Corruption and Growth?

Last week we considered economic growth, and noted the role that institutions play in fostering, or at least being correlated with, economic growth. We considered corruption when thinking about rent seeking: whether economic agents create value themselves, or seek to apportion the value created by others – for example, via piracy or theft.

We saw a version of the Corruption Perceptions Index, a measure of corruption amongst countries, noting which countries were deemed less corrupt, and which others were more corrupt. Today Bloomberg reports on the 2015 Corruption Perceptions Index, in which apparently Brazil and Turkey show the biggest falls. Related or otherwise, Reuters reports that recently the IMF downgraded its GDP growth forecast for Brazil to -2.5% from 1.1% in 2016, and the World Bank cut its growth forecasts for Turkey recently.

Fracking: Economics and Externalities

From Huffington Post

The BBC headline this afternoon communicates the outcome of a vote in Parliament to allow fracking in National Parks. This would appear to be a doubly controversial outcome. Fracking is a means to extract gas from deep underground, and is controversial, as is any kind of economic development in National Parks.

Fracking is unpopular amongst many because of concerns regarding the amounts of water used in the process, which must be transported to fracking sites at great cost, and also concerns about fracking causing small earthquakes, or tremors. Nonetheless, it is a means for producing energy, hence increasing its supply, and bringing prices down. It’s generally acknowledged to have played a considerable role in energy prices falling in the US.

The government’s own website for National Parks says they are “areas of protected countryside that everyone can visit, and where people live, work and shape the landscape”. Anybody who has visited any of them knows how beautiful they are, and rightly protected. Nonetheless, at the same time they provide a valuable place where economic activity could take place; not least there is likely plenty of natural resources beneath them, but also, wouldn’t it be nice to be able to study at university and in the afternoon take a walk, or go for a jog in one of our glorious National Parks? Many companies would jump at the opportunity to provide such a working environment for their employees (of course, many wouldn’t also). However, these are areas that are protected for a reason – primarily their outstanding natural beauty. The tragedy of the commons teaches us that more than likely without this protection, we’d overuse such areas.

Now, of course, the fracking bill passed in Parliament restricts digging to areas of non-outstanding natural beauty, but once 1.2km underground, then frackers (so to speak) can drill horizontally to get underneath the areas of outstanding natural beauty. This, naturally, is concerning – will it have no effect whatsoever to be doing things underneath the ground?

What this fundamentally boils down to is the difference between private net benefits of actions, and social net benefits. When making decisions, we will usually consider the benefits and costs that accrue to us individually and pay less attention to benefits and costs that society at large may feel as a result of our actions. When there’s a difference between the two, like for example if I choose to play music very loudly in my neighbourhood, we say there’s an externality. In the case of economic activity in National Parks, there are clearly private benefits: mining companies, and energy providers will get private benefits, as we all will, if energy prices fall. But equally, if damage is done to our National Parks as a result, we will all suffer since we can no longer enjoy those National Parks as we previously did.

The Price of Petrol

Oil price

As students, I suspect there is little likelihood you (a) listen to Radio 4 in the morning, and (b) listen to it before 8am. However, if you do, you’ll have heard a section of the Today programme on petrol prices, which the RAC expects will fall below a pound before Christmas.

This is, of course, music to the ears of anybody who drives a car. But as you’ll be increasingly aware as a student of economics, the demand side of the market is only one side – there’s also the supply side. Contrary to how we might view large oil companies, the huge range of fluctuation in the price of oil makes it clear that they are price takers, rather than price makers, when it comes to the price of oil, and subsequently the price of petrol.

The graph above shows why petrol is so cheap again – the price of oil has fallen by close to 60% over the last 18 months, and this is part of a general fall in commodity prices over this time period. This raises questions, and perhaps the most pertinent are (1) why? and (2) what does it mean?

On the why, one explanation that Vince Cable (who came to the university earlier in term) put forward was that China and other strong growth economies of recent years like Russia and Brazil are all either slowing down or in recession. This removes a huge amount of demand for commodities.

On the what does it mean: the likelihood is it means job losses as firms that mine and trade in these commodities have to cut back given decreased revenues from their activities. It seems more than likely this would affect the UK, and Scotland in particular where the oil industry resides. But equally, other large mining companies are headquartered in the UK, and this may result in job losses.

It’s not all good…

Economic Modelling and Board Games

If you are in your first year, you may well have just become aware that we’re planning on a big board game experiment next term in macroeconomics. You might be thinking: why?!

One reason, we’ll admit, is that a number of us in the economics department quite enjoy playing board games. We’re not particularly weird and whacko in that respect: the board game industry is also thriving, with board game cafes are cropping up in the UK such as Draughts in London.

However, as economists we have another angle: board games are models. A model is a simplified version of reality, of something we wish to study or understand more. Of course, board games aren’t necessarily designed necessarily with that in mind – but nonetheless, games like Risk do provide some model of global warfare, games like Monopoly must provide some model of the property market, however warped and horrifying each might be.

Settlers of Catan is the particular game we’re using next term, and you might ask why? Well, Settlers is a game about settling: about groups of people settling in areas and developing. We can think about it as modelling the origins of growth – what does it take for groups to survive and prosper?

In the game, once initial settlements (and roads) have been placed, players must optimise given the constraints of the inputs available to them – land that produces, at random, materials necessary to further develop (build more settlements, build cities). Such development might be aided by trade: two players deciding that some swap of materials they have is mutually beneficial. The rate at which materials are traded reflects their value in the game – their relative scarcity, and hence we have inflation and deflation in a barter economy.

Quickly, you can see we can think about Settlers as an economic model. And that’s what we’ll do next term. You’ll be playing the game in Week 2, and for your essay at the end of term, you’ll be writing about Settlers as an economic model.

What do you need to do right now? You need to fill out this survey, as it will help us to set up game tables that enable us to best learn about the kinds of factors that lead to economic growth (and help you to write a better essay next term). And perhaps brush up on your knowledge of the game of Settlers of Catan 🙂

Discussions on Deaton

Slow start today to blogging; my urgent attention was directed towards preparing the discussion at our weekly Conversations slot this week, the topic being birthday boy and recent Nobel prize-winner Angus Deaton.

I’ve prepared these slides:

Hopefully they are of use, I’ll be delighted if they generate some interesting discussion.

Deaton seems to be, by and large, a very empirical man, which means he has less inclination towards wild outspoken comments that might make a discussion spicy.

He’s advocated the use of more and more micro data in saying things at the aggregate level, the macroeconomy, so he’s far from irrelevant when it comes to us thinking about macroeconomics in the Spring, and such a focus on individual level, or disaggregate level data, does raise a question of how widely applicable any conclusions that can be drawn will be. Individual data is messy as a general rule, whereas aggregate data is that bit less messy (albeit full of puzzles due to the effect of aggregation).

Interestingly enough, this does appear to be his main criticism of the use of Randomised Control Trials (RCTs) in a lot of economic development work: do they reality apply more widely? An RCT is a trial in economics that resembles a medical trial – somehow the treatment is randomly administered in the population at large, allowing more to be learnt about the impact of that treatment than might be the case without random assignment.

Probably most controversially, Deaton has argued that foreign aid is useless – mainly because it undermines local governments, and he argues that poorer countries need their governments to function better in order for them to grow longer term.

See you at 1pm in HumSS 125!