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?

Revision Links

I was trawling through text books earlier as i tried to find explanations as to how trade barriers work amd after having no luck in finding anything i decided to try the internet. It staggered me as to how many economics related videos there were on youtube and i think they provide not only an excellent revision resource but also explanations that even "Average Joe" can understand. Here are a few which i found particularly useful (U6 students can thank me later!)

Quota 1

Quota 2

Export Subsidy

Tariff

The IMF, what is it?

Just a short one today amidst preparation for my A-levels....


Recently, the alleged sexual assault of Dominique Strauss-Khan on a hotel maid has hit the headlines across the world. Strauss-Khan was formerly the head of the IMF, which is the International Monetary Fund and up until the recent events i had seldom heard of the IMF. So i decided to look into it further...


The IMF describes itself as an "organisation which works to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". What this really means is it tries to prevent recessions from occuring and resolving them once they occur.


Comprising of the 187 members the IMF provides advise to its member's government based on global economic trends or forecasts as well as training to help countries manage their economies efficiently. However, over the last few years the IMF has been mainly seen as a provider of credit to countries to help deal with the global financial crisis. This works via the process by which the member countries pay into effectively a pot of money which can be drawn upon should the country encounter economic difficulties. The overall aim is to therefore act as a safety net for the individual nations.


The IMF is sometimes mistaken for the World Bank and although they are similar, they are actually different institutions. The World Bank focuses primarily on poverty reduction whilst the IMF, as the name would suggest, focuses on monetary issues. However, their work often complements the other, for example, if the IMF tries to reform part of an economy to reduce structural unemployment, this will inevitably reduce relative poverty within that same economy, thus accomplishing an aim of the World Bank. The IMF also works closely with the World Trade Organisation (WTO) in order to promote free trade which is essential to satisfying many macroeconomic objectives. 


I have only skimmed the surface of what the IMF is and what it does. From my research i have found that the role of the IMF is much deeper and more important than i first thought. If anyone out there is interested to learn more about the IMF than their website is quite a good place to start

Eurozone growth

Earlier this year i wrote on essay in which i ferociously condemned any pleas for the UK to join the Eurozone. The basis of my argument was formed on the idea that we would lose control of our monetary policy and this would lead to longer recessions, slower growth and periods of high inflation. However, it appears that i may have been a little too quick to banish the euro. Figures released recently show that the eurozone grew by 0.8% in the first quarter of this year, up from 0.3% on the last 3 months of last year. Even debt-ridden Greece experienced growth of 0.8%. Not only was this growth unexpected but it comes at a time when the UK economy has had its own growth forecasts downgraded as inflation is set to rise close to 5%, 3 percentage points above the target level. The growth of the eurozone was for the most part, due to the economies of Germany and France prospering, with respective growths of 1.5% and 1%. Obviously, the efficiency of these two economies has led to an increase in their competitiveness which has increased the volume of exported goods and services. I am still not for the UK to join the Euro, i feel that losing our sovereignty and the various menu costs of converting would harm our economy. However, it does beg the question, if we are not using our monetary policy to control inflation, then why not join the euro and at least benefit from this accelerated growth?

The rich list.

Inside today's Sunday Times was the annual "Rich list" which is exactly what it says on the tin. Philip Beresford writes an interesting piece which describes how because the rich have got wealthier over the last year, this might provide the boost that the economy needs. Now any A2 economist will tell you that governments often try and reduce the inequalities in income distribution by progressive taxation and a series of benefits etc. However, Beresford argues that amidst the government spending cuts and squeeze on middle class families, the £60 billion rise in fortunes of the super-rich will help fill the gaps left in domestic demand. After all, when people feel richer they often spend more so when the super-rich feel wealthier, they are most likely to spend a heck of alot more. After a bit of rambling on, Beresford ends with a really interesting and valid point. As the coalition has promised to cut red tape and stimulate private enterprise this may be the best time for the super rich to spend on businesses that would generate future wealth. If they hold on to their wealth, the possibility of a labour government in 4 years would surely cost them through the use of "vengeful policies".

Raining on the Royal Wedding

Today was of course, the royal wedding and a day of national celebration so as only an economist can do, i must dampen the situation. It is thought that the royal wedding could potentially bring in a £107 million to the city of London. This seems positive news however, the UK economy will experience a much greater loss due to the bank holidays recently. Over a 2 week period there will have been 4 bank holidays which means that the economy is effectively not producing and so there is a loss of productivity. This could equate to a fall in GDP of 0.1% this year or £1.5 billion. When this is added to the security costs of the day which are around £20 million, which is coming from the taxpayers, suddenly it is looking like a rather expensive day. When this is coupled with the recent growth reports of 0.5% which were published on wednesday, could the royal wedding cause the UK economy to slip into a double-dip recession?

This whole situation ties in nicely with my current revision for my final economics A-level exam. Does the royal wedding illustrate the limitations of GDP as an indicator of living standards. The general idea is that higher GDP levels indicate higher standards of living and happiness. However, here we see that GDP may fall due to the royal wedding and recent bank holidays but the most people would be happier with the extra days off work and sense of national pride that the wedding has caused. Therefore, if GDP were to fall we must not think that living standards are deteriorating. After all, Happy workers are good workers.

Growth!!

Struggling for time at the moment as i am preparing for my A2s so this blog has had to be put to one side. However, growth figures released today show that the UK economy grew by 0.5% in the first 3 months of 2011, Yipppeeeee! Here is the article which explains it further and shows how uncertain times ahead still are. http://www.bbc.co.uk/news/business-13206430

The North Caucasus...

I have just read a really good article in The Economist (9th-15th April edition), it is entitled "From Moscow to Mecca" and it raises a couple of interesting points. In short the article tells us how fundamental islam is taking a strong grip on the region of North Caucasus in Russia. The area is dominated by muslims who are separated into two main groups, Sufis and Salafis. Sufism is a traditional form of islam which recognises the state and includes local customs. Salafism however, rejects the state and insists that islam should "rule all spheres of life". This separation led to the second Chechen war in 1999 where the different ideologies clashed and the police and Russian army sided with the Sufis. What is striking from the Russian prospective is that the state have not done themselves any favours in the fact that they have not been trying to conquer the "Hearts and Minds" of their opponents. The police is often responsible for brutality which goes unpunished and the abolishment of local elections has led to an increase in support for the fundamentalists. 50% of the population of Novosasitli (a region within North Caucasus) now consider themselves Salafis, an increase of 40 percentage points on ten years ago. It seems that Russia is straining to stay intact. From an economists point of view, what this shows is that Russia is too large a country with many different ethnic groups to be ruled centrally. Is Russia showing managerial diseconomies of scale? What is true however is that local elections need to be reintroduced so that the people of North Caucasus can elect their leaders themselves (at present leaders are appointed directly from the Kremlin) which would hopefully stem some of the violence. What can also be seen from this situation is the effect it would have on the Russian economy. The violence, corruption and political instability is holding back economic growth for the region which would help to win over the "Hearts and Minds" of the people. Surely if the economy was prospering the violence and insecurity would subside.

Good News. Really?

Recent unemployment and inflation figures released recently have shown that unemployment has fallen by 17,000 in the three months leading to the end of Feb and CPI inflation has fallen by 0.4% on last month to 4%. Could this mean that we are out of the woods and that we are on the road to recovery?

Well, it appears that the unexpected fall in inflation was mainly due to falling food prices (which fell by 1.4% on this time last year) and by increased exports (up 15% from this time last year). On the unemployment front, it appears that the fall must be due to the private sector as the spending cuts are increasing public sector job losses. I am surprised that unemployment has fallen as ONS figures have shown that wages grew on average by 2% in the year to February. This is well below the level of inflation and so indicates that real wages have fallen, which puts a squeeze on consumer spending power. This should reduce aggregate demand and therefore increase demand-deficient unemployment. I fear money illusion may be at work.

Getting back to my question, it is feared that once the public sector spending cuts have been implemented fully, unemployment will rise again. Also, if oil prices rise for many reasons ( eg increased global demand or Libyan crisis continuing) this will further increase inflationary pressures and put different kinds of pressures on the MCP to increase interest rates. In short, i dont think we are out of the woods yet. Although the recent figures are positive, the outlook continues to look rather bleak on the unemployment and inflation fronts. Maybe one way to solve both problems is to substitute automated processes with more labour intensive ones if oil prices continue to rise and wage growth remains stagnant.

The euro continued...

Just found this really interesting article from Stephanie Flanders blog, definitely worth a look.Economics vs Politics in the eurozone. A point that she makes is that the rise in the base rate will hurt the countries that least need it ( Ireland, Portugal etc) as they have floating interest rates which vary according to the base rate. This comes on the back of the Portugal bail out request. Is the eurozone unravelling at the seams?

Currency boards and the "tequila crisis"

Just started reading a new book by Krugman about the financial crisis of 2008. Anyway, he talks about the "tequila crisis" in Latin America and mentions a rather interesting situation called a currency board. Basically it is a situation where the currency of one country is pegged to another currency at a fixed exchange rate. In Argentina's case, the peso was pegged to the US Dollar at a one to one ratio which helped to curb the soaring inflation as the number of pesos in circulation equal the reserves of dollars the central bank in argentina have. This is so that every peso is covered for if they are wanted to be exchanged for dollars. As the story continues this leads to the peso being overvalued which leads them to depreciate it (hoping for export led growth and renewed foreign investment). What i found interesting in the story was this devaluation led to a financial collapse as foreign investors anticipated a further fall and signaled that the economy was in trouble. The idea of a currency board therefore doesnt seem like a good idea in the case for Argnetina but it is an effective way of slowing down rises in the money supply as new notes can only be printed in exchange for currency against which the domestic currency is pegged. Learn something new everyday.

Tuition Fees... The Debate.

The recent Browne review of university funding has concluded that from September 2012 universities will be able to charge students up to £9000 per year, up from the current level of £3,290. This is obviously very disappointing for students and means that graduates with a three year course could face debts around £38000 (if the maximum fees are charged). I want to examine why these changes have occurred and what effects they will have on higher education. I will not dwell on the politics of the situation as the hypocrisy of the Lib Dems has been very well documented recently. I want to concentrate on the economics of the matter.

Firstly, the rise in tuition fees has been necessary following the recent news that 40% would be cut from the higher education budget over the next 4 years. The rise in tuition fees is therefore needed to recover these losses. Having met with Richard Williams, Pro-Vice Chancellor of Leeds university, he disclosed that currently it costs Leeds university £21000 per medical student per year to educate. Therefore it seems that at present these students are getting an incredibly good deal and maybe they should be charged higher fees, especially as Doctors are well paid. Without the tuition fee rises the quality of teaching would inevitably fall.

Secondly, will the tuition fee rises lead to an elitist situation where only the very rich can afford to go to university? Well history tells us this may not be the case. The Higher Education Act of 2004 which allowed fees to rise to the current level from £1000 per year sparked massive debate. Many thought that this decision would reduce the number of university students but in fact the opposite has been true where now universities are not able to cope with the number of applicants. Now i know that the increase this time around is a much larger increase  (in real terms) but history may indicate that demand for higher education may not fall by as much as expected. What is more concerning about the top up fees is that universities may now try and compete on price. This may mean that very strong candidates from poorer backgrounds may be disincentivized to apply to the best universities (which will charge the maximum fees) because they feel they can not afford to. Oxford university has said however that it will charge lower fees to students from deprived backgrounds as well as increasing the number of bursaries available. This price competition situation looks unlikely to occur however as 21 universities have already confirmed they will charge the maximum fees to students. What the top up fees should do though is to encourage students to think if university is really right for them. I am not saying that people shouldnt go to university but some students may just go to university for the sake of delaying getting a job. Many jobs do not require a university education and the fee rises may encourage students to further their education in other ways such as apprentices etc.

What is interesting is whether these top up fees will be profitable for the government. It is estimated that 70% of graduates will not fully pay back their loans for which the taxpayers will have to pick up the bill. Now, im sure the government have done their maths and got the figures right but because of the changes to the way the loans are repaid this could be a very expensive (and unpopular) mistake if they've got it wrong. Just a thought