theory which i learnt many times over. Not only is this because i will be taking a degree which is predominantly economics based but also because my economic knowledge can be applied to almost every real life scenario which occurs. 


Take this article which ive just read, http://www.bbc.co.uk/news/uk-politics-13918113


Now if i were sitting in an economics lesson there would be several points which we would already have picked up on.


The first is that, as the title of the article suggests, China could prove an invaluable market for UK exports which could stimulate economic growth, employment and the revival of UK industries which were previously in decline. "Up to £1 billion worth of business deals are expected to be announced during Mr. Wen's 3 day tour". This increase in trade could help prevent the UK from slipping into a much feared double-dip recession, which is looking ever more likely if you listen to small firms at present.


The second point is that this article demonstrates the impact of globalisation in the world. Economies have become integrated through increased trade and multi-national corporations taking advantage of economies of scale and this can be seen in the article as China's leading automaker has bought out MG Rover and is continuing to build cars at the Longbridge factory.


The final point links in with the second and comes under the title of comparative advantage. The chinese show a comparative advantage (i.e. can produce goods with the lowest opportunity cost) in manufacturing car parts whilst the UK shows a comparative advantage in assembling the car from the parts. Globalisation has allowed this comparative advantages to be exploited which will benefit both the chinese and british economies.


At least ome of my A levels has proven useful then...

Inflation, inflation, everywhere

Right, i havent really been paying that much attention to the news in the last week or so as i've had my head buried in the school books. However, today i decided to read last weeks edition of "The Economist" and also checked out the economy section of the BBC website. What i've found is that across the world there appears to be rising inflation, on the BBC website there are current articles which suggest that inflation in the UK, China and India is well above the desired targets and this is very worrying. CPI  inflation in the UK has held steady at 4.5%, well above the 2% target whilst inflation in China is at a 34 month high of 5.5% and India at 9.06%. "The Economist" hints that inflation in Brazil is now rising too fast and has now reached the level of 6.5%.

The reasons for the rising inflation seem to be similar throughout the world, rising fuel and food prices and it makes sense as well. With increased trade due to globalisation, rising production costs in one country are quickly going to be passed on to other countries. What's worrying however is that monetary policy, the main instruments which aim to control inflation are seemingly having little impact. The article in "The Economist" went into a little more depth than A level economics prepares you for but i got the gist that monetary policy wasnt working. The Chinese central bank has risen interest rates four times since october to rein in inflation and obviously it has been unsuccessful.

The question now is what can governments do? Apparently the Brazilian government should implement a tighter fiscal policy (again it was explained a little more complicatedly than that) but will that really reduce cost-push inflation. I doubt it but maybe that is not the aim. The impact of rising, unexpected inflation is quite worrying. This will force workers to demand real wage increases to counter any future rises in inflation. This could lead to unemployment rising as firms shed workers to keep costs low which would in turn lead to a worsening budget deficit as tax revenue would fall and more people would be claiming unemployment benefits. Could the governments try to improve the flexibility and efficiency of the labour markets to try and reduce inflationary pressures. The public sector pay freeze will be putting a squeeze on alot of families which should, in theory reduce demand pull inflationary pressures.

I'm not sure what the answer is, but feel that something needs to be done quickly, otherwise this could spell doom. Surely, Mervyn King must be contemplating an increase in the bank rate soon?