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Sri Lanka’s Financial Crisis: What Has Happened So Far and What Are the Next Steps for this Struggling Economy?

Written by: Indi Chrishan

Sri Lanka’s financial crisis is the worst that the country has faced since its independence in 1948 and has included a steep increase in the amount of debt that the country owes, and extremely high rates of inflation. Although the peak of the crisis occurred in the spring and summer of 2022, the country is still dealing with the effects of the disastrous period and is slowly starting to try to work towards some forms of solution to help heal the broken economy and repair the damage that was caused.

How did the financial crisis happen?

The current economic crisis in Sri Lanka is thought to have started in 2019, however Sri Lanka has been facing economic problems for many years. It has received bailout by the International Monetary Fund (IMF) twice in the last decade: once in 2009 (after the end of their civil war) and once more in 2016, with the promise that Sri Lanka’s government would aim to control its debt to return to 5% of the country’s GDP by 2021. However, rather than the economic situation improving at the start of the 2020s, Sri Lanka’s economy has worsened, to the point where, in May 2022, it was forced to default on its foreign debt (meaning that they failed to pay back the money that they owed according to the initial agreement).

There are many factors that can be attributed to the start of the financial crisis, but most of them link back to the president at the time, and many of the decisions he made and policies which he put in place. Gotabaya Rajapaksa served as president from November 2019 until July 2022, and was part of the Sri Lankan Podujana Peramuna party (SLPP) (which was founded by his own brother) and was put forward by the party as presidential candidate in 2019. The party promised stability and progress after the turmoil and uncertainty people felt after the 2019 Easter bombings (where suicide bombers killed hundreds during attacks on churches and luxury hotels), and because of their strategic campaigning, the SLPP won the election by a landslide vote, securing 145 out of 225 seats. However, as soon as he won the election, Rajapaksa was able to appoint other members of his family to government positions such as finance minister, and even appointed his own brother (who had been defeated in the 2015 presidential election) as prime minister of the country. The amount of power which the Rajapaksa family held allowed them to put into place many unwise policies, which had widespread and disastrous effects on both the people and economy of Sri Lanka.

This government greatly decreased taxes (the Goods and Services Tax rate was cut from 15% to 8%) and income tax brands were altered, meaning that there was a 33.5% decrease in the number of taxpayers. This is estimated to have lost the government over $1.4 billion a year, and therefore the amount of debt which they owed increased, contrary to their agreement with the IMF. The government also ordered a sharp transition to organic farming, and banned all synthetic fertilisers in 2021, without providing any support to farmers, which led to a massive decrease in crop exports, further contributing to the burgeoning financial crisis. In early 2022, this crisis greatly worsened, and the rate of

inflation grew to 50%. The country also experienced many shortages of necessities such as food, electricity and fuel, meaning many vehicles such as ambulances or emergency services could not be used, as there was not enough fuel to power them.

Whilst there were factors outside the government that can be said to have been a cause of the financial crisis, such as the lack of tourism from the COVID-19 pandemic and tourists’ fear to travel to Sri Lanka after the Easter 2019 bombings, the majority of Sri Lankans blame the government for the failure of the economy. As a result, many have protested against the Rajapaksa government, and after following violent protests on the 9th of July 2022, Gotabaya Rajapaksa fled the country on the 13th of July.

What are the next steps for Sri Lanka?

The current president, Ranil Wickremesinghe is working towards a solution to the financial crisis, however, it will certainly not be an easy resolution. Tax rates have been increased and the government is working to be able to pay off all debts, however the country owes a total of $46.9 billion, which will take a long time to be able to be paid off on the current terms. 52% of the country’s total foreign debt is owed to China, its biggest lender, and Sri Lanka has recently reached a deal with them to restructure £3.4 billion of debt (meaning that the terms of the debt are altered to make it easier to pay back) – a big step in the journey to heal Sri Lanka’s broken economy.

Bibliography: Timeline of Sri Lanka’s worst economic crisis since independence | Business and Economy News | Al Jazeera Sri Lanka attacks: What we know about the Easter bombings – BBC News Sri Lanka’s Financial Crisis: Origins, Impact, and Next Steps (cornell.edu) Sri Lanka crisis: Colombo reaches debt deal with China – BBC News Gotabaya Rajapaksa | Sri Lanka, Family, & Biography | Britannica Sri Lanka: Why is the country in an economic crisis? – BBC News

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China’s Population Demographics: Winners and Losers

Written by: Shreya Gupta

Until recently, China was the world’s most populous country with around 1.4 billion people, equivalent to a staggering 17.72% of the total world population. Yet, an irreversible population decline in China has led to India overtaking it as the world’s most populous country. Reasons for this mainly centre around the transition of China’s traditional centrally planned economy to a mixed economy, allowing for greater freedom from the state in many industries. This has allowed for China to become an internationally competitive country, with employment opportunities for men and women that has resulted in households no longer feeling obligated to have children. In fact, between 2019 and 2021, large Chinese provinces and cities have seen huge drops in birth rates, largely due to China’s economic boom. China’s urbanisation has also shown a change of view in a woman’s “purpose” and “role” in the household, particularly in rural areas. Chinese traditions that were once focussed on women being responsible for all domestic duties and having children, rather than aspiring to obtain a future career, have given way to greater emphasis on gender equality, especially in education. These progressive values have encouraged women to work rather than settling down and is leading to a view that marriage and birth are barriers to freedom.

However, the one-child policy implemented from 1980 to 2016 comes to mind as the most significant and impactful cause for this population change. Economic pressures and food insecurity during this period meant that Deng Xiaoping had to introduce this measure for the welfare of society. But many economists argue that, whilst this may have reduced short-term economic pressures, the policy is quite detrimental to China’s future economy. Predictions that China will surpass USA’s GDP in 2041 are now projected to be in danger due to its rapidly ageing population. One would never link a population shortage to such a populous country, but this can be seen in its shrinking labour force and consequent decrease in productivity levels. As an export-led economy, this could potentially have devastating consequences to both China’s domestic economy as well as global markets. China’s influence on the international stage is greatly threatened by its elderly demographic – by 2040, people 60 years or older will make up 28% of the population.

From a global perspective, this can potentially threaten many developing countries that rely on Chinese aid and investment. China’s Belt and Road Initiative has put 150 countries under its influence, which has undermined US influence as a major creditor across the world, particularly in Asia and Africa. Whether this is through the Belt and Road Initiative which is specifically a global infrastructure development project, or bilateral agreements, such as with Libya or Tanzania, China has transformed into the largest investor in the world. Therefore, population decline can have harmful effects in countries that have deep economic ties with China, particularly when major investments in developing countries are at stake. Sub-Saharan Africa is especially vulnerable to China’s economic slowdown – IMF (International Monetary Fund) shows how a 1% decrease in China’s growth rate can reduce growth in sub-Saharan Africa by 0.25%. We’ve already seen Chinese loans fall in this region since 2017. Lower investment and aid are bound to increase poverty with lower employment, living standards and development in general.

One can put a positive spin on this by arguing that a decline in Chinese influence on developing countries provides governments a perfect opportunity to escape from this “dependency culture.” Reports offer evidence that China’s investments are targeted at not improving conditions in countries, but rather exploiting Africa’s abundant natural resources. Geopolitically, this is a strategic move by China to improve their own economic growth and therefore dominance in the world, as well as compete with US influence and capitalist interests. Therefore, lower levels of Chinese commitments in African countries will allow them to become more self-sufficient or rely on other

countries such as the USA, improve competitiveness, and perhaps diversify their own exports for faster growth.

It is fair to say that this is a pivotal moment in global geopolitics and will have a significant impact on the shift in power dynamics between continents and nations; this will certainly be closely monitored by all countries as well as global institutions, such as the World Bank.

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Does money actually grow on trees?

Alexia P. Head Girl, analyses the historic and future impact of trees on the economy.

‘Money doesn’t grow on trees’. A cliché I’m sure most people will have heard when they were younger; when they had no understanding of the true value of money.  However, is this cliché wrong – are there economic benefits to trees?

As of 2020, there are approximately 3.04 trillion trees on the planet, made up of 60,065 different species. Their uses vary, from being produced into something tangible, such as paper or furniture, or providing intangible services, such as the carbon cycle or retaining nutrients in biomass to aid farmers in growing crops. Over time, although their uses may have changed, trees have always been a vital part of our economy, in ways that at first, may not be apparent.

Photo by zhang kaiyv from Pexels

Let’s jump back in time. The year is 1690, and the global dominance of the British Empire is growing. In Britain, most of the population are in the primary sector of employment, particularly in agriculture, growing trees to help build houses, or to trade for an animal to increase income for the household. As timber and fruits were traded amongst farmers, incomes increased. However, as more villages were established, space that was previously forestland was cleared of trees, and the supply started to diminish. The navy – at the time, the biggest in the world – relied on the timber for their ships; to continue to expand their fleet, they had to travel further abroad. Ships then travelled to America, India, and Europe to gain resources, power, and valuable influence to create trading alliances that are still in place today. This extra money and resources gave Britain an advantage when The Industrial Revolution hit in 1760. This allowed for a quick and smooth integration of the new, more efficient way of life that asserted Britain further as a global power and further boosted its economy. And all of this stemmed from the reliance and resources of trees, without which, the roots of our economy would not stand today.

However, as countries developed, their reliance on single resources and tangible products have decreased, particularly in ‘advanced’ countries in favour of services and jobs in tertiary and quaternary sectors. As a result, agriculture – such as timber production – has steadily decreased.

But trees still play a vital part in the growth of our economy today. In LIDCs and EDCs, such as Brazil, logging and mass production of wood has become part of the economy. Although the industry is environmentally frowned upon, it has an estimated worth of $200 billion annually, allowing many developing countries who produce this material to place money into developing infrastructure and technology further. There are not only economic benefits. In some societies, such as in parts of Indonesia, trees and wood have been used as currency on a local scale, allowing people to trade wood for farming animals, or clothes, encouraging economic movement in smaller villages, that may not have reliable national trading routes. Paper, furniture and fuel are just some other ways that trees have become so heavily relied on in people’s lives, with few other ways to substitute the valuable resources they produce.

Photo by mali maeder from Pexels

However, the rate at which tree resources are exploited is becoming too high. In the quest to become economically developed, forest sustainability has been forgotten. Increasing tropical deforestation rates account for loss of biodiversity and reduction in carbon intakes,affecting further tree growth in surrounding areas as nutrients are removed.

There have been recent attempts, however, to preserve the trees and rainforests. In a recent study by Yale School of Forestry and Environmental Studies, it was determined that rainforests store around 25% of carbon dioxide, with the Amazon alone strong 127 billion tons. To release these gases would heavily increase the enhanced greenhouse effect, changing the balance of the Earth’s ecosystems.

Sustainable income from trees is becoming more apparent, particularly in countries where deforestation rates are highest. In Bangladesh, where fuel industry relies on 81% wood, the logging industry has been encouraged to collect dead trees, wood waste and pruning rather than felling increased sections of forest. This still allows for an income, whilst ensuring trees remain part of the ecosystem. Furthermore, there has been a global effort to move away from the use of wood entirely. Reusable energy, such as solar power, makes up 26% of the global energy used and is expected to rise to 45% by 2045. Although this means the usage of trees in the economy will decline, it allows for new income sources, such as eco-tourism that encourages more environmentally aware holidays; for example, Samasati lodge, Costa Rica. The lodge uses rainwater instead of transporting water through pipes; is built on stilts rather than the ground as not to disrupt run-off water to rivers; and blends in with surroundings to ensure not to disturb local wildlife in attempts to make holidays more environmentally sustainable, whilst still taking economic advantages of trees.

‘Money doesn’t grow on trees’. Well, since 2016 in the UK, it hasn’t. Our bank note system changed from paper to plastic, showing the progression from a society that once relied on a single produce, to a new, man-made source. This well represents our economy today and our declining reliance on trees: what was once the roots of our economy will soon become a thing of the past.

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Is globalisation a new phenomenon?

Andrea T, Academic Rep, looks at the nature of globalisation and whether with the context of our history we can consider it a ‘new phenomenon’

Globalisation is an ever-present force in today’s society. Scholars at all levels debate the extent of its benefits and attempt to discern what life in a truly globalised world would entail. But where did it all begin? A comparison of the nature of colonialisation and globalisation aid our understanding of this phenomenon’s true beginning, yet no clear conclusion has been reached. This leads us to the matter of this essay, an attempt at answering the age-old question: “Is globalisation a new phenomenon?” Though there are striking similarities between both colonialisation and globalisation, I do not believe we can see them as them one and the same. Due to the force and coercion that characterised colonisation’s forging of global cultural connectivity, and the limitations of colonial infrastructure, we cannot consider it true globalisation. Therefore, though imperfect, the globalisation of the modern world is its own new phenomenon.

Before I can delve into the comparisons of colonisation and globalisation, we must first gain a common understanding of the characteristics of both. There is no set definition for globalisation, though most definitions portray it as an agglomeration of global culture, economics and ideals. Some also allude to an ‘interdependence’ on various cultures and an end goal of homogeneity. (One could certainly debate whether this reduction of national individuality is truly a desirable goal, but that is sadly not the purpose of this essay.) Furthermore, for the purpose of this argument, homogenisation is taken on the basis of equality; equal combination of culture forming a unique global identity. And the focus of this essay will be the sociological aspects of globalisation, as opposed to the nitty gritty of the economics.

Though we are far from a truly homogeneous world, we certainly see aspects of it in the modern day. With an increase in international travel and trade, catalysed by the rise of technology and international organisations, we have seen the emergence of mixed cultures and economies. Take for example the familiar ‘business suit’. Though it is seen as more of a western dress code, all around the globe officials and businesspeople alike don a suit to work, making them distinctly recognisable. One might however consider how truly universal this article of clothing is. Its first origins are found in the 17th Century French court, with a recognisable form of the ‘lounge suit’ being seen in mid 19th Century Britain, establishing it firmly as a form of western dress. We then later see, with its rise to popularity in the 20th century (as international wars brought nations closer), the suit and many other western trends adopted across the globe (see picture below). Considering the political atmosphere of the time, and the seeming dominance of the West, we may doubt that the adaptation of the suit was an act of mutual shared culture. And yet we see the ways in which the suit has been altered as it passed to different cultures. Take the zoot suit, associated with black jazz culture, or the incorporation of the Nehru jacket’s mandarin collar (Indian origin) into the suits popularised by the Beatles. Though it still remains largely western, with the small cultural adaptations we can see how something can be universalised and slowly evolve towards homogenisation. In this way, a symbol as simple as the suit can be representative of a globalising world.

This is also where we start to see the link between colonisation and globalisation form. Trade formed an essential part of each colonial empire – most notably, the trade of textiles. Through the takeover of existing Indian trade (India in fact formed 24% of world trade prior to its colonisation), British-governed India exported everything from Gingham to tweed, and had a heavy influence on the style of the society’s elite, taking inspiration from the traditional Indian methods of clothes-making. Furthermore, this notion of the business suit can be seen as early as when Gandhi arrived in Britain (seeking education on law), dressed in the latest western trends. However, though the two do certainly share characteristics, we must consider the intent behind this blend of culture. The ideal of globalisation suggests an equality that is not echoed in colonisation. Gandhi did not wear western styles because of his appreciation of British fashion trends, but instead knew that it was far easier to assimilate if you looked and acted the same. Similarly, influence of Indian dress on British dress was not from a place of appreciation either, but from one of exploitation. Therefore, though the sharing of culture is present in both globalisation and colonisation, one cannot consider them to be the same due to the underlying intent. Furthermore, as the intent in modern day globalisation is in some ways similarly exploitative, one cannot consider the world truly globalised, but rather globalising, through a process one could still consider a new phenomenon.

Another aspect of globalisation we can consider is the role of the media. McLuhan, a 20th century Canadian professor, capitalised on this by proposing the idea of a ‘global village’ that would be formed with the spread of television. His theories went hand-in-hand with the ideas surrounding ‘time-space compression’ that have come about due to travel and media. And McLuhan was right, with a newly instantaneously connected world we have become more globalised. With the presence of international celebrities, world-wide news and instant messaging we have the ability to share culture and creed, and though far from homogenous we can certainly see small aspects of global culture beginning to form. Due to this dependence of globalisation on technology it is therefore hard to view colonisation as early-stage globalisation. But one can make one distinguishing link. One could argue: the infrastructure implemented for trade routes served as the advancements in technology of the imperial time. Similar to air travel, with the creation of the Suez Canal and implementation of railways, it was easier to traverse the globe. This is what further catalysed open trade and contact between different nation states, one of the most recognisable traits of globalisation. However, despite this, the trade routes did not improve communication anywhere near to the level we see today, and the impact technology has had on the connectivity of our globe is too alien to colonisation for the two to be considered the same. In terms of interconnectivity, the form of globalisation we see today is entirely novel, and though they have the same underlying features, the difference between the two remains like that of cake and bread.

Another aspect of globalisation we can consider is the spread of religion. Religion is an incredibly important aspect of a country’s culture, defining law and leadership for hundreds of years. The American political scientist Huntington explored religion and globalisation in his work: ‘The Clash of Civilisations’ (1996) in which he put forward the following thesis: due to the religio-political barriers, globalisation will always be limited.

But events have challenged this. There has been a rapid spread of religion around the world due to the newfound (relative) ease of migration and the access to faith related information through the internet. From London (often dubbed a cultural ‘melting-pot’) to Reykjavik (rather the opposite), we see Mosques and other religious institutions cropping up. With the lack of religious geographical dependence, we see the homogenising effect of globalisation. This is also to some extent echoed in colonisation. During the years of the British Empire, colonisation followed a common narrative of the white saviour. Missionaries preached a new and better way of life, supposing that the application of Christian morals and values would help develop the ‘savage’ indigenous tribes. This attempt at integrating western Christian culture into the cultures present across Africa and Asia shows an early attempt at a homogenised culture. However, though there was certainly some success in the actions of the missionaries (as seen with the establishment of many churches across South Africa), the aggressive nature of this once again contradicts the fairness implied in the concept of a homogenous culture, and globalisation remains a new phenomenon.

One cannot dispute that colonisation does share a number of characteristics with globalisation. From free trade to new infrastructure to the mixing of culture through religion and fashion, we can certainly see aspects of a globalising world. And yet the forceful intent of the homogenisation of cultures seen in the colonial era, removes it from being the true interconnectivity of nations. This is not to say that the world today is free of this intent, but the way in which our world today is globalising is approaching the ideal of globalisation more closely than colonisation ever did, and there is a distinct enough difference between the two that one cannot consider colonisation to truly be an early-stage globalisation. Furthermore, the world today relies so heavily on technology as a facilitator of globalisation that any notion of globalisation in the 19th century cannot be considered one and the same. Therefore, the globalisation of our day and age can be considered its own new phenomenon.

Bibliography

“Cultural Globalization.” Encyclopædia Britannica, Encyclopædia Britannica, Inc., www.britannica.com/science/cultural-globalization. 

“Globalization Is a Form of Colonialism.” GRIN, www.grin.com/document/287753. 

“Globalization versus Imperialism.” Hoover Institution, www.hoover.org/research/globalization-versus-imperialism. 

Steger, Manfred. “2. Globalization and HISTORY: Is Globalization a New Phenomenon?” Very Short Introductions Online, Oxford University Press, www.veryshortintroductions.com/view/10.1093/actrade/9780199662661.001.0001/actrade-9780199662661-chapter-2. 

“What Is Globalization?” PIIE, 26 Aug. 2021, www.piie.com/microsites/globalization/what-is-globalization. 

Maddison, Angus “Development Centre Studies The World Economy Historical Statistics: Historical Statistics” OECD Publishing, 25Sep. 2003,

Chertoff, Emily. “Where Did Business Suits Come from?” The Atlantic, Atlantic Media Company, 23 July 2012, www.theatlantic.com/national/archive/2012/07/where-did-business-suits-come-from/260182/. 

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Is technology advancement really eating away at your future job?

Charlotte, Year 10, looks into the impact advancements in technology will have on future job opportunities.

Will technology only aggravate inequality, or provide healthier societies?

The technology driven globe that we live in is one full of thrilling and stimulating possibilities for our future. However, it is sure to pose countless challenges whilst advancing in this adventure.

Space tourism, people reincarnation through AI, edible water blobs (the most exciting of them all!) and self-driving cars are some of the many developments aiming to be produced in the future. But with all these startling products being created there are inevitably some challenges posed.

A major concern is jobs. Our jobs. The thing we will be relying on for income and a more comfortable lifestyle, the thing our whole education is aimed around, the thing the economy relies on from the collection of taxes. Careers play a huge role in everyone’s lives and the economy, but how on earth could this amazing technology that is advancing us so much, have a negative impact on the economy and your future?

I’m sure you have heard this many times before, and the biggest answer is simply: automation. Here are some figures to demonstrate how much will change – 9 out of 10 jobs will require digital skills, in 10 years’ time 50% of jobs will be changed by automation, and in 2025, humans will account for only 58% of total task hours, meaning the machines’ share will rise to 42% from the current 29%[1]. These staggering figures could be perceived as a negative attribute to the technology advancement, with it consuming all of our jobs and picking away at our futures. However you have perceived those numbers, let me assure you that all of the foreboding figures can easily be overridden with the fascinating possibilities of what is to come.

Examples include the following:

  • Unexpected industries will boom, not just the predicted boom of the IT industry; these include healthcare, veterinary science, social assistance, engineering, geology and history;
  • The share of women in the workforce is projected to reach 47.2% in 2024, and the number of men in the workforce is expected to slightly decrease to 52.8% in 2024;[2]
  • 85& of the jobs that will exist in 2030 haven’t even been invented yet.[3]

Personally, the last opinion excites me the most with the possibilities that are to come and will impact us. What jobs will be invented? How will they be invented? Who will invent them?

So, no matter how many articles and reports you see in the future about this topic, there are many positives that willoverride things reported as potential negatives. Change might be coming, as we have seen with the development of the internet over the last 40 years, but that does not mean that people will lose the ability to train, learn and adapt to use these new technologies in their day-to-day work. Creativity, critical thinking and complex problem solving – all things that automation currently finds challenging – have been identified as the top soft skills required by companies in 2020, and it is these areas which we need to promote in our learning.[4]

If you take one thing out of this brief article, let it be that creativity and your limitless imagination are the passport to the future.

[1] See https://www.weforum.org/press/2018/09/machines-will-do-more-tasks-than-humans-by-2025-but-robot-revolution-will-still-create-58-million-net-new-jobs-in-next-five-years/

[2] See https://core.ac.uk/download/pdf/85140562.pdf

[3] See https://www.linkedin.com/pulse/85-jobs-exist-2030-havent-been-invented-yet-leo-salemi#:~:text=According%20to%20a%20report%20published,t%20even%20been%20invented%20yet.

[4] See https://www.prca.org.uk/Creativity-is-the-number-one-skill-2020#:~:text=Creativity%20was%20identified%20by%20LinkedIn,’Future%20of%20Jobs’%20study.

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Coronavirus and the economy

Calculator and pen economics

Lily in Year 13 wrote this article just before the start of Lockdown 2 in November 2020 in the UK. As we now gradually come out of Lockdown 3 some 7 months later, how much of the article rings true?

As of the 23rd March 2020 the UK was placed under lockdown and has been moving in and out of lockdowns and restrictions ever since. This is likely to cause an economic slowdown and possibly plunge the UK into recession over the coming years because when people are in lockdown consumption and aggregate demand in the UK is likely to fall. There will be impacts on workers and the UKs supply of goods domestically and from abroad which is also likely to negatively impact the economy. Overall, the UK and its economy is likely to suffer as a result of Covid-19.

Possible impacts

Firstly, aggregate demand in the UK will be hit by the virus as when people are quarantined they will be unable to go out and spend, especially as recently all shops selling non-essential goods along with bars and restaurants have been told to close meaning this spending in these sectors won’t be possible anymore. This will be added to by the low consumer confidence that is currently present as in uncertain times people save their money as a safety net so they will be able to support themselves in uncertain times.

Consumption patterns will also change, meaning goods with an income elasticity of demand between 0 and 1 are likely to see little change in demand as these goods are classed as necessities. Some might even see a rise in demand in the short term as people panic buy (think back to scenes of toilet roll panic buying in April 2020).

However, goods with an income elasticity over one are likely to see a decrease in demand as these are classed as luxuries so people won’t be prioritising purchasing these items when economics conditions are uncertain. This means that overall consumption will decrease as people don’t have the opportunity to spend as much out shopping or on luxuries and are also likely to be more cautious with their spending by nature. This fall in consumption will also be exacerbated if people’s incomes are negatively impacted, such as if they were previously working in the gig economy, perhaps on zero hour contracts or with irregular, situation-based income.

These people would be relying on their savings or help from the government for their money, meaning their spending and consumption is likely to fall. To encourage more spending the bank of England has dropped interest rates to a new record low 0.1% to encourage people to go out and spend instead of save as they will be receiving very little gain from letting their money sit in a bank account. Also, as if demand falls whilst there is still a constant level of supply prices of goods and services are likely fall. This can be seen through the drop in the price of flights as airlines suffer a shortage in demand. For example a flight from California to London would have previously cost $1000 can now be purchased for as low as $246 dollars. However, this drop in prices is likely to have a limited effect on demand because of the uncertainty currently which also means low interest rates are likely to have a limited effect in changing people’s behaviour. Recent travel bans will also limit the impact lower prices in the airline industry since people are unable to take advantage of these lower prices when they are unable to travel or will be deterred by quarantine times. This means that overall aggregate demand and consumption in the UK is likely to fall because there will be fewer opportunities for people to spend but mostly because of consumer uncertainty. This will negatively impact the UK economy.

Aggregate supply in the UK will also be impacted by the virus, impacting costs along with exports if less is being produced domestically. A fall in domestic supply could result in cost push inflation as if demand levels for some products remain steady prices would have to rise to make up for the limited stock or production due to covid-19 restraints on supply. This fall in supply could be caused if workers have to self-isolate and cannot go to work, meaning a company cannot operate at full capacity causing a shift inward on their PPF.

Companies might also have trouble receiving stock from other countries if their production has been impacted by the virus which could prevent production in domestic businesses. This is likely to hit the manufacturing industry especially hard as these rely on parts from abroad, such as the car company Jaguar which is now running out of parts it would usually ship from China[1], and people coming to work as it is very difficult to work from home if you worked in a factory. This effect on supply could be decreased depending as the UK has a flexible labour market, meaning people can easily move from job to job meaning businesses won’t be hit as hard by the shock as resources (people) can be reallocated more easily compared to France where the labour market is very inflexible.

This effect on supply also depends how flexible the product markets are as if a company could switch supplier there would be minimal effect especially if this new supplier was located domestically instead of abroad. There might also be a time lag if producers had stockpiled meaning it would take longer to run out of stock however is still likely to happen in the long term. In the long run this outbreak could cause LRAS curve to shift inwards if there is less investment as companies will be working harder to keep afloat rather than investing or spending on R&D meaning less will be invested into the countries long term productivity.

This can be seen though the fall in the share prices of the FTSE 100 as on 9th March 2020 the average prices of shares fell 8%[2], the worst day since the 2008 financial crisis with £144bn wiped off its combined value. These top 100 companies were likely to be some of the largest investment spenders. Although, as the UKs economy is mainly based on financial services, many can work from home meaning domestic supply issues may not affect the economy as much as countries that rely heavily on manufacturing such as China and Germany shown as Chinese economy shrank by 6.8% in the first quarter of 2020, the first contraction since 1976. The government could also reduce the effect on domestic supply by subsidising companies so they are able to invest in the technologies they need and keep production lines running, or as interest rates are low companies could take out a loan to invest. Meaning there are options for companies to try and uphold supply and investment. However, there is still the underlying issue of people not being able to go to work because of self-isolation. This will have a huge impact on supply in the UK and therefore the economy as if products aren’t being made they cannot be consumed and if they aren’t being consumed profits will fall leaving companies to have less money to invest, impacting supply in the short term along with productivity in the long term.

Overall, the impact of the virus is going to be wide-ranging across the world and in the UK, impacting both supply and demand. Impacts of the fall in supply in the short term will be slightly counteracted by the fall in aggregate demand as if both curves shift inwards there will be a new equilibrium point of production and cost push inflation is likely to be limited. However, the nation’s productivity and output will decrease which means the UKs GDP is likely to fall significantly, plunging the UK into a recession. The British government are spending more to combat some of the impacts however this is unlikely to cover the full economic impact and will see a rise in the government budget deficit as a result. This also makes it likely that we will see the government to following a policy of austerity over the coming years, meaning people in the UK and the UKs economy are likely to be hit hard by this crisis. However, as the virus is a global pandemic, it is likely that its impact will also be mirrored across the rest of the world.[3]

2021 Update

The UK Government introduced the furlough scheme to support workers and businesses who were unable to run as normal owing to the impact of the virus. Up to April 2021 this has cost over £61 billion[4], with 4.7 million jobs impacted. Government spending is at the highest figure ever seen outside of periods of war.[5]

With increasing numbers of the population having now been vaccinated against the virus, and the recently announced reopening of restaurants from 17 May 2021[6], there is a feeling that we are gradually moving out of the crisis and that normality is becoming closer.

However, the vast spending seen since the crisis started in January 2020 will almost certainly mean that a return to a pre-pandemic life will be a challenge and that further austerity will be required to settle the books. The need to ‘level up’ the country, as announced by the Prime Minister on 11 May 2021[7], will be central to life as we know it for many years to come. Whether this can be achieved will be subject to criticism and debate for the significant future.

[1] See https://www.independent.co.uk/news/business/news/coronavirus-jaguar-land-rover-suitcases-supply-chain-factories-china-a9343336.html

[2] See https://www.theguardian.com/business/2020/mar/09/ftse-plunges-to-below-6000-amid-global-coronavirus-sell-off-oil#:~:text=9%20March%202020%20Fears%20of,into%20an%20official%20bear%20market.

[3] See https://www.ons.gov.uk/economy/grossdomesticproductgdp/articles/coronavirusandtheimpactonoutputintheukeconomy/december2020#:~:text=6.,declined%20by%209.9%25%20in%202020.&text=GDP%20measured%20by%20the%20output,growth%20of%201.4%25%20in%202019. The impact on the UK economy is a 9.9% fall in GDP over the course of the year.

[4] Table and reference from https://www.statista.com/statistics/1122100/uk-cost-of-furlough-scheme/

[5] See https://www.bbc.co.uk/news/business-52663523

[6] See https://www.telegraph.co.uk/politics/2021/05/12/covid-lockdown-roadmap-new-rules-may-17-dates-when-end/

[7] See https://inews.co.uk/news/politics/queens-speech-2021-boris-johnson-pledges-to-harness-spirit-of-lockdown-as-he-sets-out-uks-covid-recovery-995558

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Bringing the real world in: using current affairs to shape A Level Economics.

Stack of newspapers

This article focusses on how we incorporate current affairs into our teaching of A Level Economics. It is written by Richard Finch – Head of Economics at Wimbledon High School.

One great aspect of teaching Economics at A Level is that we can relate the topics on the specification to real world events. We run weekly news article review sessions with all our classes to build their understanding of contemporary issues in Economics and strengthen their ability to apply fundamental concepts and theories to these real-world events. For many pupils, beyond improving their chance of achieving a top grade and boosting their ability to critically analyse articles, this process builds their confidence to engage in debate and can be very empowering.

However, it often it is a challenge to stimulate that initial interest in current affairs, particularly stories related to the Economy.  However, in recent years we have made significant progress on this issue.

At the start of the course, each week, we ask our Year 12 students to find two articles, one related to microeconomics (individual industries and business) and one to macroeconomics (the entire economy). These articles can be from any publication and on any subject that interests them.

The pupils post a brief summary of the article on our OneNote system along with their general reflections. We keep the brief very flexible at this stage and the emphasis is very much on exploring what interests them. We as teachers then review the articles and post some leading questions for each. This encourages the pupils to reflect on what they’ve read and think about where their research might lead them.

The pupils have time to prepare their response to these questions prior to the lesson. During the lesson the teacher will project the summary on the screen and the pupil then presents to the class. The teacher chooses three pupils from the class who have demonstrated clear analysis or whose topic area was addressed by many students in the class. We have found that celebrating work in this way creates an element of friendly competition and encourages others to engage.

Interestingly, although we do not limit the topics at this stage, the pupils tend to gravitate towards similar articles and as they source their information from different publications these presentations often lead to enthusiastic class debate. This also serves as a great way to break the ice with a new Year 12 class.  

Through our questioning we encourage pupils to pursue additional articles on the same topic. Over weeks the pupils start to develop expertise in certain topic areas and having that deeper understanding builds their confidence. As they become more familiar with the jargon used in Economics they start to source articles from more challenging publications.   

As the course progresses we start to encourage the pupils to apply the fundamental concepts and theories we cover in class to these real-world examples. We want our pupils to use this “Economics Toolkit” to deepen their analysis and understanding.

For example, here a pupil has applied their knowledge of Income Elasticity of Demand (the responsiveness of demand to a change in income) to the demand for Fortnum & Mason products to assess the extent to which these products can be described as luxury items and the implications of a change in national income on this particular organisation and the wider economy.

The term “luxury good” is used commonly in society but Economics pupils develop an understanding of what this term actually means and how it can be calibrated. This gives them a clearer understanding of the likely implications of a national rise in income on this market. They begin to make links at this stage between different concepts and ask broader questions, beyond the focus of that article. We continue to encourage them to explore and connect topic areas through our questioning and through class debate.

The pupils start to develop real expertise at this stage and we find ourselves referring to our “in-house retail expert” for example during class discussion. Being the authority on an issue is incredibly empowering for the pupils and builds their engagement and enthusiasm for the subject. The ultimate aim of this initiative is to encourage our pupils to use their voices and speak with authority on this traditionally male dominated subject.

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Gentrification, an urban phenomenon?

Amy (Year 13) looks at the issues surrounding gentrification of an area and the impact this has on the value and cultural capital of an area.

Gentrification has often been seen as a contested and negatively connoted process; it is routinely blamed to be destroying the ‘souls’ and ‘hearts’ of many cities across the globe, with higher housing costs to increasingly globalised high streets acting as forces driving those less privileged out of historically culturally rich community areas. It can be seen as an oppressive mechanism which, in potentially adding fiscal value to an area, does so at the expense of cultural diversity.[1]

Gentrification is a term first created more than 50 years ago by the German-born British sociologist Ruth Glass to describe changes she observed in north London – but it is a phenomenon that has been at the heart of how cities evolve for centuries. Cambridge dictionary defines the term as ‘the process by which a place, especially part of a city, changes from being a poor area to a richer one, where people from a higher social class live.’[2] It is an important factor in the change and transformation of urban areas. However, whether it really eradicates poverty is subject to lively debate.

From NewDream.org

In London especially, gentrification characterises economic and demographic changes as the predominantly middle-class citizens settle in areas often occupied by high percentages of ethnic minority residents, who are often priced out of the new ‘improved’ areas. Not only does it have significant negative impact on smaller community areas, it also sends ripples throughout the rest of the country and down the class hierarchy.

Much resistance has been seen from those who see the process as an antagonised way of removing character and community from an area. In particular, estate agents and property developers are subject to this disapproval, with many campaigners vocal against their activities, given they seek to make money from attracting new, richer residents. Especially extreme campaigns such as the 200 anti-gentrification and housing campaigners that disrupted the beginning of the annual Property Awards in 2016 reveal the strong opinions many people have towards the process of gentrification.

When examining this change in London, it is important to inspect the history and background of the city itself. Gentrification is not a new process to the city, beginning in the 1960s when bits of the run-down, old post-war city attracted adventurous young architects who started doing up often cheaper, damaged, Georgian squares. The process is deeply ironic, as these forces of change accused of ruining London are products of its revitalisation.

Decades ago London was still recovering from detrimental damage done during World War 2. The population of inner London was still attempting to recover to its pre-war importance. At this point, it wasn’t the wealthy being the cause of change in the area but skilled manual workers seeking cheap and convenient land, headed for ‘the New Towns’ in the 1950s.

By the start of the 2000s however, London’s dynamic had completely changed. London had become an influential source of economic growth, catalysed by its ability to generate money from its ‘turbo-charged’ Square Mile. Increased profit immensely amplified the attractivity of London, in turn increasing the demand of space in the city. It is regularly said that ‘demand for space is the seed of gentrification’[3], and a failure to meet that demand is what stimulates the growth of it. London is a prime example of this. Hugely inflated property prices are a certain cost of gentrification, and this can be seen all throughout London. The average house price in Hackney, and area renowned for its influence of gentrification, has increased by 489% in the last two decades, up from £91,000 in 1998 to £536,000 in 2018. This directly drives out many ethnic minorities and those living on low income or relying on government benefits to afford housing costs.

Hackney wick’s ‘graffiti building’ – from Londonist.com

The standard picture of gentrification is that new arrivals benefit greatly from gentrification at the expense of lower-income residents. This picture is often true in many cases. New arrivals to a community often get stylish housing and all of the expensive accessories of life in a trendy urban neighbourhood (boutiques, bookstores, coffee shops, clubs and more) that they can afford. While long-time residents may benefit initially from cleaner, safer streets and better schools, they are eventually priced out of renting or buying. As the new arrivals impose their culture on the neighbourhood, lower-income residents become economically and socially marginalized. This can lead to resentment and community conflict that feeds racial and class tensions. Ultimately as lower-class members of the community move out this can induce loss of social and racial diversity. Rowland Atkinson, a member of the ERSC centre for research describes it as ‘a destructive and divisive process that has been aided by capital disinvestment to the detriment of poorer groups in cities.’[4]

However, should gentrification really be held accountable for the unacceptable level of poverty in London? Assertions that it is ‘pushing out’ the deprived of the city often look less persuasive when examining the figures of social housing which still exist in classic ‘gentrified’ areas of north London. In Camden, 35% of all housing is for social rent, in Islington it’s 42% and in Hackney, 44%. Although poverty rates have fallen in those boroughs, the absolute numbers of poor people (people living on the reliance of government benefits) remain high.

Although there are many deservingly negative outlooks on the consequences of gentrification, assumptions should not always be made to antagonise the process. For example, middle class pressure often leads to improvement in community features such as modernised and beautified public buildings and spaces. As the property tax base increases, so does funding to local public schools.  Jobs arrive with the increased construction activity and new retail and service businesses, and crime rates habitually decline.

Edward Clarke of the UK urban policy research company Centre for Cities writes that the debate should not be reduced to ‘a simple battle between plucky communities and greedy gentrifies’, emphasising that this ‘fails to recognise that the roles and functions of urban neighbourhoods have always changed over time and within a city’ or to acknowledge that gentrifying ‘new work businesses can create new jobs and improve wages in many fields.[5]

Clarke concludes in general that the real roots of the problems that come with thriving urban economies are ultimately down to “poor city management”. He argues that to improve this it requires better skills training for local people, more planning and tax-raising powers to be devolved to local politicians and more land, including a small portion of green belt, being made available for building.

Ultimately gentrification, as a form of change and transformation in urban areas, is an issue that has been going on for decades. Although it potentially brings improvement to the appearance and functionality of urban environments, the problems created by this process must be addressed; failing to do so will result in places like London becoming so unaffordable they will begin to deteriorate – not only in potential economic value, but also in cultural capital. The process often exacerbates inequality on a local scale and drives out the cultural diversity that can so often be found at the heart of London’s communities.

Bibliography

Glass, R. (1964). London: Aspects of Change. London: MacGibbon & Kee

Hill, D. (2016). Let’s get our gentrification story straight. London: Guardian

Dr Atkinson, R. (2002). Does Gentrification help or harm urban neighbourhoods? An assessment of the evidence-base in the context of the new urban agenda. CNR Paper 5

Clarke, E. (2016). In defence of gentrification. London: Centre for Cities

[1] See https://newdream.org/blog/consumption-gentrification-and-you

[2] See https://dictionary.cambridge.org/dictionary/english/gentrification#:~:text=Meaning%20of%20gentrification%20in%20English&text=the%20process%20by%20which%20a,of%20East%20London%20by%20gentrification.

[3] See https://www.theguardian.com/uk-news/davehillblog/2016/oct/24/lets-get-our-gentrification-story-straight#:~:text=Demand%20for%20space%20is%20the,were%20born%20%E2%80%93%20look%20further%20afield.

[4] See http://www.urbancenter.utoronto.ca/pdfs/curp/CNR_Getrifrication-Help-or-.pdf

[5] See https://www.centreforcities.org/blog/in-defence-of-gentrification/

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A short introduction to foreign aid

Alex in Year 13 writes a short introduction to foreign aid, highlighting some of the successes and problems that can appear from the charitable act of giving.

Instilled in us from a young age is the principal that we should help those who are in extreme need. And what could be simpler? From charity mufti days and bake sales, this theory underpins social behaviour in our modern day. It is indeed this principal that drives support for foreign aid.

In the words of Roger Riddell, ‘The belief that aid is a ‘good thing’ is sustained by the assumption that the resources or skills that aid provides do make a difference to those being assisted’. However, the impact of such aid on recipient countries is not always as positive as it may initially appear.

As the effects of climate change enhance the frequency and severity of natural disasters, we often see foreign aid expenditure in an emergency form. Altruism of this kind is uncontested as in the short-term these humanitarian responses are overwhelmingly positive. However, it is with sustained aid that potential problems arise.

Overtime, foreign aid has expanded from small beginnings to become a large and complex global enterprise. Development cooperation (as foreign aid is also called) is now established as an integral part of international relations, with many donor countries contributing at a UN target rate of 0.7% of their gross national income. For the UK, this sum stood at £14.6 billion in 2018. As can be seen from the charts below, few countries meet this target.

Foreign Aid Graph
Net development assistance by country (total million US$ in 2015)

 

However, if we compare this data above with looking at this giving as a percentage of GDP, a rather different picture emerges:

 

For many people, this huge economic contribution to foreign aid and development is a triumph in the world of humanitarianism and society as a whole. An ethical theory linked closely with the topic of foreign aid is utilitarianism. To put it simply, this is the notion that ‘moral life should be guided by the objective of trying to achieve the maximum happiness for the greatest number of people.’

As stated by Paul Streeten, ‘a dollar redistributed from a rich man to a poor man detracts less utility than it adds, and therefore increasing the sum total of utility’. This argument is comprehensive and easy to wrap your head around, which explains why foreign aid is so often short sightedly seen as a win-win situation.

Unfortunately, this is not always the case. There has been evidence of several key factors that can inhibit the aggregate impact of foreign aid.

The first problem arising with aid is its potential for misuse. Additional resources in the hands of potentially corrupt governments are significant impediments to optimum utilization of funds. This is because the fungibility of aid could enable the financing of non-developmental projects against the interest of the population. Hence, aid itself has, in some cases, the perverse ability to create negative effects on recipient economies.

Secondly, there are limits associated with aid and a country’s absorptive capacity. As the volume of aid increases, it is subject to diminishing marginal utility. In basic terms, the effect is as if I gave you one chocolate bar that you enjoyed consuming. And perhaps a couple more wouldn’t do you any harm… but once I’ve given you 100 chocolate bars, each individual bar’s worth has decreased along the way. In this way it can be seen than after a certain point (called the absorptive capacity threshold), providing more aid becomes completely ineffective.

Finally, fluctuations in aid inflows are external shocks to vulnerable economies, which plan expenditures based on promised aid commitments. When a highly dependent country’s aid is not given in full, this can damage future growth prospects significantly.

From all this, we can gather that the future of aid-giving and its associated policies may need modifying to ensure aid is given and used in the most efficient and appropriate ways possible, enabling it to help those who are most in need.

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What is a sovereign wealth fund and why are they important?

Lily in Year 13 looks at the importance of sovereign wealth funds, telling us more about this area of Economics.

Simply, a sovereign wealth fund is a state-owned investment fund meaning countries can invest in shares and assets internationally in the hope that these investments will then increase in value. These profits can then be extracted by a government when shares are sold and ideally then used to benefit the country’s economy and citizens.

The term sovereign wealth fund was initially created in 2005 by the economist Andrew Rozanov who stated that the funds in question “are neither traditional public-pension funds nor reserve assets…but a different type of entity altogether”. A new and exciting form of investment was emerging, now commonly called the sovereign wealth fund.

Sovereign wealth funds are important because of the economic benefits they can bring to a country. The largest fund in the world at the moment is the Government Pension fund of Norway which “owns on average 1.3% of all equities listed worldwide”,  which means that Norway owns 1.3% of global stocks and shares, now worth over $1 trillion in assets. This shows the scale of these funds and the influence they can have on the world economy.

One key benefit of sovereign wealth funds is the diversification of countries incomes. This is because sovereign wealth funds almost always invest in foreign assets which is particularly helpful if a country relies on a single commodity for their income as they are more at risk if that particular industry experiences a downturn. This is why many oil reliant countries have sovereign wealth funds as oil markets are often volatile. This factor has become particularly important in 2020 through the corona virus epidemic, one specific example being in the oil industry since “US oil prices went negative for the first time in history” in April 2020, resulting in companies paying people to take oil off their hands because the demand for oil had fallen so rapidly.

This shows the oil industry is particularly vulnerable to large fluctuations in price and if a country relies on oil for their income they could be at risk of an economic downturn (recession). Sovereign wealth funds have been shown to limit this risk as some funds around the Gulf (largely oil reliant countries) are already “channelling some of their billions back to counter the recession triggered by the coronavirus pandemic.”, showing how important these funds have already been for the recovery and survival of oil reliant economies throughout the Covid-19 outbreak.

However, there are debates surrounding the benefits of sovereign wealth funds as there will always be an element of risk in making investments since they can never be one hundred percent safe as assets always have the possibility of decreasing in value. This includes the idea of black swan events – the idea that some events are unpredictable and therefore markets cannot prepare for the shocks they cause. This is one way of stating we can’t predict the future and therefore will never be able to completely rely on an investment bringing positive returns. Which poses the question ‘is it a good idea to be risking millions of public money on the stock market?’

Sovereign wealth funds can be very beneficial but there are always opportunities for investments to turn sour. This means that it is important for a country to analyse the rewards that can be generated before creating a sovereign wealth fund. These countries are still not immune to black swan events which can disrupt the global economy however, if profits from these funds are used well they can actually mitigate these risks and add huge value to their economies, such as through diversification. A well-managed and cleverly invested fund will always benefit the country at hand if it is used wisely. These benefits mean that sovereign wealth funds are likely to become more and more common, making them important as they a likely to become a huge factor of the global economy.

Sources:

Report – Who Holds the Wealth of nations? By Andrew Rozanov – see http://piketty.pse.ens.fr/files/capital21c/xls/RawDataFiles/WealthReportsEtc/SovereignFunds/General/Rozanov2005.pdf

How Sovereign Wealth Funds improve firms’ corporate Governance by Vincent Bermejo – see https://www.forbes.com/sites/esade/2019/11/11/how-sovereign-wealth-funds-improve-firms-corporate-governance/

FT article – US oil prices below zero for the first time in history – see https://www.ft.com/content/a5292644-958d-4065-92e8-ace55d766654

Bloomberg article  – Gulf sovereign wealth funds seen shedding $300 billion in market mayhem, by Mathew Martin and Nicolas Parasie – see https://www.bloomberg.com/news/articles/2020-03-26/gulf-sovereign-funds-seen-shedding-300-billion-in-market-mayhem

Nassim Nicholas Taleb ‘The Black Swan’ Penguin see – https://www.amazon.co.uk/Black-Swan-Impact-Highly-Improbable/dp/0141034599