The Political Economy Review 2016

The Political Economy Review 2016

18 th Edition

Brexit: I don’t have a vote but I do have an opinion – p6 Luke Henderson African development through finance – p27 Khalil Gbla

Patents and monopolies – p30 Kenza Wilks

elcome to this year’s edition of the

W ,

Editor R ICHARD C LANCY

Political Economy Review. We hope you enjoy the diverse range of articles and reports detailing the political and economic thoughts and reports of the Remove year at Dulwich College. This year’s edition has been dominated by the UK’s momentous decision to leave the European Union: from essays focusing on political issues such as the effect of increasing refugee acceptance and the hypothesizing of new methods of refugee re- distribution to the more important question of what the price of strawberries will now be. Although the outcome of the referendum didn’t quite go the way many of the boys had hoped (a College poll of 346 boys and staff put remain ahead 74.9% to 25.1%) it will at the very least shape textbooks and curriculums for generations of economics and politics students to come. In this edition of the PER, students dabble in topics as wide ranging as the French infatuation with calling strikes, to the justification of austerity, to the price of housing across the country, with clarity and thought-provoking economic analysis. With many of these essays set to be submitted to prestigious competitions such as the RES Essay Prize or the Cambridge R.A Butler Prize, they truly are of the highest calibre. As ever, we are proud to be supporting the Dulwich College Bursary Appeal which helps to ensure that the education of future and current Alleynians is continuously supported regardless of their parents’ ability to pay the fees.

Editorial Team K ENZA W ILKS K HALIL G BLA L OUIE M URPHY

Design and Layout K HALIL G BLA

-- K ENZA W ILKS & K HALIL G BLA

R ICHARD C LANCY / 5

Introduction

B REXIT

L UKE H ENDERSON / 6

Brexit: I don’t have a vote but I do have an opinion

M ATTHEW K EMPTON / 8

Strawberry fields forever?

How has EU legislation concerning agriculture and the Single Market impacted the UK?

M ICAH R OBERTS / 9

M AURICE C HAN / 12

Brexit: Aftermath

What are the possible developments between the UK and other economies after Brexit?

Z ED C HEN / 15

E NRI S OPOTI & T OMMY C HEN / 16

The impact of the UK’s EU referendum

C ARSON C HAN / 18

Should the UK leave the EU?

O THER

J ASPER G OODSELL / 20

What are the economic implications of the Rio Olympics for Brazil?

A DAM B EESE / 22

Why are the French always on strike?

#FeelTheBern – The significance and influence of Bernie Sanders’ presidential campaign

T IMOTHY L O / 23

R OHAN M ISTRY / 25

Should economists rule the world?

K HALIL G BLA / 27

The roles of micro and macro finance in the development of Africa

Should we have patents on companies that threaten to hold monopoly, offer essential services or are critical

K ENZA W ILKS / 30

for saving the planet?

C HRIS A NNOUS / 32

Should private schools implement progressive fees?

L AP H ANG T ONG / 35

A resident’s take on Nine Elms

N ATHAN E MOIKE / 36

Is austerity justified?

S ELVIN S ELBARAJU / 37

Is immigration beneficial for refugees and the economies they come to?

O LIVER W OODCOCK / 42

The ever-growing problem of UK house prices

G IACOMO S KEATE / 44

Should internet companies like Uber and Airbnb be regulated?

R ICHARD C LANCY

Introduction

2016 has so far been a challenging year for both economics and politics, and it looks set to get even more difficult.

Terrorist attacks in Paris last November and in Brussels this March killed over 160 people – the deadliest attacks on major Western European cities in recent memory. Sadly, events of this sort seem to be increasingly common; indeed at the time of writing Istanbul also faces a period of solemnity as it too suffers from the aftermath of an attack on an airport. The rise of so-called Islamic State continues to dominate popular media in the wake of these events. In addition, the murder of Jo Cox MP was truly a tragic story, the like of which has not been seen since the days of the IRA. However, the major news story of this year to date remains one of the British electorate’s choosing: on June 23rd the British public went to the polls to vote in a referendum on the United Kingdom’s membership of the European Union. Despite reports suggesting that the campaign to remain in the EU still held a small lead prior to the polls opening, voters awoke the following morning to find that the reverse had happened: the Leave campaign had garnered 52% of the vote. The UK had voted to leave the European Union. In the days since the referendum, British economics and politics has received a severe wake-up call. David Cameron announced his resignation as Prime Minister declaring the need for ‘fresh leadership’ to lead the exit negotiations and invoke ‘Article 50’, triggering a leadership contest in which it seems Boris Johnson is the front-runner. Jeremy Corbyn still clings on defiantly, despite a 4 to 1 majority vote of no-confidence from within the Labour party. It looks unlikely he will last much longer.

Britain looks set to slip into recession, as it faces the consequences of downgraded credit-ratings, a catastrophic fall in the value of the pound (though at the time of writing it seems to be levelling out at £1:$1.32 – see chart), and uncertainty over firms’ employment situations, and what the terms of our EU divorce will be. Furthermore, it seems likely that whoever steps in at Number 10 will call a snap general election to provide them with a mandate for rule. It remains to be seen what happens over the coming weeks, months and years: we are now in unchartered territory. With the refugee crisis in Europe not showing signs of slowing, the prospect of Donald Trump in the White House, and all the uncertainty surrounding Brexit, there are certainly challenging times ahead. Who knows what I’ll be writing in a year’s time!

The 2016 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 Kenza Wilks, Louie Murphy and Khalil Gbla for their hard work in producing this publication.

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- BREXIT -

L UKE H ENDERSON

Brexit: I don’t have a vote but I do have an opinion

As a Dulwich College economics student, I have been fascinated by the recent departure of the UK from the EU both from an economic and personal perspective. I didn’t get a vote, but I do have a strong opinion; I’d like to explain why I believe the result is the wrong one for my generation. There is still uncertainty on the outcome with the Labour party in disarray, Scotland and London holding a strong view with over 60% wanting to remain in the EU, and no indication of when (or if) article 50 might be implemented. Therefore, a calm, informed discussion on this subject still could have an effect on the outcome. The democratic decision was close, though clear. Understandably there has been a strong backlash asking the government to revoke the public’s decision to leave the EU, but there are still reasons to stand by the outcome of this referendum. One of the most persuasive is to ‘take back control’ from what is widely seen as an inefficient, possibly corrupt, and certainly aloof unelected administration in Brussels. This bureaucratic system seems far removed from the best interests of the UK in the long and short term, and the expansion of the new countries has meant that UK ‘control’ recedes further as the EU grows. This strong feeling comes hand in hand with a desire for independence and a wish for the ‘good old days’; for Little Britain to rise once again, especially among the older demographic. There is widespread disillusion with the political classes creating a strong populist protest vote, although the logic of this is very weak - this ultimately life-changing decision is about leaving the EU, not choosing an alternative government. We could also argue that many people based their decision on the threat immigrants seemingly pose to people’s jobs and a general consensus that they don’t benefit the economy. The Leavers’ argument was that five more countries on the verge of joining the EU, such as Turkey (although that seems unlikely anytime soon), could lead to an exponential rise in migration of people to our country (as well as Germany and Western modern economies) and a threat to jobs and housing availability. On the economic side, leaving the EU gives the UK opportunities to expand their export interest to other countries such as China and other BRIC’s and NIC’s that are growing rapidly and could become key trading partners. Even if there are more tariffs to other countries, this potentially strengthens our economy because we would be forced to rely on ourselves in domestic products whilst solving the current account debts; killing two birds with one stone. According to Leave, we could also keep the money we currently send to the EU, all of the ‘£350 million’ to be part of the commission that we could spend on arguably more beneficial instruments to the UK economy (e.g. the NHS, although this was later retracted as a policy by the leave campaign). Finally, the depreciation of the pound we have already seen could be seen as a positive factor for the leave camp; with cheaper exports so, consequently, greater aggregate demand, although this would be a trade-off for a greater expense on imports. So there is a case to be made for leaving the EU. But the huge majority of economists and large analytical firms have overwhelmingly judged that it would be a bad idea to leave the EU. Why? We can safely say that guaranteed trade with the EU wouldn’t reach its previous level for several years after article 50 is implemented. Along with the free movement of people being restricted, the implications of this would be rises in wage prices due to less supply of workers to the market, therefore an increase in costs of production. So, if everything stayed the same, supply would actually fall causing a retraction of growth which

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can be catastrophic for any economy, especially when we have only recently started to recover from the 2008-9 recession. Fewer jobs and a decrease in growth would create uncertainty among businesses and consumers. This could mean that delayed consumption will become a threat along with malign deflation followed with, potentially, a decrease in the standard of living that would rupture all of the government’s efforts of returning GDP per head to 2006 levels. On the effect of migrants to the economy, one could argue they actually put more benefits into the economy than they take out with a report suggesting that migrants have contributed over £25 billion net since 2000. However, a very, in my opinion, controversial point is that many believe the ability for poorer communities to access the opportunities that Great Britain offers should only be given if these communities are able to contribute to our economy if they so wish to encourage growth in their home country too. To me the world is only as strong as its weakest member; we can start by modernising the rest of the EU to the standard we live in today. Even if you are still adamant that migrants can’t benefit our economy, the leave campaign has not promised any improvements. In fact, by retracting their policy of making the migrant situation better and because we wouldn’t actually be able to send anyone away, we aren’t ‘taking back control over our borders’! Another reason why many people chose to leave was the £350 million to Brussels campaigners promised would be redirected to the NHS, a policy later denied by Nigel Farage and others; Leave voters have been lied to. This sum of money isn’t even a large enough proportion of the economy to make a difference; on any calculation it is less than the benefits the EU brings to the UK. The prosperity of the UK, including subsidies to areas that voted Leave, is largely dependent on a successful finance sector. However, banks and investment firms thrive from the agglomeration of capital and information. Being isolated from Europe would therefore have a strong negative effect and could be an incentive to relocate to Paris, Brussels or Frankfurt (a relatively easy task for them) taking the contribution of this huge sector away from Britain. This became clear to me recently when a group of Dulwich College students visited Blackrock, an asset management company. Here, analysts were clear their situation in the global market would falter outside the EU so the firm would have to relocate. While the emotion is understandable, the rational case for ‘beating the banks’ is hard to follow. As well as a vast contribution to our GDP, the sector has become more compliant with regulation, as well as creating a path for our economy to recover from the recent recession. Why would we want to erase this? Finally, politically this has already been a disaster with the Labour party collapsing, Scotland now willing to separate from the UK and, as a ‘lame duck’, Prime Minister David Cameron is unable to lead us to safety from this turbulent period. Personally, I see tension and uncertainty as the immediate results of this referendum. My brother, sister and I do not know how our education experience will be affected and what the job market will look like in the coming years. My father’s firm is already in negotiations with his international clients who cannot plan or invest with confidence. Therefore, for us (a personal belief), a vote for leave is a vote against a system which, while imperfect, works. The anger of people who feel they have no stake in the global future of our country, and an expression of distrust of the establishment, is understandable. I have met very intellectual and persuasive Leave voters who have eloquently urged me towards scepticism of the EU and an understanding of the potential benefits that could arise from leaving it. The economic and social case is balanced and complicated and the referendum result may even be a fair reflection of that balance.

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But I would still have voted to Remain if I had the power because for me, there is an even stronger emotional argument for Remain. My view of the future lies in the world moving toward a closer community where war is less likely and in which everyone has a greater possibility to thrive. Both are better achieved by bringing ideas, capital, and people closer together. That is why we should remain part of the European Union.

__________________________________________________________________________________________

M ATTHEW K EMPTON

Strawberry fields forever?

In 2015, over 80 thousand tonnes of strawberries, a fruit that is grown in the UK, were sold in Britain. And yet most people wouldn’t realise what a huge influence the EU has on the sale of strawberries. The EU plays a huge role in giving subsidies to farmers; it spends 40% of its annual budget on farming subsidies, equating to £45 billion. Should we leave the EU, famers will continue to need such subsidies, otherwise we face food prices increasing (as farmers will need to raise prices to maintain profit margins), or farmers going bust, neither of which are beneficial to anybody. Leave campaigners often argue

that money saved on the EU membership fee could cover the cost of subsidising farmers. Meanwhile, remain campaigners argue that exiting the EU, and thus likely having to abandon free trade, will result in a slowing, or even declining economy. Because of this, the Government won’t be able to cover the cost of subsidising farmers. Should this be the case, we could see unemployment significantly increase in this sector, or an increase in food prices, in turn decreasing the spending power of households across the country. Importing food is also an unattractive option. A “Brexit” would likely lead to a decrease in the value of the pound, due to uncertainty over the state of the economy and future trade deals. As a result, international investors may well pull money out of the UK, decreasing the demand for the pound. Combine this with additional trade tariffs, and we could end up paying high prices for imported food. An obvious solution, trade agreements, would certainly help, however these are unlikely to lead to a revival of the pound, and could potentially take years to complete. Another role that the EU plays is the setting of regulations. This is strict even for a simple product, such as strawberries. In order for a strawberry to make it onto the shelves it must comply with rules surrounding shape, size and colour. Strawberries must be “Fresh in appearance, but not washed” and “free of abnormal external moisture.” On top of this, the leaf must be fresh and green, and a minimum of 18mm wide. Should we leave the EU, and abandon the regulation, we could see a drop in the quality of food on shelves. In actual fact, British regulation is stricter than EU regulation for most foods. We require higher meat content in sausages, safer pesticides, and cleaner egg farms. Therefore, it is unlikely that we would see a drop in quality. However, leaving the EU certainly would give us more freedom over the regulation. If at some point in the future we decided that regulation was either too strict or not strict enough, it would be much easier to make

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adjustments by tightening or loosening the regulation. Having said this, any products we export to the EU will still need to comply with EU regulation, meaning that most farmers would continue to obey the same rules they do now. In 2015, 73% of our food and drink exports were to the EU. As this figure is so large, we’ll still be tightly bound by EU regulation regardless of whether we leave or remain. Leaving the EU would certainly result in a lower level of EU immigration, a fact accepted by Migration Watch, most political parties, and most MPs. This is particularly important for certain sections of the food market the majority of strawberry-pickers are from Romania and Bulgaria and are allowed to take up UK jobs due to the Free Movement of Workers EU policy. Although these types of jobs could become available should Britain leave the EU, according to Elaine Clarke, a strawberry farmer, “it has become impossible to get local people interested in fruit picking 1 ” So how easy would it be to fill jobs at the current wage level, which seemingly only EU immigrants are willing to accept? There is a growing amount of evidence suggesting that cheap labour is leading to a decrease in British workers’ pay. Could Britain leaving the EU lead to an increase in pay for the lowest pay bracket? Would this equally lead to further food price increases? For centuries the UK’s Parliament reveled in full-blown sovereignty granted by the ‘doctrine of Parliamentary sovereignty’ (that our uncodified constitution relies on), essentially meaning that Parliament is subject to any form of ‘higher law’ and can make and unmake any law. Some of this much-loved sovereignty was ceded to the European Union as a result of the landmark ‘Costa V ENEL’ case that was taken to the European Court of Justice. This case concluded that “member states have limited their sovereign rights… and have thus created a body of law which binds nationals and themselves.” It was reluctantly acknowledged under the leadership of Edward Heath in the 1972 European Communities Act. There is much debate as to whether EU legislation has significant/far-reaching impacts on the UK economically and whether the benefits of experiencing the Union’s legislation exceed the drawbacks. To quote Nigel Farage, does EU legislation concerning agriculture and a 500 million-consumer single market really render the EU a “Union of economic failure, of mass unemployment and of low growth?” Legislature in the UK must comply with regulations regarding agriculture. It has seen scathing criticism by many for not allowing farmers and growers to respond effectively to market forces. Even our current Conservative government committed the party to an attempt to reform this aspect of EU policy (Common Agricultural Policy 2 ) in their manifesto. At the moment, the current powers of the European Union to legislate in respect of agriculture are showcased in articles 38-44 of the TFEU (Treaty on the Functioning of the European Union 3 ). These articles establish that the EU must implement a ‘Common Agricultural Policy,’ thus extending the ‘Single Market’ to agriculture and trade in agricultural products. Although the articles in the TFEU extended the areas of agriculture and trade in agricultural products to the ‘Single Market’, the legislation also made the areas subject to a certain combination of rules that don’t apply to other products traded in the single market. These areas included regulation of pricing and supplementing the marketing and production process of agricultural products. __________________________________________________________________________________________ How has EU legislation concerning agriculture and the Single Market impacted the UK? M ICAH R OBERTS

1 http://www.bbc.co.uk/news/uk-36574769 - Graham Satchell (20/06/2016) 2 The Agricultural policy of the European Union that implements a system of agricultural subsidies, and other programs. 3 One of the Two primary treaties of the European Union (alongside the treaty on European Union), it states EU law and sets out the scope of the EU’s authority to legislate.

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With regard to the agricultural legislation’s effect on the UK economy, the National Farmers Union (NFU) believes membership of the Single market decreases food costs for consumers. The NFU stated that the UK imported £28.9 billion worth of agricultural products from the EU in 2012 and that the cost of imported products from Europe would rise notably for consumers in the absence of the free trade in agricultural products (assuming tariffs would be imposed if the UK were outside the EU). More recently, Peter Kendall, former NFU president, stated in the run up to the EU referendum that “Leaving risks higher prices for families to put food on the table.” It is evident higher domestic prices can ensue as a result of the loss of the hefty subsidy British farmers receive per annum (between £2.4bn and £3bn) from the EU. The loss of this subsidy is likely to increase the costs of production for farmers, reduce the general supply of British agricultural produce to the market and, consequently, raise prices. Legislation within the TFEU that establishes the

‘Common Agricultural Policy’ (CAP) is also of huge economic significance; The UK government aimed to help the UK farming industry become more competitive and responsive to signals of the market, since the CAP (that the UK is subject to) is accompanied with ramifications for the farmers market orientation 4 . The ramifications are the overproduction of agricultural goods by insulating farmers from the market forces of supply and demand, since farmers make up 3% of the EU’s population but still receive circa “30%” of the EU’s total budget through the CAP (according to the European Commission). Although a free market solution would ensure a better allocation of resources, this would be at the expense of the food security that the CAP provides. Without the CAP we would be too reliant on more volatile imports. During a time where global warming is impacting harvest it’s increasingly important that we ensure stable food supplies at reasonable prices through the CAP. Prior to the ‘four freedoms’ 5 being enshrined in EU law by the passing of the Single European Act 6 (1987), all legislation covering the ‘four freedoms’ (that constitute the ‘single market’) had to be agreed unanimously by EU member states. The creation of the ‘Single Market’ involved the establishment of a free trade area (removal of tariffs and quotas between member states) and went further to establish a customs union (creating a common tariff imposed on rest of the world). Theoretically, the establishment of the ‘Single Market’ would mean increased competitive pressure on domestic markets (due to the greater choice available for consumers), increased trade between member states, and general diversion of trade from third countries. Additionally, firms are able to operate on a larger scale whilst engaging in business activity as they would domestically and achieve a better allocation of resources (e.g. by carrying out production where it is most efficient: enabled by the ‘free movement of capital’). Gains with regard to economic performance may be ‘static’. For example, a rise in real national output due to a more efficient use of resources (e.g. due to the free movement of labour) and increased specialisation (due to the fact firms can operate on a larger scale), all of which could see an outward shift in short run aggregate supply.

4 A business approach concerned with identifying and meeting the needs/wants of consumers 5 The free movement of goods, capital, services and people 6 Set the European Community the objective of establishing a single market by 1992, and codified the ‘European Political Cooperation’ (precursor to the European Union’s Common Foreign and Security Policy)

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However, the UK could also see ‘dynamic’ gains, such as an increase of the trend rate of growth (currently 2.5%), through firms experiencing greater competitive forces from the 27 other member states (which encourages research development), a greater supply of labour (combating the shortage of workers in essential industries due types of unemployment typical to the UK: such as structural unemployment exacerbated by hysteresis), and greater innovation (since it’s easier to exchange ideas across national borders within the Union). This would increase the quality and quantity of the factors of production available the UK, consequently fueling the trend rate of growth. These theoretical economic benefits arising from the establishment of the ‘Single market’ and its function of integrating of the Union’s member states are evident in practice. The HM Treasury concluded in 2005 that specifically UK trade with EU member states increased by 7% as a result of the ‘Single Market’. Contrary to popular belief, this was only at the expense of a proportionately higher diversion of trade from ‘third countries’ (which in reality was only 4%). Although the UK reaps the benefits of integration of EU members due to the single market, this integration does indeed differ from sector to sector. Economists like Professor Alasdair Young argue that the integration of services within the EU has not progressed as much as goods so the loss of access to this part of the single market would have little significance, especially since the UK economy is service based (according to the Financial Times, services currently make up 80% of the UK economy). Furthermore, in practice, although EU single market legislation allows for the free movement of labour, labour markets are still not very integrated. Wage dispersion levels are much higher than one would expect. This is partially due to the low levels of labour mobility (comparatively with nations like the USA). This largely results from the linguistic and cultural barriers within the European Union that hamper assimilation of many citizens of the member states to work productively with UK nationals. It is difficult to isolate the impacts of the Single European Act (1987) on economic growth due to contribution of wider developments towards the UK’s real national output. Wider developments in recent years include the general movement towards trade liberalisation in the global economy, the addition of members to the EU, and the fluctuating supply of tradable goods make it difficult to identify the consequences solely of the European Single Market. However, most studies present the argument that the Gross Domestic Product of the UK (and even the EU as a whole) is considerably greater than it would be without economic aid and European integration supplementing our economy’s existing prowess. Prior to the establishment of the ‘Single Market’ program in 1992, predictions concerning the rise in Gross Domestic Product that the ‘Single market’ would bestow were quite ambitious: such as the Cecchini Report 7 of 1988 . Contemporary studies such as Monti and Buchan’s findings in 1996 showcase that whilst the Gross Domestic Product increased upon the establishment of the ‘Single Market’, this increase was not as significant as prior predictions hoped for. Moreover, in 2007, the combined studies of Dierx, Kavocs, Ilzkovitz, and Sousa showcased that without the establishment of the ‘Single Market’ EU Gross Domestic Product would be 2.2% lower and lack the additional 2.75 million jobs created within the Single Market. Leave campaigners, like Boris Johnson and Michael Gove, would argue that these economic benefits obtained as a result of being a part of the ‘Single Market’ are undermined by the fact we send “£350 million a week to Brussels.” The use of this evidence does give their case some verisimilitude, however it is misleading since it doesn’t take into account the money we receive back from the EU acting as an injection into our economy (e.g. farmers subsidies handed out to UK farmers due to the Common Agricultural Policy). In conclusion, it’s evident that, although the legislation concerning agriculture and the ‘Single Market’ have their pitfalls and are a manifestation of sovereignty we have ceded to the European Union, these two huge aspects of the EU’s legislation protect the interests of individuals and have contributed the UK’s current title: “the fifth largest economy.” I do not believe the UK has “had enough of experts” (- Michael Gove), nor do I believe “taking back

7 Indicated that GDP could rise by 4.25-6.5% as a result of the Single Market 1992 program

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control” of economic turmoil in order to repeal the EU’s flawed legislation is the right path to venture down for our country.

__________________________________________________________________________________________

M AURICE C HAN

Brexit: Aftermath

On 23rd June 2016, the United Kingdom held a national referendum to decide whether it will stay in the European Union. Being in the European Union brings many benefits, such as having free trade with other members of the union as well as having free movement of labour. However, there are also costs of being in the European Union, especially for a country such as the United Kingdom. These include huge funding to the union itself to support its operation costs and lack of border controls. Citizens of the United Kingdom had to reach a smart judgement as to whether the country should leave or stay in the European Union. The results were announced the following day after the voting, and the majority (51.9%) voted for the UK to leave the EU. David Cameron, The Prime Minister of the United Kingdom has announced that he will step down from his position within three months as a result. The results have sparked huge amounts of controversy and made people realise how much of a divided nation the United Kingdom actually was. Here is a rather brief analysis of the effects of the referendum results on the UK.

One of the key factors with regard to what the future holds is the significance of the referendum. Usually countries have safeguards against referendum results in case they could not reflect the general stance of the public. For the UK, this safeguard is the fact that referendum results are only advisory. This means that the government can actually disregard the results of the referendum to do what it deems best for the country. However, the chance of that happening is rather slim, as the UK is a democratic country. There were also pleas to hold a second referendum, supported by an online petition. However, David Cameron’s spokesperson said the possibility of the second referendum was “not remotely on the cards”. The current government seems determined to follow through and comply with its citizen’s decisions. David Cameron has said he will allow his successor to start negotiations about the details of leaving the EU. This includes triggering Article 50 of the Lisbon Treaty, which states “the Union shall negotiate and conclude an agreement with that State, setting out the arrangements for its withdrawal”. This is to be done within two years once a formal declaration is made.

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Leaving the European Union is certainly going to have an impact on the UK economy. Almost immediately after the referendum results were announced, the exchange rate of the sterling dropped to a 31-year low. This was due to the very low consumer confidence caused by the instability leaving the EU would bring to the UK economy. This depreciation in the pound will decrease the price of exports and increase that of imports, causing exports to increase in competitiveness while that of imports to decrease. This causes aggregate demand to increase, causing demand pull inflation and positive economic growth. Costs of production are also increased as imports are a key part of firms’ production, which cause short run aggregate supply to decrease, causing inflation and reduced economic growth, in a phenomenon known as cost push inflation. Despite the depreciation of the currency slowing down, it shows how much of an effect the EU membership can have on the UK economy. The long term economic effects of the UK leaving the European Union depend on one huge factor, which are the negotiations and transition taking place after Article 50 of the Lisbon Treaty is triggered. Currently, the UK has around 40 countries which it has free trade deals with thanks to its EU membership. However, it has to pay a membership fee to allow the European Union to operate. The UK will likely attempt to ensure that the free trade deals that the UK currently has remains unchanged. However, some have expressed concerns that the EU is likely to be stringent with the exit of the UK from the EU to make an example for other stronger countries in the EU such as Germany. If the EU decides to be lenient and allow the UK to retain its free trade deals, then not much is going to change in terms of trade. However, if the EU were to in any way restrict the UK’s mean of trading, it could deal a major blow to the UK economy. Currently, the UK is suffering from a current account deficit, which means the value of its imports exceeds that of its exports. Decreasing the current account deficit is one of the objectives of the government, but it may increase following its exit from the EU. If the EU were to stop the free trade deals, the UK will lose one of its major exporting partners. This will reduce its exports and worsen the current account. As a result, aggregate demand will decrease, causing disinflation or even deflation as well as negative economic growth in a phenomenon known as malign deflation. This may even cause a deflationary spiral, a situation caused by delayed consumption as a result of deflation which constantly causes decreases in aggregate demand. Leaving the European Union may also cause a drastic decrease in foreign investment. Before Brexit, the UK was very successful at attracting investors as it plays a huge part in the EU and has a large amount of its stock. However, Brexit will make the UK a less appealing place to invest. The main reason is that the UK will have tougher restrictions which make it more troublesome for foreign companies to set up factories and offices in the UK. This decrease in investment will also cause a decrease in aggregate demand, resulting in deflation and negative economic growth. Moreover, the decrease in investment may cause a decrease in long run aggregate supply of the UK economy, also known as the productive potential. This may cause the economy to ‘slow down’, and suffer a decrease in long run growth. From an economic perspective, the costs of leaving the European Union far outweigh the advantages. Immigration is another factor which will change after Brexit. The government no longer needs to follow EU regulations after Brexit, and can now establish a better immigration system, allowing the more talented in and others out. Immigration is one of the main reasons that people support Brexit. More stringent border controls can reduce local competition for jobs, as well as relieving the heavy strain on the NHS. However, the UK will also likely be a less attractive place for talented individuals as there are more restrictions on border control. Furthermore, Brexit has caused many hidden problems to surface, such as a divided country and prejudice

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against ethnic minorities. The UK will have less talented people from abroad arriving to work or study, which in turn will inevitably reduce labour productivity and its productive potential in the long run.

It is simply impossible to fully predict what is going to happen to the UK following the referendum, but the impacts are definitely huge and will last for many years to come. The referendum has shown how divided the UK is as a nation, and it is blatant that we need to unify to move on and achieve greater heights from multiple perspectives.

References

1. Factsheet 2-Benefits of EU membership outweigh costs

http://news.cbi.org.uk/reports/our-global-future/factsheets/factsheet-2-benefits-of-eu-membership-outweigh- costs/

2. Swinford, S. Costs of EU membership ‘outweigh benefits’

http://www.telegraph.co.uk/news/newstopics/eureferendum/12072128/Costs-of-EU-membership-outweigh- benefits.html

3. EU referendum results

http://www.bbc.co.uk/news/politics/eu_referendum/results

4. Robertson, G. How to stop Brexit: get your MP to vote it down

https://www.theguardian.com/commentisfree/2016/jun/27/stop-brexit-mp-vote-referendum-members- parliament-act-europe

5. Cooper, C. David Cameron rules out second EU referendum despite popular online petition

http://www.independent.co.uk/news/uk/politics/brexit-what-is-eu-referendum-petition-david-cameron- a7105596.html

6. Ruparel, R. The mechanics of leaving the EU – explaining Article 50

http://openeurope.org.uk/today/blog/the-mechanics-of-leaving-the-eu-explaining-article-50/

7. Brexit: EU spells out procedure for UK to leave

http://www.bbc.co.uk/news/world-europe-36632579

8. Allen, K. Treanor, J. Goodley, S. Pound slumps to 31-year low following Brexit vote

https://www.theguardian.com/business/2016/jun/23/british-pound-given-boost-by-projected-remain-win-in-eu- referendum

9. The economic consequences of leaving the EU

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https://www.cer.org.uk/sites/default/files/smc_final_report_june2014.pdf

10. Tilford, S. Britain, immigration and Brexit

https://www.cer.org.uk/sites/default/files/bulletin_105_st_article1.pdf

11. Foster, A. Brexit: What will happen to immigration when Britain leaves the EU?

http://www.express.co.uk/news/politics/676612/Brexit-what-happen-to-immigration-if-Britain-leaves-EU- referendum-2016-Chris-Grayling

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Z ED C HEN

What are the possible developments between the UK and other economies after Brexit?

Since the EU referendum everyone knows that the majority of Britons have voted to leave the EU and it will take no longer than 2 years for the UK to break bonds with the remaining 27 countries in the EU. It is definitely not a question of whether or not there will be changes, but rather when and how these changes will take place. There are many reasons for the UK to look forward to seeking new opportunities to cooperate with other economies.

Frexit or another?

The Brexit has been a blasting fuse within the European Union. The EU is now facing a problem of breaking down to a small EU. There is evidence that countries such as France and the Netherlands may leave the EU and make their own paths into the world market. This is because the citizens in those countries who hold favourable views of the EU are in increasingly small number or the leaders may think those poorer countries in the EU are hindering them. Some say that after Brexit the 50% of UK exports that enter the euro-zone will decline dramatically. It makes sense that once the UK leaves the EU there wouldn’t be any more free trade – we would have to sign up to the

rules and standards. However, supposedly when France or other better-off economies in the EU quit as well, the UK will have chances to negotiate deals or sign contracts to allow further trades. Without the regulations of the EU, perhaps it will work out better for Britain.

Asia and the US

The sharp depreciation in the pound will impact trade in goods hugely. Since the volume of exports into the US and China will rise due to relatively cheaper products, the total real output of the UK may rise and domestic industries can grow further. Correspondingly, the price of the imports will increase. Most production lines in the UK highly rely on raw materials imported from the US, China, Germany and other South-east Asian countries. Therefore, industries are going to be shocked if we take imports into account. To overcome the balance of trade deficit, it is crucial to set up a friendly relationship between fast growing economies in Asia. If

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so, importing raw materials can be cheaper with small tax and UK exports will be favoured in those partner countries. Hence, the possible loss of volume of exports in the EU can be countered. Depreciation in the pound does not mean the UK will perish. One of every 10 tourists in the UK comes from the US and two from Asia. A cheaper pound would encourage more inward tourism meaning more inflow of money. And, because the other currencies become more expensive, British people would be less likely to have holidays outside the country meaning less outflow of money. It is beneficial. However, depreciation won’t affect tourism as much as we suggested. If the business expands between the Asia and US, more and more people will be tied around the UK and this will eventually increase mass tourism. One of the solutions can be diffusing the service of financial centre into the US and Asia markets. Asian Infrastructure Investment Bank can be a great platform to do so and the UK is able to possess a seat at the ‘table’. The Asian market has a larger potential than the EU, so it is important to be economically diverse and dynamic. Overall, it will be very exciting to see the positive changes. There are risks in the storm, together with lots of opportunities. On 23 rd June 2016, millions of British citizens headed out to have their say in the European Union Referendum; a vote on whether the United Kingdom should either remain in the EU or whether it should leave it. The result announced the next day detailed that Remain held 48.1% of the votes, while the Leave campaign, headed by conservative politician and former Mayor of London Boris Johnson, managed to gather the remaining 51.9% of the 33,551,983 people that voted. This result had large scale impacts throughout the domestic and international financial markets with the value of the Pound Sterling against the US Dollar depreciating by over 10% from the date of the referendum to the date of writing. The FTSE 100 also declined by the largest amount since the global financial crash of 2007-8 with some members falling by as much as 37%, as was the case with homebuilder Persimmon, in that same period of time. This evidently shows a huge decrease in investor confidence in the British economy. Furthermore, this quitting of the EU would cause even more damage both to the global and local economy. One way in which the UK economy could be damaged further is via a phenomena known as hot money outflows. Hot money refers to capital which continuously flows between financial institutions in different economies in an attempt to capitalize on increased interest rates in these economies and this capital is usually owned by investors. This, given that the value of the GBP has decreased and hence the Pound is worth less in terms of other currencies, will result in the real value of capital deposits in the UK decreasing greatly. This is especially true when considering the fact that the UK has a very low interest rate of only 0.5%, meaning a low return on investors storing capital in the country. Therefore, investors will instead store their capital in institutions in other countries which have higher interest rates in order to maximize their profits. This, paired with the fact that the main reasons for the UK being used as a store of capital deposits previously were its very stable economy, high investor confidence in the UK and its valuable currency, all of which have been severely damaged by the decision to leave the EU (at the very least for the time being), means that hot money will flow out of the economy at an increasing rate. Another way in which the UK economy may be impacted for the worse is due to falling house prices. This fall in house prices would initially be triggered by a loss in confidence of investors in the state of the UK economy in the __________________________________________________________________________________________ The impact of the EU referendum: housing, investment, and ‘hot money’ E NRI S OPOTI & T OMMY C HEN

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short run due to the depreciation of the pound which is seen as a key indicator of the performance of an economy. In the long run, investors may also be scared away from buying property in the UK as a result of perceived decreases in potential demand from a reduction in the number of immigrants coming to the UK in the future. Also, the fact that among academics, notably 10 Economics Nobel Prize winners including James Heckman in an open letter to the Guardian newspaper, there is a general consensus that the UK leaving the EU will damage our economy meaning there will likely be a decrease in investment into the UK house building projects. The decrease in the investment in home building would cause very large increases in unemployment as the construction industry accounts for 6.2% of the UK’s workforce (2.1 million jobs). This would not only drive homebuilders, such as Persimmon, into turmoil but also reduce the demand for products in interrelated markets such as concretes and large machinery industries causing further increases in unemployment. This would spell disaster for the UK economy because it is a consumer based economy and unemployment would, in theory, increase resulting in a massive decrease in the Gross National Product of our economy. When this effect is paired with the increased social welfare payments on benefits that the government will face, malign deflation may be caused that is akin to that experienced in 2007-8 globally. However, this would be especially damaging as a result of this being localized to the UK only, unlike the previous financial crisis, and, therefore, relative to the rest of the world the UK would be hugely impacted. Thus the UK could not implement any quantitative easing, which helped greatly in the global recession, as the increased money supply would not be diluted throughout the global economy. To add to this, the fact that there will be increases in the cost of mortgages will result in decreased domestic demand in the housing markets with house prices forecast to fall by as much as 18% 8 by the Treasury, despite Mark Carney’s assurances of the Bank of England being prepared and having contingency plans in place. This would be especially magnified in London as a result of it being a hub for foreign investment and would likely experience the largest decrease. So, to conclude, the negative effects of the EU referendum would stretch far and wide throughout the British economy in both the short and the long term. This will cause problems such as a reduction in investment in our economy and a large increase in the unemployment rate. However, all of this would be subject to exactly how much confidence is lost by investors in the economy and its ability to grow in the future, which is, as we know, nowhere near as quantifiable as simply an exchange rate or a stock price.

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8 http://www.express.co.uk/finance/city/683140/Brexit-what-will-happen-to-house-prices-when-Britain-leaves-EU-referendum-2016- property

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C ARSON C HAN

Should the UK leave the EU?

The EU has been the talk of town in recent years and many people don’t really have a clear concept of what it is. The European Union (EU) is a politico-economic union of 28 member states that are located primarily in Europe. It has an estimated population of over 500 million people. The EU has its origins as the European Coal and Steel Community, set up in 1952. Over time it then grew to become one of the biggest economic zones in the world. The EU has developed an internal single market through a standardized system of laws that apply in all member states. EU policies aim to ensure the free movement of people, goods, services, and capital within the internal market, enact legislation in justice and home affairs, and maintain common policies on trade, agriculture, fisheries, and regional development. Within the Schengen Area passport controls have been abolished. A monetary union was established in 1999 and came into full force in 2002, and is composed of 19 EU member states which use the Euro currency.

Here are some advantages of being an EU member:

1. Tariff Free Trading among Members Among EU members, there are no additional tariffs between the trading of goods and services. This means the price of goods and services are kept comparatively lower.

2. Opens up More Opportunities

As residents of the EU, countries are able to move among EU countries; they can have more job opportunities and more chances to attempt training for certain jobs and careers. 3. Culture is Not Lost Although a country has joined the EU, it still retains its individuality as there is no general language nor are there any general customs that member countries are obliged to abide by. 4. A Common Currency The euro is the common currency that is used among most of the EU countries and it can improve the efficiency between trading of goods and services. This is because there won’t be the problem of waiting for the currency to drop in order to buy more because they are all using the same currency. 5. There is No Conflict between Nations Since the establishment of the ECSC in 1952 there have been no wars between EU countries. This is because EU residents are protected from other neighboring countries because of the clear guidelines of EU on security and the national defense in their member countries.

Here are some disadvantages of being EU member:

1. Communication Barriers Due to the fact there is no official language, it may be difficult for EU residents to communicate as they don’t speak the same languages.

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