The Political Economy Review 2017

The Political Economy Review 2017

19 th Edition

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Editor R ICHARD C LANCY

elcome to this year s edition of the Political Economy Review . We have had a rollercoaster ride of a year in politics and economics and our articles reflect that. With essays ranging from the stagnation of the Japanese economy, to ideological questions on free trade and austerity, and topical arguments related to Theresa May, Brexit and terrorism, we have an exciting batch of articles that members of the Remove have worked very hard to write. While this year continues to be dominated by Brexit, at least at home, it has been a strange but fascinating year in the realm of international politics and economics, with the US elections, the continued fallout of the 2008 financial crash, and the ever-deteriorating situation in Syria. Special mention must go to Conor Hughes, who has decided to tackle an extremely difficult question that is very close to Dulwich hearts on the charitable status of private schools, and to Jay Wong, whose excellent essay on the subsidising of job creation in the North of England is also being submitted to the Fitzwilliam College Cambridge Land Economy essay competition. The breadth and depth of this year’s articles only scratch the surface of the ability of the Dulwich Remove in the realm of politics and economics but represent an extremely high quality selection of powerful and interesting pieces. We are also proud of our continued support for the Dulwich College Bursary Appeal, to which all proceeds go. Enjoy reading!

Editorial Team A SHER L AWS B EN C UDWORTH LUKE WALKER TITLEY

-- A SHER L AWS

R ICHARD C LANCY / 5

Introduction

B REXIT

P ETER B RISTOW / 6

Brexit… What next for Britain?

The impact of Brexit on FDI in the UK R ICHARD T RENEMAN / 11 How will Brexit affect UK Research and Innovation funding, and should we care? A LEX W ARING / 14

H ARRY R OBERTS / 16

The long-run effects of Brexit on the UK economy

Should Theresa May resign as Prime Minister in the wake of the 2017 General Election?

C HARLIE P RIFTI / 17

L UKE W ALKER T ITLEY / 18

Leaving the Customs Union: Two Possible Scenarios

O THER

C ONOR H UGHES / 19

Should Public Schools retain their charity statuses?

A SHER L AWS / 21

‘Free Trade is a necessary evil’

F ELIPE B UNGE / 24

The Effects of the Drugs Trade on the Mexican Economy

C ARLO D WEK / 27

Oriental Stagnation

O CTAVE DE B AYNAST - C HEVAL & A LEX C LIGNET / 29

Macron and the EU

H IBBAN R AHMAN / 30

Bursaries: An Economic Analysis

B EN C UDWORTH / 31

Only Economic Neo-Liberalism is the answer

J AKUB P APAJ / 36

The Future of Multinational Corporations

J OE S NUGGS / 38

The Economics of Drug Consumption

J AMES P EARCE / 39

Are Football Transfer Fees Still Justified?

M ATTHEW B ARRETT / 40

Is the Age of Austerity Dead?

L OUIS W ILSON / 42

How recent terrorist acts have shaped the political climate in the UK

‘The best way to ensure affordable housing and a strong economy across the UK is to subsidise job creation in the North of England.’ Discuss. J AY W ONG / 43

R ICHARD C LANCY

Introduction

2017 has so far been a turbulent year for both economics and politics.

Last year’s edition of the Political Economy Review was dominated by one topic – Brexit. This year, even though Article 50 has now been triggered and negotiations to leave the European Union have now begun, the articles submitted to this journal, rather refreshingly, show that there is more to the world of politics and economics than Brexit (although many boys did still choose to write about the subject). I am delighted that, through this journal, we are able to publish a wide variety of articles and essays which showcase the talents of the boys in the Remove. The majority of those submitting a piece to this journal will go on to study Economics or a related discipline at university; though it is also notable that many are applying for other subjects, and have still chosen to contribute out of their own academic interest. The major news story of this year to date (beyond the already-mentioned triggering of Article 50) is without doubt Theresa May’s failed election gamble. In an attempt to secure what polls had suggested might be an increased majority, a General Election was called for Thursday 8 th June. Three weeks down the line, and May is still in power, but now, in a result that few predicted, she is the head of only a minority government, having garnered only 318 seats in the House of Commons, short of the 326 needed for a majority. The Conservatives, having formed a minority government, with the support of the Democratic Unionist Party, now look shaky at best, but, for now at least, hang on, opposed by a re-invigorated Labour party led by Jeremy Corbyn. However, there is little public appetite for another election any time soon. Who knows whether May will still be in charge next year? Elsewhere, Donald Trump is now in the White House, having seen off Hillary Clinton in November 2016, and Emmanuel Macron, whose new party “En Marche!” won a record majority this month, is the now the French President. A passionate Europhile, Macron will look to espouse the continued relevance of the European Union during this crucial time in its history. Meanwhile, in Germany, Angela Merkel contests yet another election in September. In macroeconomic terms, Britain is yet to feel the full effects of Brexit. To date we are still experiencing positive economic growth, although inflation is approaching 3%, the MPC’s upper bound. Unemployment remains low at around 5%, yet real wage growth and labour productivity levels continue to stagnate. We continue to live in uncertain times!

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The 2017 Political Economy Review offers a selection of articles written by the best of this year’s Remove economists. I hope that you enjoy reading…

R ICHARD C LANCY / [email protected]

My thanks go to Asher Laws, Ben Cudworth and Luke Walker Titley for their hard work in producing this publication.

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- BREXIT -

P ETER B RISTOW

Brexit… What next for Britain?

The most complex negotiations of modern times are underway, thanks to a decision made last June. Despite Brexiteers believing it is 'all over' and that the 16.1 million members of the 'liberal elite' should accept this, in reality, Brexit has only just begun. But what does this actually mean for Britain? I will make no secret of the fact that I believe Brexit is a totally unnecessary and disastrous decision, but I will seek to answer this question realistically, acknowledging the real challenges and opportunities (however limited) Brexit will bring; although, of course, this is only speculation. Firstly, some of the effects of Brexit have already been felt, which can help us predict longer-term consequences. Last June, pound sterling fell almost 15% against the dollar to a 31-year low, and this depreciation has persisted since. This, as shown by the almost over-night nature of the fall, was a direct result of the vote, as global financial markets feared for the future health of the UK economy. There has, in fact, been a

series of falls almost every step in the Brexit journey; when Theresa May decided to pull the UK out of the Single Market, the triggering of Article 50, and when her snap 'Brexit-election' went wrong and created further political chaos and economic uncertainty. The weak pound has also persisted because of the record-low 0.25% base interest rate, introduced by the Monetary Policy Committee immediately after the Brexit vote last June as a way of easing uncertainty and a predicted slump in demand. International investors have been discouraged from saving in Britain, thus a 'hot-money outflow' has contributed to this depreciation.

With this depreciation, came inflation - most notably cost-push inflation, caused by rising import prices pushing up prices along the supply-chain. This is a real concern as the UK is so heavily dependent on imported goods (one third of all finished goods in the UK are imported) and imported raw materials. UK inflation, according the CPI, now lies at 2.9% (Q3 2017), a massive rise from 0.6% this time last year, with many projections predicting 3.2% inflation for the fourth quarter of this year. This, of course, is a headache for the Bank of England as it is above the 2% inflation target and increasing, but more importantly, it significantly outstrips wage growth, which currently stands at 2.1%. This means that in terms of real incomes, on average, wages are falling by 0.8%, and if you work in the public sector (where the 1% pay cap still exists), wages are falling, on average, by 1.9% per annum. This should be compared to this time last year, when real wages were growing by nearly 2%, a huge shift. This, as Mark Carney confirmed in his Mansion House address on 20th June, is a direct result of the inflationary pressures caused by Brexit; hence, we should not be under the illusion that Brexit will not hurt ordinary working families. And this is set to worsen. Considering what has happened and the fact that the base interest rate is not set to rise in the immediate future, it is easy to predict that higher inflation and anaemic wage growth will continue to squeeze workers' pockets, increasingly so as higher prices continue to filter through supply chains to consumers. Brexiteers will be quick to mention that Brexit has, however, injected much-needed competitiveness in Britain's export market. Pound sterling has long been overvalued, hindering UK exports, and thus Brexit could go some way towards reducing the UK's massive current account deficit. In fact, many predict that the UK trade deficit will fall from 6% of nominal GDP to 3.5% by 2019. Brexiteers even suggest that this is an 'opportunity' to

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rebalance the economy, with the re-birth of UK manufacturing. Firstly, this is very unlikely given the extent to which the economy relies on services, and secondly, this 'opportunity' can only occur, of course, if foreigners buy British goods and services. They most probably will until March 2019 (when Britain formally leaves the EU), however, after that, the future is uncertain. Assuming Britain no longer enjoys the benefits of the Single Market and must form a new comprehensive trade deal with the EU, they most probably won't to the same extent, if varying tariffs are added on top. Even if the UK boosted demand in the form of exports, let's not forget how much we import, and hence, how much inflationary pressure there is going to be. This contraction caused by inflationary pressure vastly outweighs the possible improvement in the trade balance, as shown by growth figures since last June. UK GDP growth has slowed since last June, and Britain hasn't even left yet. In 2016, despite the Brexit vote, the UK economy grew by 2%, but now 'project fear' is turning into 'project reality'. The CBI predicts 2017 growth at 1.6% and 2018 growth at 1.4% driven by a fall in consumption. In the event of no deal, many leading experts are convinced a recession would unfold. However, these numbers do not tell the full story. Firstly, as mentioned earlier, this slowdown is eased by a rise in exports, which doesn't necessarily affect the ordinary consumer who is suffering from negative real wage growth. Furthermore, given the falling rates of unemployment we have seen, the economy should be growing, but it is clear that as real wages are falling, ordinary working families (or those 'just about managing') will have to reign in their consumption. Further evidence of a Brexit slowdown is that Mark Carney stated in his Mansion House address that 'now is not yet the time' for a base rate rise (despite rapidly growing inflation), as the MPC remains scared about the 'Brexit squeeze' on consumption. Mr Carney also clearly implied in his address that Brexit would make the UK

economy poorer. Along with Philip Hammond, he predicts further 'price rises and job losses' as the UK leaves the EU. A further sign of the dismal times is that the target to balance the budget has been postponed until 2025, due to Brexit. This, however, is not so the Treasury can end austerity, but to pay for the cost of Brexit. Austerity and its painful consequences will be extended due to Brexit as the government will receive less in tax receipts in the coming years. Therefore, by looking at what has happened and what is predicted, workers will be hit not only by

poor wage growth but by strained public services.

Britain's negotiations with the EU will, of course, be uncertain. However, there is something we do know - they won't go well (and there will be a significant administrative cost). What the government has done over the last year is all the proof you need.

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Primarily, the government has been deluding itself that Britain can have 'the exact same trading benefits outside the EU' to quote the Secretary of State for leaving the European Union, David Davis. This is simply not true, especially as the Prime Minister has ruled out staying in the world's largest trading bloc, not to mention the prospect of 'no deal'. Furthermore, the European Commission has made it clear that Britain won't enjoy the same benefits of being inside the Union once it has left, so it is clear that Mr Davis' vision won't go down well in negotiations. Secondly, Mrs May's mantra that 'no deal is better than a bad deal' is not only fiction but also very dangerous for the UK economy. As I will explain later, a 'cliff-edge' Brexit will mean a major economic shock for the UK economy, much worse than we have seen to date. Not only this; the cabinet itself seems confused about the consequences of 'no deal'. The Chancellor has recently warned of the dangers, stating 'no deal' would indeed be a 'very, very bad deal'. It appears to me rather contradictory that a 'very, very bad deal' is better than a 'bad deal'. Walking into the negotiations as the bully threatening to walk out doesn't seem to be the best way to secure a 'deep and special partnership between allies'. Furthermore, the government's version of megaphone diplomacy is not only outdated and arrogant, but not helpful in terms of the negotiations. Accusing Europe of interfering in the general election, characterising herself as a 'bloody difficult woman' and threatening to undercut her European partners by creating an unregulated tax-haven off the coast of Europe doesn't strengthen her hand but only antagonises already tough/emotion-driven negotiations. Moreover, I don't believe the Brexiteers' utopian 'Brexit deal' is at all plausible; it is clear that the UK has the weaker hand in the negotiations. On a simple level, there are 27 of them (including major global players - France, Germany, Italy etc.) and only 1 on the other side. In addition, the very nature of Article 50 of the Lisbon Treaty ensures that the leaving state is in a weak position. According to the former Italian Prime Minister Giuliano Amato who wrote it, it was intended to be a 'punishment mechanism' to discourage such a move; he also added that 'when it comes to the economy, they have to lose'. Article 50 is unrealistically restrictive and has no mention of a 'future relationship', so Britain will have to flirt its way to securing a deal upon which 27 member states will agree, which the UK government most certainly is not doing. Furthermore, one of the UK's greatest weaknesses is that, fundamentally, it lacks the manpower; there is a significant shortage of trade negotiators and analysts on the British side (the main reason being that Brussels has negotiated on Britain's behalf for nearly half a century and hence it has not needed its own negotiators). Recruited civil servants do not compare with Brussels' team of negotiators. Britain's weakness is greatly contrasted with the newly-found strength in the EU; some Eurocrats are predicting a more prosperous Europe post-Brexit. All 27 remaining member states unanimously backed the Commission to negotiate on their behalf in minutes (the most unified the Union has been in quite a while), the Eurozone's economy is back on track and the newly-elected French President Emmanuel Macron brings greater confidence in Brussels. Recent events have brought this contrast into sharp relief. Macron has secured a massive mandate for his pro-European stance with his landslide victory in the French parliamentary elections (securing 350 out of 577 seats), and indeed the UK general election, where there were no winners (except perhaps Michel Barnier and the Commission negotiating team), has resulted in the weak and wobbly Conservative Party scrambling to hold on to power. Theresa May is still (at time of writing) trying to secure a deal with 10 DUP members to ensure she has a workable majority in parliament. This is not only terrifying for the future of Northern Ireland (as I will explain later) and an embarrassment for the Tories, but a further weakness in Britain's negotiating position, as there is a real risk that Parliament could reject the Brexit bill in 2 years' time. Frankly, if she can't negotiate with Arlene Foster, how does she have any hope with the European Commission with a spring in its step? We also know that the 2-year deadline is totally unrealistic. The EU has never secured a trade deal in this timescale (on average, comprehensive free trade deals take 4-5 years to negotiate), let alone a deal this complex

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which involves an administrative Brexit, a legal Brexit and finally a trade Brexit. Let's not forget that the countdown has started and that around 3 months was wasted with a general election and that the Germans will be pre-occupied later this year with their own election. In reality there is little more than a year for talks themselves. It seems inevitable that a transition arrangement will emerge, but under what terms? We do not know. Last June, the referendum asked the electorate whether Britain should remain or leave the EU, and hence there is a mandate to leave the EU. To quote Ian Dunt, 'the referendum settled a question. It did not shape the answer.' This is because it is not like leaving a golf-club. There are many different versions of Brexit: hard, soft, cliff- edge, fast, slow, open, and even 'red, white and blue', each with different consequences. The Tory government has selected the 'hard' option from this menu, extrapolating its own mandate from the referendum result. Apparently the government has a mandate to leave the Single Market and to prioritise hostile sentiment towards immigration over the economy. It doesn't; not only because this wasn't on the ballot paper, but also because 42% of leave-voters (according to YouGov) would like Britain to follow the Norwegian-style option, whereby Britain leaves the EU but remains in the Single Market. Even Mr. Farage has spent his career calling for us to be like Norway or Iceland. Hence, there is by no means majority support for a 'hard' Brexit, clarified by the election result where 57.6% rejected this vision. However, the approach doesn't seem to have changed. Theresa May's 'hard' Brexit means Britain leaving the Single Market and making UK families poorer. 45% of UK exports and 53% of imports depend on the Single Market, guaranteeing tariff-free and barrier-free trade at present. Clearly if Britain left, it could not enjoy the benefits of trading with 500 million consumers in the same way. The UK, depending on the new deal, could be subject to export tariffs as well as other non-tariff barriers/ regulations. It is also important to point out that once Britain leaves this market, it will lose the 56 free-trade deals which it had with the rest of the world as an EU member state. Therefore, the UK will have no free-trade deals until all these bi-lateral agreements have been negotiated, which each take years. This is estimated to cost the UK billions of pounds annually. Mrs May seeks to negotiate a free-trade deal with the EU (like the US and Canada have), to gain access to the Single Market, but to do this, the UK will need to accept a lot of red-tape dictated from Brussels, over which the UK would have no control. This also means accepting the authority of

the ECJ (European Court of Justice), which David Davis and his Brexiteer friends will not accept. Thus, there is a major issue in the government's 'hard' Brexit plans. Not only will it cost the UK billions (on top of the multi-billion divorce settlement), tightening the squeeze for consumers, but there is also a prospect of no deal i.e. 'cliff-edge' Brexit. This is the worst possible deal, meaning no co-operation between the UK and EU and the UK being subject to WTO tariffs on all trade to and from the EU. These include a 59% tariff on beef, 40% on cheese, and 10% on cars, pushing up prices drastically in the UK. Leaving the Customs Union would also create chaos in Ireland and make border controls more complex. Thus, even the possibility of 'no deal' is terrifying. Although the Brexit team seem to have ignored the election result, many leading members of the party and business

leaders are calling for more cross-party consensus about the approach to Brexit. They highlight the realities of a 'hard' Brexit and demand a 'soft'/'open' Brexit, whereby the UK joins the EEA (European Economic Area) -

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outside the EU but inside the Single Market. This way, the UK economy can be put first, protecting jobs and livelihoods. This is essential to stop thousands of jobs being moved from the UK to the Continent (which has already started in London). This is the only way to ease the 'Brexit squeeze' on consumers and ensure the economy suffers minimal damage. It is, frankly, shameful and irresponsible that the government decided to take the best deal off the table before negotiations even began. Since the election and the somewhat desperate talks with the Democratic Unionist Party (DUP) started, it has all become even more complicated and difficult for the Tories. The DUP, despite having links to terrorists and rejecting climate change, may help us secure a 'softer' Brexit. They are adamant that Britain does not leave the Customs Union, for fear that a hard border will emerge with the Republic. Therefore, it is likely Parliament will reject a very hard Brexit. However, that is not to say the DUP deal is a good thing, especially for the 2 million people living in Northern Ireland. This arrangement with the government is certainly contrary to the Good Friday Agreement, as it is impossible for the government to stay neutral when it relies on the unionists for support. It seems as if direct rule from Westminster is now inevitable as the Stormont Assembly has totally collapsed, a catastrophe for the peace process and the people of Northern Ireland. In terms of Brexit, although both parties don't want a hard border, there may well have to be one if Britain leaves the Customs Union, to stop Ireland from being a back door into the UK for EU migrants. This would damage both economies and the livelihoods of those near the border, taking them back to an infamous era. There are numerous other ramifications to leaving the EU, many of which have been scarcely mentioned, yet need to be considered as they will significantly affect our lives. Firstly, a grave threat to our society, terrorism. The Schengen Information System >Page 1 Page 2 Page 3 Page 4 Page 5 Page 6 Page 7 Page 8 Page 9 Page 10 Page 11 Page 12 Page 13 Page 14 Page 15 Page 16 Page 17 Page 18 Page 19 Page 20 Page 21 Page 22 Page 23 Page 24 Page 25 Page 26 Page 27 Page 28 Page 29 Page 30 Page 31 Page 32 Page 33 Page 34 Page 35 Page 36 Page 37 Page 38 Page 39 Page 40 Page 41 Page 42 Page 43 Page 44 Page 45 Page 46 Page 47 Page 48

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