A Level Economics Essay 21: Investment

 Explain the factors which may affect the level of investment in an economy.

Investment refers to the expenditure made by firms on capital goods, such as machinery, equipment, buildings, and infrastructure, with the aim of increasing future production or generating income. It involves the allocation of resources in projects or assets that are expected to yield returns or contribute to economic growth.

The level of investment in an economy is influenced by several factors. These factors can be broadly categorized into four main types: economic factors, financial factors, political factors, and institutional factors.

1. Economic Factors: Economic growth, market size, and demand, as well as the cost of production, are important economic considerations that affect investment levels. For example, a rapidly growing economy with a large market and favorable production costs can attract higher levels of investment. When firms anticipate higher future demand, they may invest in expanding their production capacity or adopting new technologies.

2. Financial Factors: Interest rates and availability of credit play a significant role in shaping investment decisions. Lower interest rates reduce the cost of borrowing, making investment projects more financially viable and attractive. Additionally, the availability of credit and financing options enables firms to access the necessary funds for investment.

3. Political Factors: Political stability and government policies are crucial in attracting investment. A stable political environment provides businesses with confidence to make long-term investment decisions. Government policies, such as tax incentives, trade regulations, and investment protection measures, can significantly influence investment decisions. Favorable policies that support investment and reduce regulatory barriers are likely to attract higher levels of investment.

4. Institutional Factors: Infrastructure, property rights, and governance are important considerations for investment. Well-developed infrastructure, including transportation networks and energy supply, facilitates business operations and reduces costs. Strong legal frameworks, protection of property rights, and effective contract enforcement create a favorable environment for investment. Additionally, low levels of corruption and transparent governance practices enhance the attractiveness of an economy for investment.

It's important to note that the relative importance of these factors may vary across countries and industries. Additionally, these factors can interact with each other, creating complex dynamics that influence investment decisions in an economy.

Examples of investment include firms investing in new machinery or equipment to enhance productivity, individuals purchasing residential properties for rental income or capital gains, governments investing in infrastructure projects to stimulate economic activity, and businesses investing in research and development activities to drive innovation and competitiveness.

Overall, investment plays a crucial role in economic growth, job creation, and the development of industries and infrastructure. By allocating resources towards productive assets, investment stimulates economic activity and contributes to the overall well-being of an economy.

A Level Economics Essay 17: Phillips Curve

Explain, using a diagram or diagrams, why some economists argue that the long run Phillips curve is vertical but that the short run Phillips curve is not.

To understand why some economists argue that the long run Phillips curve is vertical while the short run Phillips curve is not, we need to examine the relationship between inflation and unemployment in both the short run and the long run.

Diagram:

• Horizontal axis: Unemployment rate
• Vertical axis: Inflation rate

1. Short Run Phillips Curve: In the short run, there is a trade-off between inflation and unemployment due to various factors such as nominal wage rigidities, price stickiness, and imperfect information.

The short run Phillips curve is represented by a downward-sloping curve. This implies that as the unemployment rate decreases, inflation tends to rise, and vice versa. The curve shows the inverse relationship between the two variables, indicating that policymakers can influence the unemployment rate through expansionary or contractionary policies that impact inflation.

2. Long Run Phillips Curve: In the long run, economists argue that the Phillips curve becomes vertical, indicating that there is no trade-off between inflation and unemployment. This view is based on the concept of the natural rate of unemployment.

The natural rate of unemployment represents the level of unemployment that exists when the economy is at its potential output in the long run. It is determined by structural factors such as labor market institutions, demographics, and technological changes.

As the economy adjusts over time, wages and prices become more flexible, and any short-run trade-off between inflation and unemployment diminishes. In the long run, the economy returns to the natural rate of unemployment regardless of the level of inflation.

The vertical long run Phillips curve implies that policymakers cannot permanently reduce unemployment through expansionary monetary or fiscal policies. Any attempts to push unemployment below its natural rate would result in higher inflation without any sustained decrease in unemployment.

Therefore, the short run Phillips curve is not vertical because it reflects temporary trade-offs between inflation and unemployment due to nominal rigidities and other factors. In contrast, the long run Phillips curve is vertical because it represents the equilibrium level of unemployment that is consistent with the natural rate and does not change with inflation.

It's important to note that the Phillips curve is a theoretical concept, and the actual relationship between inflation and unemployment can vary over time due to various economic factors, policy interventions, and changes in expectations. Nonetheless, the vertical long run Phillips curve indicates the absence of a permanent trade-off between inflation and unemployment.

Fallacies of Capitalism 11: The Financialization Fallacy

The Financialization  Fallacy

Financialization refers to the increasing influence and dominance of financial markets, institutions, and activities in the economy. It involves the growing importance of financial transactions, speculation, and the pursuit of short-term profits in shaping economic decisions. While financialization has become a prominent feature of modern economies, it is considered a fallacy because it prioritizes financial activities over real productive activities, leading to detrimental effects on the economy and society. Let's explore this concept further with simple examples, quotes, and explanations:

1. Focus on short-term gains: Financialization often emphasizes short-term profits and quick returns on investments, rather than long-term productive investments. Economist John Maynard Keynes warned, "Speculators may do no harm as bubbles on a steady stream of enterprise. But the position is serious when enterprise becomes the bubble on a whirlpool of speculation." This suggests that when financial activities overshadow productive investments, it can lead to economic instability and hinder sustainable growth.

2. Financial sector dominance: Financialization can lead to an over-reliance on the financial sector for economic growth, potentially at the expense of other sectors. Economist Hyman Minsky cautioned, "In capitalist economies, the financial system is supposed to serve the needs of the real economy, not the other way around." However, when financial activities take precedence, it can create an imbalance, diverting resources away from productive sectors like manufacturing, innovation, and infrastructure development.

3. Risk and instability: Financialization often involves increased complexity and risk-taking in financial markets. Financial instruments and practices become convoluted, making it difficult to assess true risks. Nobel laureate economist Robert Shiller observed, "Financial innovation is a little like technology innovation: not all of it has value." The pursuit of financial innovation without proper regulation and oversight can lead to financial crises, as seen in the 2008 global financial crisis, when risky financial practices caused severe economic downturns.

4. Growing inequality: Financialization tends to exacerbate wealth and income inequality. Financial activities can disproportionately benefit a small segment of society, such as high-income individuals, large corporations, and financial institutions. Economist Thomas Piketty noted, "When the rate of return on capital exceeds the rate of growth of output and income, as it did in the 19th century and seems quite likely to do again in the 21st, capitalism generates arbitrary and unsustainable inequalities." The concentration of wealth in the financial sector can widen the wealth gap and hinder social mobility.

5. Neglect of real economy: Financialization can divert resources and attention away from the real economy, where goods and services are produced. Financial markets can become detached from the underlying value and productivity of the real economy. Economist Ha-Joon Chang remarked, "Financial markets, far from being simply 'efficient' mechanisms for allocating capital, are inherently unstable and crisis-prone." Neglecting the real economy in favor of speculative financial activities can lead to economic imbalances and distortions.

In conclusion, financialization as a fallacy arises when financial activities and priorities overshadow real productive activities and the long-term health of the economy. The focus on short-term gains, dominance of the financial sector, increased risk and instability, growing inequality, and neglect of the real economy are all detrimental consequences of financialization. Recognizing and addressing these issues is crucial to ensuring a more balanced and sustainable economic system that benefits society as a whole.

Has the US given up on Pakistan?

 

What an amusement park can teach us about central banks

Tim Harford in The FT

To Tivoli Gardens in the heart of Copenhagen, one of the world’s oldest amusement parks. It was founded 180 years ago, and its creator George Carstensen secured the land by petitioning King Christian VIII, arguing, “When the people are amusing themselves, they do not think about politics.” 

In Tivoli, I don’t think about politics either. But during the wait to ride the Demon and the Star Flyer, I can’t help but think about economics. Specifically, I think about Robert Lucas’s charming speech, “What Economists Do”. It was delivered as a commencement address in 1988, seven years before the hugely influential macroeconomist was awarded the Nobel memorial prize. 

I revisited the speech when news reached me of Robert Lucas’s recent death at the age of 85. “We are basically storytellers,” wrote Lucas, “creators of make-believe economic systems.” 

To illustrate his point, he told a story about a depression in an amusement park. In Lucas’s imaginary park, people buy a wad of tickets at the entry kiosk and spend them on anything from rollercoaster rides to hotdogs. Each attraction is run as an independent business, while the ticket desk serves as a central bank. 

On a slow day, the ride owners will send their workers home. Both employment (hours worked) and the number of tickets bought (call that GDP if you wish) will vary depending on school holidays, the weather and chance. 

Should we call a slow Monday in March a depression? No, said Lucas. “By an economic depression, we mean something that ought not to happen, something pathological.” 

So then imagine that the central bank — sorry, the ticket kiosk — decides to crack down on fun by squeezing the money supply. Instead of issuing 100 tickets for DKr100, the kiosk charges DKr100 for 80 tickets. Importantly, it doesn’t tell the businesses in the park that it has decided to make this change. Without their consent or knowledge, it has effectively raised all their prices. What happens? 

Some customers grit their teeth and spend a bit more to ensure they get all the tickets they would have expected anyway. Others buy fewer tickets. Some walk away without buying any. 

Inside the park, tumbleweed. There are fewer customers, and they bring sandwiches rather than buying hotdogs. They spend less on the rides and take more time to enjoy freebies such as walking around the lake. Operators who had been planning to expand in the face of long queues will now not be so sure. Other operators who had worried that their ride was going out of style see gloomy confirmation and may close permanently to cut their losses. The amusement park as a whole will lose its mojo, with physical capacity, output and employment shrinking to match a misunderstood fall in demand. 

As Lucas explained, this slump “is indeed a kind of pathology. Customers are arriving, eager to spend . . . Concessionaires are ready and waiting to service them.” All the pieces are in place, but they don’t fit together because of a monetary policy mistake. 

Eventually, the park should recover its equilibrium. The ride owners can ask for fewer tickets per ride; the customers will come to realise that 80 tickets will buy as much as 100 tickets did before the price change. The amusement park will be lively again. But all this will take time, and permanent harm may have been done. 

Flip the story around: what if the central bank — sorry, the ticket kiosk — gets excited and hands out too many tickets instead? In effect, the kiosk has slashed all the prices without telling the concession-holders. Expecting bargains, people cram into the park. The hotdog stand runs out of hotdogs; the mustard and ketchup run dry. Park-goers spend most of their time queueing rather than rollercoasting. The businesses inside may call up extra staff, even borrow money to expand. Yet eventually they will realise the double-handfuls of tickets they’ve taken in aren’t worth as much as they expected. 

These stories tell us how a central bank might engineer a recession — or cause shortages and inflation. I find them a delightful window into how economies work. 

True, there are other types of recession. In my book The Undercover Economist Strikes Back, I told a true story about a recession in a prisoner-of-war camp in the 1940s, as described by one of the POWs, the economist R­­­­­­­­­­­­­­­A Radford. 

The camp, like the amusement park, had a simple economy. It was fuelled by the supply of packages from the Red Cross, the contents of which were then traded: the Sikh prisoners didn’t want razor blades or beef, the French were desperate for coffee, the English craved tea. 

The prison-camp recession occurred, not because the money supply was constricted, but because the Red Cross parcels stopped arriving — what an economist might call an “exogenous shock”. (For a real-world example, imagine a war interrupting the supply of oil, natural gas and food. It shouldn’t be too much of a stretch to do that.) 

These little stories teach us that sometimes an economy can be dragged down by a simple mistake in monetary policy, while sometimes a recession occurs because the economy has hit an implacable obstacle. One job of a good central bank is to make sure that it perceives the difference, something central bankers are puzzling over right now. 

The disadvantage with such stories, admitted Lucas, “is that we are not really interested in understanding and preventing depressions in hypothetical amusement parks . . . the analogy that one person finds persuasive, his neighbour may well find ridiculous.” 

So then what to do? “Keep trying to tell better and better stories . . . it is fun and interesting and, really, there is no practical alternative.”

What's causing the wave of Economic Collapse?

 

The Only Function of Economic Forecasting Is To Make Astrology Look Respectable

 Tim Harford in The FT 

Economist Ezra Solomon once quipped that “the only function of economic forecasting is to make astrology look respectable”. I’m not sure if the astrologer “Mystic Meg” was ever respectable, but she was certainly much loved. “Britain’s most famous astrologer by a million miles,” said her agent, after her recent death prompted an outpouring of affectionate recollections about her campy image and her arch forecasts about the National Lottery, praised both for their brilliant accuracy and sheer absurdity. 

It seems hard to imagine that an economic forecaster will ever earn such valedictions. But many economic pundits seem to have been taking lessons from astrologers. Consider this horoscope: “The balance of risks remains tilted to the downside, but adverse risks have moderated . . . On the upside, a stronger boost from pent-up demand in numerous economies or a faster fall in inflation are plausible. On the downside, severe health outcomes in China could hold back the recovery . . . ” 

That pretty much covers everything: good news, bad news, more inflation, disinflation. In case you’re wondering, it’s the latest World Economic Outlook from the IMF. But that sort of “rainbow forecast” is typical of the genre. 

Forecasting expert Philip E Tetlock, in his 2005 book Expert Political Judgement, noted that expert pundits had a tendency to make vague forecasts, and to excuse error as “erring on the side of caution” or being wrong only on timing. 

If so, those experts are treading a well-worn path. Consider the following statements: “You have a great need for other people to like and admire you.” “You have a tendency to be critical of yourself.” “While you have some personality weaknesses, you are generally able to compensate for them.” 

They sound like the kind of thing a clairvoyant might say after gazing into a crystal ball, but these statements are from an academic paper, “The Fallacy of Personal Validation”, published in 1949 by psychologist Bertram Forer. 

After getting his students to fill out a diagnostic questionnaire, Forer handed each of them a written assessment of their traits. The students believed the assessments were uniquely tailored on the basis of the questionnaire. But, in fact, each student got the same list of 13 statements, including the three above. The students felt the diagnostic had done an excellent job, and the vast majority agreed with at least 10 out of 13 statements. When the deception was revealed, wrote Forer, “they burst into laughter”. These “Forer statements” — also sometimes called “Barnum statements” after showman PT Barnum — can feel uncannily specific. Most people don’t realise that they are almost universal. 

In defence of economic forecasters, including the IMF, Barnumesque verbiage is traditionally accompanied by specific falsifiable numerical predictions. Surely, the real incorrigibles are the economics columnists. We’ll blithely hand-wave about risks and opportunities which may or may not manifest. And like Mystic Meg, we’re kept around only because people find our prognostications entertaining. 

The parallels should be no surprise. Walter Friedman’s history of economic forecasting, Fortune Tellers, explains that clairvoyants and economic forecasters started from a similar place. Evangeline Adams and Roger Babson were near contemporaries, born in the US in 1868 and 1875 respectively. Both offered investment advice in general and stock market forecasts in particular. Both were in high demand, and both died rich. The chief difference was that Adams was an astrologer, while Babson offered data-driven forecasts inspired by ideas from physics. 

Babson’s forecasting ideas look very strange today. He was a huge fan of Isaac Newton: he purchased and moved the parlour of Newton’s house from London to Massachusetts, funded research into antigravity, and his forecasting ideas are full of misappropriated Newtonian physics. His “Babsonchart” was built around the Newtonish idea that each boom above the trend was followed by an equal and opposite bust below. With hindsight, this was true by definition when Babson plotted the trend line in the right place. Alas, it offered little predictive power beyond generalities. 

Still, generalities will get you a long way. Babson’s reputation as a forecaster was secured when, on September 5 1929, a few weeks before the great crash, he opined, “sooner or later a crash is coming which will . . . cause a decline of from 60 to 80 points in the Dow-Jones Barometer”. Impressive. 

What is less impressive is that those gloomy forecasts began years earlier, in 1926, after which the Dow more than doubled. The crash was vastly bigger than Babson had predicted, and it continued long after Babson started predicting a recovery. 

No matter. Shortly after the crash began, Babson ran an advert in The New York Times announcing that “Babson clients were prepared” and he still gets credit for predicting the crash. Aficionados of clairvoyancy will recognise some similarities here. If you want to be admired for your forecasts, temper your bold claims with vagueness and be sure to trumpet the successes and downplay the failures. 

No sooner had Mystic Meg’s death been announced than The Sun, which published her column, was explaining that her final horoscope was a “sweet prediction” that she would be reunited in the afterlife with an old flame who died in a car crash in 1977. “Leo: It can be the most routine of routine journeys that takes you towards your soulmate.” 

For those readers willing to swallow the idea that death itself is “the most routine of routine journeys”, it’s a startling piece of prescience. For the rest of us, it’s audacious silliness. Mystic Meg would have been proud.

The Wishful Thinking of Diaspora Pakistanis Reveals A Clandestine Truth About Pakistani Politics

Pakistan is financially, politically, and philosophically bankrupt. What it needs is a new paradigm: a truly people powered government by Arsalan Malik in The Friday Times 

 


In recent months, I have had several conversations with my fellow diaspora Pakistanis in the US about the dumpster fire that is Pakistani politics and economy. To my incredulous amazement, many of them still support the artist formerly known as the “Kaptaan.” Imran Khan continues to have a firm hold on the imagination of these diaspora Pakistanis.

To wit, a very successful, and intelligent Pakistani finance professional told me “IK is the only person who will stand up to the military and save Pakistan from default.” Never mind that IK was a construct of the military in the first place (indeed the overwhelming majority of Pakistani politicians are) and was unable to bring it to heel when he tried during his first unsuccessful term as PM. Pakistanis who think this way although passionate and well meaning, seem to be in-denial of the fact that a large part of the reason we are facing default is because of the fuel subsidies Khan revived a few days before his ouster. Those subsidies further depleted the Treasury at a critical time and effectively tore up the IMF agreement. It made no economic sense and was an act of pure pique to sabotage the subsequent government and curry favor with the masses. This was not the act of a leader who puts his country’s interests before his own. The successive government had to reverse this but the damage was already done. This is the same sort of irrationally misplaced good will that afflicts Trump supporters, who still think he will “drain the swamp” when, in actuality he moved the swamp to DC with him after his election. Just like Trump supporters are convinced he is the answer, many Pakistanis still think that IK will somehow save the Pakistani economy. This is a defensive retreat into fantasy in the face of the unpalatable reality that IK is perhaps even more narcissistic and incompetent than the other inept and feckless fools who have tried and failed to run Pakistan.

Another group of less sophisticated expats think that IK will be successful because “he is not corrupt and is not looking to enrich himself” as opposed to the shamelessly kleptocratic Bhutto/Zardari and Sharif clans. True, IK may not be corrupt but a person is known by the company he keeps. In IK’s case, this consists of the same corrupt, bandwagon careerists in bed with the military who have been a blight on Pakistan’s iniquitous politics ever since its inception. They continued to loot the country in cahoots with the military, under his watch and then abandoned him as soon as the going got tough and he ended up on the wrong side of the military establishment.

However, what both of these Pakistani expat types get right is that if elections were held tomorrow, IK would sweep to victory. He is doubtlessly the most popular politician in the country and has activated and vitalized countless numbers of young people who would not have been otherwise interested in politics. At the same time, he has unwittingly exposed the real puppet masters of Pakistan – its insatiable and pretorian military – and focused the ire of the masses against the top men in khaki behind the curtain for the first time in Pakistan’s history.

IK’s supporters have legitimate grievances against the failed ruling class and establishment elite, and see Imran as their last best hope. This is similar to the effect that Bernie Sanders has had on American millennials and Gen Z. The difference is that Bernie Sanders actually has a progressive, pro-worker, truly populist policy agenda. IK is an inept, incompetent, socially conservative, right-wing populist figure. He is a cult leader, whose track record proves that he cares for his ego much more than he cares for the country. We can be sure that, if accepted back in the fold by the military establishment, instead of confronting it, he will turn out to be even more compliant, because like all narcissists he cares more about power and assuring his own ascendancy and legacy.

Also, unlike Bernie, his politics excludes a class analysis of the problems that afflict Pakistan. Pakistan is at a crossroads. Instead of looking for solutions in another authoritarian strong man and the same old neoliberal policies, the answer to Pakistan’s travails lies in returning power to the working class people of the country, through, for example, the local grassroots organization of truly leftist and socialist political parties like the Mazdoor-Kisaan Party, the Awami Khalq Party, and the Awami Worker’s Party. No one who belongs to the elite that IK belongs to, which includes myself and my friend in finance by the way, can be expected to fix Pakistan.

Pakistan is financially, politically, and philosophically bankrupt. What it needs is a new paradigm: a truly people powered government, led by leaders from the working class, a la Lula in Brazil, that will have the mandate of a super majority of the people to enact progressive policies like raising the taxes on real estate speculation which is the most secure and profitable form of investment for Pakistan’s elites. Such a movement will also institute much needed land reforms to break up antediluvian and anachronistic agricultural monopolies. It will invest in the health and education of the working people of Pakistan instead of F-16s and it will confront the neoliberal institutions that have a stranglehold on Pakistan’s economy by, for example, reversing the disastrous terms of business with the Independent Power Producers (IPPs) which are the central reason for recurring power shortages resulting in an untold number of work days lost, and loss of profitability of private enterprises, and has plunged Pakistan into darkness and creeping de-industrialization.

True change only takes place when millions of working people demand it and when they demand justice. Then, the people at the top have no choice but to respond. In the end, the only force that will save Pakistan are the people of Pakistan, not the military, not the elite, not the businessmen, not the neoliberal economists or a cult of personality but the working-class people of the country. Otherwise, like all Potemkin villages, it will fall apart.

Is life in the UK really as bad as the numbers suggest? Yes, it is

The past 15 years have been a disappointment on a scale we could hardly have imagined writes Tim Harford in The FT 

At a time of shortages, we are certainly not short of gloomy economic forecasts. The Resolution Foundation think-tank notes that average real earnings have fallen by 7 per cent since a year ago and predicts that earnings will take four or five years to recover to the levels of January 2022. 

Yet if the forecasts are bad, it is the scene in the rear-view mirror that is truly horrifying. The British economy is in a generation-long slough of despond, a slow-burning economic catastrophe. Real household disposable income per capita has barely increased for 15 years. 

This is not normal. Since 1948, this measure of spending power reliably increased in the UK, doubling every 30 years. It was about twice as high in 1978 as in 1948 and was in touching distance of doubling again by 2008, before the financial crisis intervened. Today, it’s back at those pre-crisis levels. 

It’s worth lingering on this point because it is so extraordinary. Had the pre-crisis trend continued, the typical Brit would by now be 40 per cent richer. Instead, no progress has been made at all. No wonder the Institute for Fiscal Studies is now talking of a second lost decade. 

Go back and look for historical precedents for this, and you will not find much. In the National Institute Economic Review, economic historians Nick Crafts and Terence Mills examined the growth in labour productivity over the very long run. (This is defined as the total output of the UK economy divided by the total number of hours worked; labour productivity is closely connected to material standards of living.) They do find worse runs of performance — 1760 to 1800 was not much fun — but none within living memory. Nowhere in 260 years of data do they find a sharper shortfall from the previous trend. The past 15 years have been a disappointment on a scale that previous generations of British economists could hardly have imagined. 

The questions of how this can have happened, and what can be done to change things, can be left for another column. (Part of the problem, in any case, may have been government by newspaper columnists.) But it is worth looking for symptoms. Is life in the UK really as bad as the apocalyptically bad economic numbers suggest? Perhaps so. There are some obvious problems: widespread worry about the cost of living; strikes everywhere; the utter meltdown of the UK’s emergency healthcare. 

There are also subtler indicators of chronic economic disease. Consider the public finances. In an ideal world, governments offer their citizens low taxes, excellent public services and falling national debt. In normal circumstances, we can’t have it all. Right now, we can’t have any of it. 

We have rising taxes. At more than 37 per cent of national income, they are four percentage points higher than they’ve tended to be over the past four decades. Yet those high taxes are doing nothing to shore up public services, which have been steadily squeezed for more than a decade. (The NHS, believe it or not, has been shielded from this squeeze; if it’s bad at your local A&E, don’t think too deeply about schools, courts or social services.) Low growth puts pressure on public sector wage settlements — if the pie isn’t growing, no wonder there is such a scrap over each slice. 

One might at least hope that, with high taxes and spending constraints, debt would be low and falling. No. Debt is high, the deficit is a permanent fixture and interest payments on public debt have risen to levels not seen for 40 years. 

Many people struggle to pay for the basics. A large survey conducted by the Resolution Foundation in late November found that about a quarter of people said they couldn’t afford regular savings of £10 a month, couldn’t afford to spend small sums on themselves, couldn’t afford to replace electrical goods and couldn’t afford to switch on the heating when needed. Three years ago, only an unlucky few — between 2 and 8 per cent — described themselves as having such concerns over spending. More than 10 per cent of respondents said that at times over the previous 30 days, they’d not eaten when hungry because they didn’t have money for food. 

This is not supposed to happen in one of the world’s richest countries. But then, the UK is no longer in that club. As my colleague John Burn-Murdoch has recently shown, median incomes in the UK are well below those in places such as Norway, Switzerland or the US and well below the average of developed countries. Incomes of the poor, those at the 10th percentile, are lower in the UK than in Slovenia. 

 

If all this was happening during a deep recession, we could have hope. “One day,” we’d say to ourselves, “the business cycle will turn, businesses will start hiring again, tax revenues will increase and some of our problems will disappear of their own accord.” 

But we are not in a deep recession. Recently unemployment has been lower than at any time since before the prime minister was born, which suggests that a dramatic cyclical uptick is unlikely. The UK economy has the accelerator to the floor yet is barely able to gain speed. That is hardly likely to improve as the Bank of England applies the brakes. 

I don’t believe the situation is hopeless. The UK has many strengths and many resources and has overcome adversity before. But if we are to solve this chronic economic problem together, we first need to acknowledge just how serious — and how stubborn — the issue has become.

Time to Finish Off Pakistan

 

Halal economy. How it works? What effects on society? Who gets its benefits?

 

The Pakistan Government will have to pull a rabbit out of the hat

 

US Dollar vs. China's Yuan

 

Confidence Tricks: Pakistan

Abdul Moiz Jaferi in The Dawn

By 2050, Pakistan will become the third most populous country in the world with 380 million mostly poor people. The Pakistanis working towards making those future millions a reality, are doing so today fuelled by largely imported foodstuff. Before you start screaming at the fromagers and the chocolatiers, they are not really to blame. Our daal is from abroad, and so is the oil it is cooked in. Our broiler chicken is fed foreign produce and even our naan dough is supplemented with imports.

We are already a food-insecure country, even though agriculture is supposed to be our backbone. Our once formidable cotton produce struggles to keep up with the region. Without investment in seed quality and technology, our cotton crop is now only fit to make coarse materials. Farmers have no incentive from the state to support essential crops, so they plant fields upon fields of water-hungry sugarcane, producing a crop which goes into a regressively controlled and speculative sugar industry and comes out as per the whims of billionaires with private planes. 

Pakistan earns about eight thousand billion rupees a year in tax and non-tax revenue. Let’s try and approximate this as a single naan. About half of that naan is put together with sales tax and customs duties — indirect and retrogressive taxation which extracts without discriminating between the poor buyer and the rich. An eighth of the naan is income tax, which is paid in large part by a million-odd poor souls caught in the net of ‘deductions at source’, who are either too weak or too caught in the net to get away with tax theft. These poor souls do silly things, such as subscribe to English-language print dailies like this one, whilst their trader neighbours rely on WhatsApp videos for their news stories, drive flashier vehicles, and write odes to their fictional poverty for the taxman and get away with it. A quarter of the naan is non-tax revenue; a final eighth is put on the table by federal excise duties and miscellaneous levies such as those on petroleum. 

When it comes to spending this money, Pakistan gives just under half the naan away to its provinces, who have many more responsibilities after the 18th Amendment but have not expanded their own revenue portfolios, nor devolved power or funding to local government. We then give away three-eighths to debt servicing. Those adept at math will guess that we have about an eighth left. Most of that goes to the military. We then borrow some more to run the actual government and pay pensions.

From the first day of work, we are in fresh debt, eating borrowed naan. Our economy is propped up by the sustenance sent home by unskilled labour, who toil to make foreign deserts green in conditions of modern-day slavery.

Countries break from such fatal cycles through improvement in their people — education and inclusion. Our basic public education system has been reduced to the worst possible state while our higher education system produces unnecessary degrees instead of focusing on skill-based diplomas. Our doctoral circuit is best known for being an elaborate diploma mill, where dummy publications print you onwards to hollow PhD glory.

If you consider the threat of violent force to be a commodity, it is our major produce and international bargaining chip. We bring to the table our possible nuisance value and take back whatever the world is willing to give us if we promise to keep it in check. At the head of the institutions which regulate our use of force are people who realise that their own powerful hand spins the roulette wheel which determines many fates, including their own.

Meanwhile, the pinnacle of the established order in our country enjoys millions of dollars’ worth of retirement packages and is bestowed with state land as service gifts and depreciated duty-free luxury vehicles as buy-offs. Golf clubs are carved out of mountains for their subsidised leisure; lakeside vistas become their sailing clubs.

Our country’s largest corporate players are owned and run by the military. I would say our country’s largest political player is also the military, but then this paper might not print it and, as penance, I might have to go to a seminar at Lums, where, a satirical publication noted, a management scientist recently turned up to speak for the whole day.

When you throw a no-confidence motion against a prime minister into this mix, it seems minor in scale. A sleight of hand compared to the larger circus that is the running of our country. When you factor in that the process through which he is being removed is itself riddled with the same interference from unelected quarters which had drawn condemnation from across the aisle when he was first brought in, the farce is highlighted further.

The opposition, previously being unable to remove the Sadiq Sanjrani pony from the merry-go-round that is our political arena, has now realised where the ticket booth is. Everyone is now jumping the queue to exchange their lofty slogans for a ticket on the ride, while the ringmaster promises larger and larger horses as long as the circus stays in town.

If I was part of the management science team which ran Pakistan’s circus, I would encourage my colleagues to wake up and smell the urgency in the air: the poverty which encircles the circus’s manicured boundaries. It is not long before the only solution to all evils will once again present itself as a gross permutation of religion and violence. Unlike last time, when we went after the Russians with it whilst taking American money (which ended up in Swiss banks), this time it threatens to burn without direction or order, and without a care for how much of the forest will remain when the flames are finally doused.

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Pakistan's New Security Policy

 

Understanding the BJP

 

The Political Economy of South Korea

 

End to China’s estate market boom could spell trouble for the economy

Housing activity accounts for 29% of GDP, but Evergrande’s debt crisis is sign that things could soon change writes George Magnus in The Guardian

The Kangbashi district of Ordos in Inner Mongolia, famed for being a ‘ghost city’, has since filled up a bit. Photograph: Qilai Shen/Corbis/Getty 




In China today, the buzz is all about how the government there too has stumbled into an energy crisis with widespread power cuts. Yet this and other supply shocks will eventually pass, while the $300bn (£218bn) of debt enveloping China’s second biggest property developer, Evergrande, is of greater significance. It suggests China’s long housing boom is over, and bodes badly for the increasingly troubled economy, with implications for the rest of the world too.

China’s real estate market has been called the most important sector in the world economy. Valued at about $55tn, it is now twice the size of its US equivalent, and four times larger than China’s GDP. Taking into account construction and other property-related goods and services, annual housing activity accounts for about 29% of China’s GDP, far above the 10%-20% typical of most developed nations.

Real estate busts can be as painful as the preceding booms were exuberant. China, however, has only known growth as its previous housing welfare system was transformed from the 1990s onwards. A protracted housing downturn is now poised to add to the Chinese economy’s other mounting headwinds, with significant and unpredictable implications.

The signs were there 10 years ago, when the spotlight fell on China’s “ghost cities”. One of the most publicised was the Kangbashi district of the city of Ordos in Inner Mongolia, famed for its gleaming but empty office blocks and apartment towers, barren boulevards, deserted highways, and vacant shops and plazas. However, ghost cities turned out to be more bad investment than overinvestment. Ordos and similar cities remained eyesores for a while but have since filled up a bit.

Aside from ghost cities, the property sector prospered in the 2000s and 2010s because Beijing not only appeared to want a maturing real-estate market, but promoted it hard to underpin growth and the formation of a propertied, urban middle class. Developers had no qualms about borrowing heavily, because credit was freely available and they felt the government would always support the market if needed.

By the time the pandemic struck in 2020, it had certainly become a case of overinvestment. About a fifth of China’s housing units now lie vacant, often because they are too expensive for the population, 40% of whom earn barely 1,000 yuan (£115) a month. For second and third homes, the vacancy rates are higher still.

Meanwhile, since 2017, Beijing’s attitude towards rampant credit creation and the financialisation of housing – treating it as a commodity rather than as somewhere to live – has undergone a sea change. Xi Jinping told that year’s Communist party congress that “houses are built to be inhabited, not for speculation”, and that action would be taken to curb demand, overbuilding and rising home prices. Tighter mortgage terms and restrictions on multiple-home ownership followed.

Last year, regulators tightened regulations on developers designed to curb debt, preserve cash, and limit overbuilding. The government is sensitive to high housing costs, which are deemed to be excessive and a disincentive to larger family size. The crackdown chimes with its recent “common prosperity” drive, ostensibly designed to address rampant inequality, which has also seen a regulatory clampdown on big tech firms such as Alibaba, Didi and Tencent.

Those changes have exposed the financial fragility of developers and moved the precarious housing bubble centre stage. Even if, as seems likely, the Chinese authorities can keep the fallout from Evergrande from becoming a Lehman-type shock, a downturn in the property and construction sector could well aggravate China’s looming economic slowdown. Some expect China’s growth rate to slide to 1%-2%, for a while at least.

Banks and property companies are likely to restrict building activity and financing as they restructure broken balance sheets and Chinese households will be wary about taking on new mortgages. Household debt has risen from about $2tn in 2010 to more than $10tn last year, with the ratio of debt to disposable income surging to about 130%, significantly higher than in the US. With incomes rising only slowly, especially in the gig or informal economy, which now accounts for about three-fifths of employment, households are likely to remain on the back foot.

Demographics, especially the low 1.3 fertility rate, are also working against the economy. China’s working age and main home buying age groups are declining. The number of prime-age, first-time homebuyers – those in the 25-39 bracket – is set to fall by 25% in the next 20 years from 327 million to 247 million. The urbanisation rate, moreover, which doubled to 64% between 1996 and 2020, is bound to slow. There will be fewer marriages, fewer children and lower household formation.

In the last 10 to 15 years, local and provincial governments could always be relied upon to boost real estate and infrastructure spending to get the economy out of a hole if needed. They are already heavily in debt, however, and under pressure to find resources to support Xi’s “common prosperity” programme.

It is harder to predict what will happen to home prices in China. If they do, for the first time, decline far or over any length of time, expect to see much bigger problems emerge for banks and for consumers as negative wealth effects spread among the urban population.

We do not know how well China will manage to wean itself off real estate construction and services, but it will not be easy or painless. There will be important consequences for China’s economy, possibly its leadership, and the way China projects its influence abroad. Stay tuned.

What's wrong with mainstream economics? Prof. Richard Werner