Sunday, June 21, 2009

Krispy Kreme Agressive Expansion Outside US

Krispy Kreme was first founded by Vernon Rudolph in 1937. Since then, it went through a period of blistering expansion albeit facing some financial and operational difficulties in mid 2000s. The first store opened outside North America was in Sydney, Australia in 2003. Besides that, there are also franchise owned stores in UK, South Korea, Hong Kong, Indonesia, Philippines, Japan, Qatar, Saudi Arabia and the most recent one in Malaysia

Possible reasons to expand outside US:

(1) Increase supernormal profits. This is the most fundamental argument and it is also the reason businesses are set up for. Probably the management in North Carolina felt that there is not much space for further growth since most market has been tapped into. The argument sounds since they have been operating close at home for nearly 70 years. Their strongest market is within the Southeast. They even took a bold move to set up stores in Massachusetts, the backyard of its rival, Dunkin Donuts in 2003. Now it will have to choose to go international, since profits usually increase with the size of operation

(2) High income growth. Just before the credit crunch crisis, many countries in East Asia were experiencing a period of economic boom. This led to the creation of many middle income earners with higher appetite to spend outdoor, thus presenting a window of opportunity for Krispy Kreme to capture the market segment. In Japan, between the period of 2006 and 2007, we witnessed a fight-back of Japanese economy, although fragile but still a big market. Last but not least, the bull-run in oil prices have had a significant multiplier effects onto most Gulf Nation’s economy. Rise in income means rise in standard of living. People will want to consume more and desire for variation in goods.

(3) Strong competition in US. Although Krispy Kreme (KK) successfully enlarged its market share in US, still it is no match for Dunkin Donuts (DD). It loses out in many ways. First, its product is not well diversified unlike DD which serves bagels, breakfast sandwiches and now increasingly specialise in coffee. Many claim that its coffee is even better than those served in Starbucks. As such, it gained notorious reputation from industry observers as “coffee shop disguised as doughnut shop”. Besides, one would most likely purchase DD's coffee along with its doughnut (complement goods) though the taste is inferior to KK. It may not be economical to travel to KK to get the doughnut separately

Second, DD invaded the South with a different sort of doughnut which is thicker and cakier than the traditional Southern treat which is lighter and sugar-glazed. The attempt to break KK customers’ loyalty seems to work. Last but not least, DD’s research team had successfully cracked a code in doughnut production. Now it is almost trans-fat free and yet its original taste is preserved, something that Americans desire for in the light of increasing health awareness. Unfortunately, KK made the discovery a little too late

(4) Minimise losses. KK faced a series of financial and operational difficulties earlier. Its share price and profits skyrocketed after listing in 2000 but crashed in 2004 after its shareholders filed a lawsuit. Its reputation also tarnished with investigations alleging it engaged in faulty accounting. Nosediving share performance will make it hard for them to raise sufficient capital for investment in US. With limited capital, therefore it only makes sense it they choose to operate in a low-cost economy. Besides, it can also help KK to offset its financial losses in home country

(5) Create brand awareness. To be honest, I’m not a great fan of doughnut due to health-consciousness. As far as I’m concern, I have seen Dunkin Donuts all over here in Malaysia, from pump station to even hypermarket. But, I just got to know about the existence of Krispy Kreme lately, when its first store was opened in April and I heard that it went well with the locals here. Those who work nearby now frequent it daily after having their first-bite on the original glazed

Saturday, June 20, 2009

Between National Debt And The Raise Of Retirement Age In UK

Although there are ‘green shoots of recovery’ in many of the Western OECD economies, rest assured the worst nightmare is far from over. The present credit crunch crisis although has done sufficient damage to world economy, sending prestigious financial institutions six-feet under and denying many people to employment will appear to be nothing more than a blip. The real fiscal headache will be the ‘permanent’ unbalanced equation of national debt and retirement of baby boomers

Think about this. The birth rate in many developed economies has slowed markedly and some had even fallen into negative territory like Italy and Japan, just to name a few. With declining number of young adults entering the job market, tax revenues (income, corporate, VAT, stamp duties etc) will inevitably fall. At the same time, increasing number of people is entering into their twilight years means governments have larger fiscal responsibility of paying out pensions and social benefits. The issue is where to get the needed financial resources?

One thing for sure, governments cannot forever rely on the issuance of bonds to finance these spending. Besides, much had been borrowed in recent months to bail out inefficient banks, assuming responsible of toxic debts etc. These had already caused the national debt to inflate further

Arguably many developed economies are accused of hiding the real level of national debt. Take UK for instance. The reported current level of national debt is quite close to 50% of GDP. But if we were to include all the pension liabilities, the whopping figure is around 103% of GDP

Policymakers address that the most possible solution to this is by extending the working lives of British people, unpopular but the best of a bad lot

Should retirement age be increased?


(1) Alleviate shortage of skilled workforce. It is increasingly difficult to substitute a skilled worker who is retiring. Supply of skilled labours is highly inelastic. In other word, even a large increase in wages may bring about a less than proportionate increase in number of people offering themselves into the profession. This is because many years may be needed for the field such as medic, specialist doctor, lecturers, and financial advisors with ACCA or CFA qualifications etc. In short demand outstrip supply which largely explains why they are handsomely paid

(2) High productivity. Generally, skilled employees with seniority are perceived as having higher productivity (output per worker) compared to young ones. This is so, after years of repetition and specialisation. It can come in many forms. They execute decisions efficiently, produce greater number of As or publish more research articles per year, cure more patients, getting more corporate clients etc. Shall these skilled workers go into retirement, the operation and profitability of a company may be jeopardised

(3) Reduce national debt. The beauty of raising retirement age from budget standpoint is that, it raises revenue and at the same time reduces spending. As more Britons are working, there will be a continuous inflow of income tax revenue, at least for now. Having an income, people will continue to spend into the economy. Demand for more goods will hence ensure VAT and profitability of private sectors will contribute to more corporate tax receipts. Government’s commitment on pensions and various social benefits will automatically go down. If this policy is executed immediately, UK may once again get the debt back to the old ceiling of 40% of GDP, set by Gordon Brown

(4) Closing the savings gap. Perhaps this is the strongest argument of all. Over the years, households’ savings ratio in UK had fallen dramatically especially after UK took an exit from the ERM (Exchange Rate Mechanism). There are several reasons for this. First, UK people tend to have high marginal propensity to consume (mpc) by culture. This means, as their disposable income increase, large proportion of it will be devoted to consumption. Secondly, period of low interest rates and high inflation in early 2000s have discouraged savings due to the effect of negative real interest rates (nominal interest rates – inflation rates)

Up to date, many Britons actually do not have sufficient means to have smooth sailing throughout their twilight years, especially when life expectancy have increased. By making them retiring at 70 years of age, actually provides them the ‘second’ opportunity to accumulate more wealth. This policy helps to reduce the gap of what they currently save and what they would actually need to save for a comfortable retirement


(1) No end to increase in retirement age. Institute economists think that UK’s national debt will increase to 100% of GDP by 2015 before gradually coming down to 90% in 2023. However, the forecast may not be reliable as it assumes that this figure is within reach so long as there are no major disruptions to the British economy. What if there are external shocks such as another form of financial crisis, oil price bubble and the debt default explosion originating from Eastern European economies? Are we going to see more bailouts after this?

One thing for sure, UK can no longer tolerates another round of ‘Great Recession’, not at least for few decades (which is quite impossible). Otherwise, the government will again have to spend itself out of recession and entering into an uncharted territory of debt. Probably by that time, retirement age will have to go up to 75 years

(2) Public shouldn’t be held responsible. The late retirement fiasco aggravates once again due to the sudden hike in national debt, after series of effort to bailout RBS, Northern Rock and other inefficient bank. The present Labour and future government hence face greater fiscal constraint, having to pay for pensions and social benefits besides other productive public spending. Hence raising retirement age to 70 years old is one of the methods to ease government finances at the meantime. However, this policy has come under severe attack. Critics argue that government shouldn’t have sacrificed the welfare of millions by denying their rights for earlier retirement. Besides, why must the public be responsible for the wrongdoing of banks?

(3) Graduates unemployment. Setting such high retirement age will also deny fresh graduates from employment opportunities. This often breeds hysteresis, a situation where one finds it increasingly difficult to secure a job after being jobless for a long time period. It eventually leads to many other problems such as social ills, self degradation and lost of confidence, lost of skills and becoming even more unmarketable. Rest assured that UK’s unemployment will probably be as high as in France, Germany or even in Spain if we allow this to happen

(4) Exacerbating recession. Late retirement will exacerbate recession. As the ceiling is set at 70 years, it is expected that many people who retire slightly before the age of 65 years will re-enter the job market, thus creating competition. Increase in the supply of labour will drive down wages, something that employers will always cheer about. They may want to consider expanding their operations since production costs have fallen, leading to an increase in goods and services. However, the demand is not there since there is a fall in purchasing power accruing to lower wages. Nevertheless, there are many arguments for this

(5) Other ways to reduce spending. Again, the retirees must not be victimised. There are in fact many other ways where the government can pursue to reduce its budget deficit. For instance, give priority to development projects that have been identified to be truly beneficial in long run and not ‘pet projects’. Government must also introduce effective mechanism to reduce leakages and corruption or considering an increment freeze in public sector pay for two years

(6) Disproportionate burden on lower income group. Most of the increase in life expectancy made in recent decades has been among higher income workers who can easily gain access to good food, nutritional needs and personalised healthcare. Hence it is an easy say for well-paid elite to contemplate working up to 70 years old or more. For ordinary folk doing manual jobs which strained them physically without rewarding them financially, very often have to enter into early retirement. Hence, making it ineligible to claim for pensions and other benefits before 70 years old will create a vicious cycle of relative poverty

Video Lesson: Obama On National Debt

Obama gave his public speech on the issue of unsustainable national debt. Although the video was made last year, nevertheless the content of the discussion is very much relevant to where we are today

Wednesday, June 17, 2009

Big Crack In Central & Eastern European Economies

Following the collapse of Soviet Union and Stalinist states, Central and Eastern European Countries (CEEC) provided global capitalism superior access to its cheap labour and raw materials. The recession that plagued many of the Western economies in 1990s had caused influx of capital into the former Soviet states as multinationals seeking to reduce costs by locating in a newly opened up and low tax areas

Giant car companies such as GM and Volkswagen had invested hundreds of millions of dollars into new factories not withstanding the much higher cost of operating in home country due to strong trade unions and legislations favouring employees. In short increasing number of firms around the world is looking at CEEC as a manufacturing hub that have great potential to become the ‘second China’. This together with the European Union (EU) enlargement in 2004 provide rock solid argument for high growth experienced by these economies in the recent few years

Nevertheless, these Central and Eastern European economies had become far too dependent on credit from international market

(1) Deepest cut. This round of recession is the first major downturn since the post-communist chaos in 1990s. As mentioned earlier, these emerging economies of Europe have become highly dependent on financial flow especially from richer Western European countries like Germany, France, Austria etc. However, due to unmanageable recession time bomb and credit crisis from those financiers, there is a severe reversal of inward investment, putting an immediate end to its growth. For instance, President Nicolas Sarkozy was under fire lately for his attempt to cut jobs in the car production plants in Czech Republic and ‘bring home’ some of those jobs to kick start local economy

Besides, Czech Republic together with Hungary and Poland are poised to suffer an economy contraction of more than 5% this year. This has something to do with the underlying structure of these economies. More than 50% of their national income is derived from export activities to richer Europe. Their reliance on exports far succeeded Germany, US and China

(2) Rising unemployment. The jobless rate in these emerging economies of Europe increase as fast as they fall. Again, consider countries like Poland and Czech Republic which have become major centres of manufacturing for the EU market. Over the years, the boom comes from the development of car production plants, electrical equipments and household goods for Western Europe. With ailing demand, many of the labours together with those from other related industries are no longer needed. Not to forget, the economic misfortune of large economies like UK, Germany and France have forced many migrants to return home, thus pushing the jobless figure higher. From the positive note, there will be downward pressure on wages which could be good news to employers

(3) Ballooning fiscal deficit. As level of unemployment increase, income tax revenue falls. Marked slowdown in economic activities automatically reduces corporate tax revenue and VAT. Falling number of property transaction reduces stamp duties. However, the governments at the same time have to pump in more money. Schools, hospitals, construction of roads and bridges are expected to kick start soon to offset the fall in exports and private investment. One must also not forget the extraordinary amount money involved in bailing out failed financial system. In near future, commitments towards the baby boomer generation will be an added burden. Together this means unimaginable budget deficit

Many of these Eastern and Central European economies will soon fall into a deficit-trap like UK- big and ‘irreversible’ sudden rise in public spending. Why? Because, it is politically sensitive and unpopular to cut spending even when the economy may have recovered. Given the nature of these fragile economies many would probably face the crisis of confidence and servicing the national debts is utterly painful

Current account deficit in Baltic states
(4) Depreciating currencies. Perhaps, this is the most dreadful ill of all. Under normal circumstance, weakening exchange rate should be able to boost the export market of Eastern and Central European economies. This is because, lesser euro is required to purchase a unit of say, forint. In current situation, their source of demand has dried up. Fiscal deficit and current account deficit are widening, therefore triggering a fall in confidence towards an already fragile economy. Investors no longer keen to hold these currencies, hence began dumping them in foreign exchange market. Simultaneously, massive capital flight and fall in inward investment further belittle all efforts to maintain the currency within a reasonable range
Therefore, debt servicing in these days have become increasingly difficult especially for countries like Hungary and Poland. Going default seems to be imminent when both forint and zloty fell more than 30% against euro. There are contagion worries to Western European countries like Germany, Sweden and Austria which have more than $1.7 trillion of loan exposure to CEEC. A collapse like this will create another version of Asian financial crisis (1997-1998), but three to four times worse
Fall of house prices in Latvia

Fall of house prices in Estonia

(5) Asset price deflation. The housing markets in the Baltic States have many similar traits with those in UK. Due to highly successful economic reform, enlargement of EU in 2004 coupled with the doubling of income per capita, increasing number of people in countries like Latvia and Estonia have shown great interest in storing their wealth in property market. In such a short period, asset prices skyrocketed in Latvia due overwhelming demand and shortage of supply. Between 2004 and 2007, house prices tripled or even quadrupled in Latvia capital city, Riga. This explains why Latvia is the fastest rising economy in Europe

However, the recent housing market crash of Latvia is a painful one and probably not only the worst in Europe but also in the world. One of the main reasons for collapse is due to the pegging of Latvian lat to euro. With series of hike in interest rates by ECB throughout 2006 and 2007, Latvian mortgage rates rose disproportionately as pressure on the peg rose. Latvian variable rate mortgages peaked at 14.7% by end of 2007, creating the highest level of default in history of housing market. Until today, situation seems to be much worse as banks are reluctant to lend or extend credit. Rising unemployment and oversupply of houses are putting more pressure on the price
(6) Currency pegging. The Baltic countries (Estonia, Lithuania and Latvia) which have expressed their interest to adopt euro at later stage, chose to peg their currencies against it. Recently, officials from these three countries have vowed to protect the peg at whatever cause. However, based on previous experience, chances are the costs outweigh the benefits of doing so. The Baltic members are highly likely to go through the same experience as UK which entered into the ERM (Exchange Rate Mechanism). Expected prolong recession is likely to trigger a continuous attack on local currency. This will cause drainage to foreign reserve

Latvia for instance had spent more than $1 billion last year to defend the peg, in which inevitably it turned to IMF to seek further assistance of $9.6 billion. In return, it is allowed to retain the peg but required to cut wages, raise taxes and reduce public investment which will jeopardise the state of its economy in longer term. Probably its other two neighbours are likely to follow suit in near future

That’s not all. In fact CEEC economies have some other distinct problems such as increasing number of ageing population, widespread of relative poverty etc which I’ll cover in some other posts

Thursday, June 11, 2009

The Nature Of Tuition Industry In Malaysia

Basically, we have four types of market structures and they are perfectly competitive market, monopoly, oligopoly and monopolistic. The first two are rather ideal as each was set at one of two extremes of spectrum. Firms in perfect competition are assumed to have infinite competition with identical products while monopoly no competition at all. From life experience, most of us can tell that most of the businesses out there actually lie in between these two

Think about this. Have you come across any food or magazine or hairdressers that are perfectly substitutable to one another? Don’t you think that you actually have some level of preference on one over another? Next, if a monopoly firm is reaping supernormal profits, it tends to attract the attention of some tycoons or smaller entrepreneurs which may have the thought of venturing into the same industry despite high entry barriers. The justification is benefits probably outweigh the costs in long term. Therefore, nowadays having single firm in an industry is a very rare occasion

These lead us to the discussion of monopolistic competition (I will not talk about oligopoly in this posting), the more realistic one. One of the best examples that economists often overlook is tuition centres which are available in nearly every corner of Malaysia
Why it is best classified as monopolistic competition?

(1) Many sellers and buyers. The sellers in this case will be the tuition centres which offer their service and students as the buyers. There are many of these two but not to the extreme as in perfect market. As such the industry is still very competitive

(2) Differentiated products. This is the main distinct from perfect market. Different tuition centres will offer different combination of subjects to be taken as full package, some may have additional subjects offered, the strength of academic staffs, ambience of classroom, a cafeteria in larger centres etc. The non-price features will give some space to these tuition centres to create the scope for brand loyalty e.g. not changing to other tuition centre

(3) Price maker. Monopolistic firms do have some price making ability. As such they have a downward sloping demand (AR) curve, but an elastic one. This is because the existence of many rivals. If the incumbent tuition centre tries to raise the price of fee say by 20%, it may lose 30% of its customers

(4) Very low entry and exit barriers. It doesn’t cost much to set up a centre. All the operator need is some tables and chairs, white boards with markers, paying monthly utilities and rental and probably a second-hand air conditioner. Besides, costs of recruiting teachers from schools nearby to teach part-time are not that high. This is because these teachers also realise that it is not easy to secure a tuition job outside given that they still have to compete with thousandths of other independent tuition provider. Therefore they hardly ask for higher fees

(5) Inefficient. Tuition fee is often above the marginal costs of providing the service (P > MC), hence leading to allocative inefficiency. Also, since the barriers of entry and exit are low, over the time more tuition centres will be set up. The industry is fast becoming saturated and spread of operating costs is becoming thinner among fewer students per centre. The operator will be unable to enjoy internal economies of scale and is therefore not being productive efficiency (MC = AC)

Monopolistic in short run

(6) Normal profits in long run. I will have to disagree with this last characteristic. However, it could be true only to some extent. As operators find it easy to enter and exit the industry, these people (normally teachers) will not hesitate to ‘try’ the market after observing some of their colleagues or friends made supernormal profits in short run. Due to the high growth of tuition centres, MC and AC will increase due to lower spread over of costs, while MR and AR decrease due to falling number of students. The combination of these two will yield normal profits in long run when AC = AR (tangential)

Having said so, this assumption is only true if on average growth rate of students in a local area is less than the growth rate of tuition centres

Arguments for tuition centres:

(1) Improving academic performance. This is the most fundamental argument. Students, who usually dedicate a greater portion of their time on revision and practising, tend to do better than those who don’t. In school, probably a student got to 10 sums to do. But in the tuition centre, they will be given more sums to practise on. It’s all about constant repetition. This is exactly the technique used by KUMON centre (from Japan) to train those very young to be capable of mental math

(2) Reduce revision time at home. The argument is, if one doesn’t spend time revising in tuition centre, he is going to do it at home anyway. So what’s the difference? Besides, the centre may have a better environment to study with television, computer and PSP far away from reach. Also there is someone for you to ask from

(3) Side incomes. This is the best part for all teachers. How much can a teacher earn solely depending on one job?

(4) Sharpening teaching skills. The teacher will probably be the biggest beneficiary. Again, constant repetition will lead to higher level of specialisation. Say, if someone taught about monopolistic in school or college then taught again at tuition centre, he would have sharpened his teaching skills on that particular topic e.g. able to explain better or catch students’ weaknesses

(5) Reducing social ills. Young ones are highly susceptible to pressure from peers. They easily engage in unhealthy habits such as wasting time and money in cyber cafes, loitering with no sense of direction and probably pick up bad drinking and smoking habits. Although putting them in tuition centres is not the best solution to problems among teenagers, at least it will help to curb some if not all

Arguments against tuition centres:

(1) Unable to get the best brain. Very often, the tuition operators are unwilling to pay a good salary to entice the best teachers and simultaneously, these teachers feel that they can earn much better by providing personal tuition. As such, teachers recruited may not be the best e.g. inexperience, jobless graduates or those who don’t even have basic degree. This will jeopardise the academic performance of students under his or her tutelage

(2) Not reported income.
Most of the teachers do not report their income to IRB (HMRC in UK). As such there is a lost of tax revenue for the government. Also the size of GDP will be underestimated since the activity is more like another type of ‘informal’ economy. However, one could also argue that as it is highly insignificant as a percentage of GDP

(3) Reflection of poor teaching in schools. Ballooning number of tuition centres in Malaysia lately is an indicator of degradation of quality in our education system. There are numerous complaints about how some teachers in school skip classes, not giving any homework due to laziness to mark, ineffective delivery of lesson etc. This problem must be addressed if we desire to become an education hub in Asia

(4) Waste of parents’ money. Believe it or not, some Malaysian students view this as a trend. To secure themselves better grades in future, they request their parents to find them a tuition centre. Almost every single kid receives tuition nowadays

(5) Burdening students with more homework. Students already have enough homework from school. I don’t think they need much more. I knew a student who told me how she spends her whole night completing both school and assignment from tuitions. She takes six tuitions-Malay Language, Additional Math, Physics, Biology, Chemistry and History. The vicious cycle repeats itself from Monday to Friday

Have a good thought over this!!

Video Lesson: Ageing Population In UK

Wednesday, June 10, 2009

Costs of Corruption

In most economies, corruption is institutional and it seems that living with it on a daily basis is much more convenient than rooting it. Bribery is more than any wrong doing. It is the most unjustified crime. The functioning of the economy is paralysed with the widespread of ‘coffee money’. In the end, it will be the society, private sector and government, who bear the brunt.

This is a very common malpractice in developing economies such as Malaysia, Indonesia, Bangladesh, India and many more. It flourish in an environment where there is ample of natural resources, development projects, high level of bureaucracy in government’s administration, income per capita is usually very low and where media is strictly controlled by government

It is the root of all evil as most of the time, few benefit at the expense of millions

Economic costs of corruption:

(1) Misallocation of resources. Tax revenue from multiple sources whether direct or indirect, are not spent onto production of goods and services that can raise the standard of living. It is siphoned off in many ways, often for personal enrichment or to ensure a success in political agenda. For instance, the Prime Minister of Malaysia is accused of spending RM25 million to buy an opposition member which eventually led to the fall of Perak state into the hand of government. Also financial resources for development projects often ended up in the wrong hands. It is not the most cost-efficient firms but rather those well-connected firms that get the government contract

(2) Judiciary system that is questionable. In a corrupted system, lawmakers will often generate policies and regulations that have no intention to unite peace, economic and political stability. Laws are amended in a way that favour top government officials. Judges are equally corrupted and decisions announced in highest level of court is usually going against the public will

(3) Lower investment level. Corruption is perceived to have a significant adverse impact onto level of investment. Investors probably would have to pay a sum of money to acquire license, land or to expedite the application process. It raises the costs of investing and doing business and yet there is no guarantee that the business will be profitable. There is also no assurance that the same corrupt officials will not ask for bribery in future. For an example, my friend is in the dragon fruit plantation business. I was told that to acquire a land, he needs to pay large sum of money. At later stage, when the business kick start and becomes profitable the corrupt government officials want a share but losses will be fully borne by my friend. Therefore it said that an economy that is corrupt increases uncertainty and risks as well as reducing incentive for entrepreneurs

(4) Lesser money for public investment. Difficulty to start up a business will also force many of these firms to go into informal sector which do not report their profits and hence evade taxes. Some of the firms which are in formal economy meanwhile choose to pay some fees to high rank officials rather than tax since the latter costs more. It is hoped that these top-guns in public administration will help them to escape from being detected. The combination of these two will lead to rampant shortage of tax revenues which are essential for public spending which in return generate job opportunities

(5) Ballooning fiscal deficit. A corrupt government loves to declare mega scale projects such as the building of dam, airport, hospitals etc since it increases their opportunities to get bribes. As such they will tend to promote as many development projects as possible which very often have no details when tabled in the annual budget. They may announce spending like $5 billion onto construction but lack of transparency in how the money is allocated. These projects given to cronies are never finished as funds got ‘stolen’ half way. Then the government will announce bigger scale of spending, thus creating fiscal deficit due to shrinking tax base

(6) Higher inflation. Firms that have to continuously pay bribery fee will incur an increase in production costs and to remain profitable or ensure certain level of profit margin, these costs will inevitably be passed on to consumers in the form of higher price, leading to cost-push inflation. In a poor economy, this will depress lives if the item is food-related. Also expensive goods reduce consumer surplus. In a case where businesses are in very competitive environment, costs may not be passed down but rather cost-cutting at the expense of quality of goods. Consumer welfare is eroded here

(7) Retard growth and development. Corruption can distort these two in many ways. Tax evasion leads to shortage of funds to build necessities such as schools and hospitals. Even if there is enough funding, we also need to consider possibility of the money not being spent in accordance with its objective. Also it can influence the decision of donor community to provide aid and financial assistance. They may consider the withdraw those aid if it’s spent onto projects with high corruption potential such as the purchase of military equipments

(8) Aggravates poverty and violation of human rights. With corrupted system it will be the Prime Minister, its cronies and relatives that laugh their way to Swiss bank all the time. One project could provide several millions if approve. Those who helm the administration throne for a decade or more are good enough to live a life like Forbes billionaire though they don’t declare their assets in black and white. On the other hand, those poor will remain poor having insufficient income to fulfill basic needs. In the poorest part of the world, parents would have to bribe head teachers or else their kids will be denied even a basic education. This is said to have violated the child’s right. Having no education will condemn their job-hunting opportunities in long run. The vicious cycle of poverty kicks in and relative poverty is chronic

(9) High profile crime rates. High profile white-collar criminals or Ministers that are caught in scandals can easily slip off by ‘owning’ the law and the judges they bribe. In such circumstance, normally the public will despise these people, and even those once well-respected figures are ‘spitted’. Also it deteriorates the profile of the country and may hinder inward investment

(10) Devastator to environment. Where natural resources are abundant, corruption thrives. Corruption help accelerates the exploitation of resources disregard of environment impact. Tycoons will just have to pay some fee and asked a government to relax regulations on environment or perhaps requiring them not to meddle with their business. Hence there is often overexploitation of forests, fisheries and farmlands in pursuit of quick profits at the expense of local populations

Monday, June 8, 2009

Highly Possible Questions For Unit 6: UK In The Global Economy (GCE Edexcel)

I decided to write on this since I got overwhelming requests from my fellow students. Here it goes:

Part A (60 marks and 40 marks essay)

(1) Issues relevant to balance of payments: (90%)

(a) Why UK almost permanently experiencing a current account deficit?
(b) Policies to improve the competitiveness of UK’s goods
(c) Why some countries record large trade surpluses? (Haven’t been tested so far)

(2) Globalisation and trade (90%)

(a) Advantages and disadvantages of globalisation
(b) Advantage and disadvantages of protectionism
(c) How effective is WTO in promoting trade liberalisation?
(d) Does the establishment of trading blocs defeat the objective of WTO?

(3) Issues related to fiscal policy (80%)

(a) Implications of increase in government spending
(b) Implications of UK having unusually big national debt or continuous fiscal deficit

(4) Foreign investment (90%)

(a) Implications of adopting Euro currency
(b) Does UK’s withdrawal from Euro affect its inward investment?
(c) Reasons for UK being the largest recipient of FDI?

(5) Phillips curve (70%)

(a) Why unemployment and inflation can increase at the same time?
(b) Reasons for low inflation and low unemployment in UK?

Part B

(1) Questions that involve comparison between UK and Eurozone economies such as:

(a) Bank of England vs. European Central Bank
(b) Unemployment: UK vs. Euro
(c) Inflation: UK vs. Euro
(d) National debt: UK vs. Euro
(e) Interest rate: UK vs. Euro (why interest rate in UK higher than euro?)
(f) Government spending: UK vs. Euro (bring in growth and stability pact)

(2) Questions on protectionism:

(a) Do import tariffs and quotas save local industries and jobs?
(b) Trade retaliation
(c) Diagram of tariffs

Some reminders:
(1) I’m quite sure that this year there will be some questions closely related to balance of payments and globalisation or trading bloc. So to all students taking the exam, please CONCENTRATE on these two areas

(2) Many students generally face difficulty answering questions that are related to Phillips curve. I don’t know why. Probably is due to the difficulty of drawing the short run Phillips curve shifting upward or due to the concept of NAIRU. However, the last time it was tested was in June 03 and June 07. So I’m sort of 70% sure that it will make a comeback this year June 09

Please be sure that you are familiar with some common issues like:

(a) France, Germany and especially Italy having high level of national debt
(b) Unemployment in these three economies are much higher compared to UK, but is nothing compared to Spain
(c) Growth in the largest four economies in Eurozone are sluggish
(d) Euro economies are facing the problems of declining population in the long run. Italy is very synonymous with this
(e) Germany is the largest economy followed by France
(f) Germany is an export driven economy
(g) Both Ireland and Spain were experiencing property boom and bust

This is written as a guide. The questions MAY or MAY NOT appear in your real exam. It is to your best interest if you’re prepared in everything

Sunday, June 7, 2009

Video Lesson: Hunger & Poverty

This video is a very good reflection onto us. We are indeed very....very fortunate having more than enough to eat. This is however a very common sight in most developing economies and could be much worse in fourth world countries

Other than food, these people very often have acute difficulty in obtaining clean water supply , living in shacks with no electricity and there is no such thing as telephone lines. These are the real survivors of modern time!!

Techniques To Write Long Essay-Unit 6: UK In The Global Economy (GCE Edexcel)

This post is dedicated to all those A-Levels candidates who will be sitting for Unit 6: UK In The Global Economy under GCE Edexcel. I’m actually taken by surprise since there are quite a number of students who are quite “lost” despite the exam is couple of days away

I often get questions like:

(1) How many points to write for essay (a)-40marks and essay (b)-60 marks?

For 40 marks essay, to obtain good scores one must have three explanations with two evaluations and each of this must be well elaborated. For 60 marks essay, a candidate will need four explanations plus three evaluations. Again, to score good grades each must be well explained

(2) How much time to allocate for each?

The rough guideline given is 1 mark = 1 minute. So 100 marks essay which will be subsequently divided into two means Section A is 50 marks. So candidate is advised not to spend exceeding 50 minutes or MAXIMUM 55 minutes in this section. I would recommend candidates to spend approximately 25 minutes for essay (a) and 30 minutes for essay (b). If one still couldn’t finish the essay within the stipulated time, please proceed to Part B, the data response question. Part B is equally as important as Part A and I feel that is much easier to score compared to long essays since students are systematically guided through each question

(3) Do I separate explanations and evaluations, as in first few paragraphs all explanations while last few evaluations?

Since this is an essay, I would normally start off with a simple introduction. One or two short sentences will do. Then I will proceed by explaining the first point and immediately followed by evaluation. I don’t usually segregate evaluations and place all at the back of the essay

(4) Is it difficult to write such essay?

Well, to most students, the answer to this question is YES. Economics by nature is a reading subject and requires someone to have inquisitive nature and of course, read a lot on current issues. If you don’t have such nature, then writing I don’t deny is a painful procedure. But to some, it is joy. I do come across some students who obtain full marks 120/120 while some below 10. Surprisingly, those who don’t do well in Economics, pass their Math with flying colours!

(5) How candidates are judged?

The 100 marks here allow the examiners to judge a student from many perspectives such as grammars, punctuations, ideas, how well the candidates explain things and whether the essay is presentable. I believe no examiners would like to mark a long-winded essay with no PARAGRAPH and the handwriting is UNREADABLE. Although examiners are told to bear with it, but nevertheless they will be “emotionally disturbed” and this may somehow affect your grades

Tips to write good essays:

(1) Choose topics you’re familiar with. Once you have done that, try to brainstorm as many points as possible and from there choose only those that you think you can explain well. You can also take this as a practice from now. Take all the past year papers you have, go through some questions and brainstorm all the possible points. In the exam, I got a lot of complaints from students saying that the time constraint is crazy. They claimed that there is no time to think. The time allocated is just nice to write. So to save more time in exam due to thinking process, again I have to say practice on brainstorming now. Try to come up with say seven or eight points if possible

(2) Elaboration. As you write, try to ask yourself the question of HOW and WHY. This will at least give you a guide in writing and provide a continuation in essay. For instance, consider the question asking: “Reasons for worsening current account deficit”. So this is what I will write:

First, UK is increasingly losing out in terms of competitiveness to low cost Asian economies such as China. There, many employers are not subjected to safety regulations and legislations unlike in UK. It is also worth to take note that the Chinese labours are often overworked and yet ill-paid. These two factors combined are good enough to give their manufacturing sector an artificial cost advantage over UK via the violations of labour rights. With the admittance of China into WTO, their cheap goods have gained immediate attention and therefore flooded the world market

(3) Avoid duplicating sentences. Some students have no idea how to elaborate on their essay. So they write the same idea again and again in different sentences. This will not be given marks. It is very apparent among weaker candidates

(4) Diagrams and examples. Examiners love candidates that can relate theories to applications and to diagrams. For instance anything that got to do with economic growth, try to see if you can fit in an AD-AS diagram wherever is appropriate. Also, please use more examples to support your explanations. This will inform the examiners that you’re a indeed a knowledgeable candidate that knows about current issues. The examples can be like countries that are relevant to your explanation. For instance, export driven economies are like Germany, Japan, US, China and Malaysia. Countries with high national debt are like Japan, Italy and potentially US

(5) Overexcited. Students tend to be overexcited when it comes to their favourite topics or points. This is because they tend to write better. However, in such situation there is also a tendency to be carried away. Please avoid that as it leads to nothing but a waste of time

(6) Evaluations. This is very subjective. There are just too many techniques. But among the lots I like contradicting or arguments against the points you have written earlier. Other alternatives are like short run versus long run effects and critical argument on information or data provided e.g. insufficient, or requiring dynamic rather than static data. Also not to forget that Unit 6 is a synoptic unit. This means students are allowed to bring in arguments that are micro in nature
Hope this helps!!

Monday, June 1, 2009

Will US Dollar Collapse?

The issue of dollar going six-feet under is not something new since it was debated even back in 1990s. However, this topic seems to resurrect recently and once again provokes the interest of national policymakers and economists around the world in debating the survivability of the greenback. To be truthful, everyone seems to have a prophecy that the doom of dollar is imminent. It is not difficult to see why.


(1) Quantitative easing. The Federal Reserve has announced its interest in pumping about $1 trillion into the financial system by buying long term Treasury bonds and mortgage backed securities from troubled firms. Henry Paulson also added that additional liquidity may be needed if major strategic firms and banks continue to make inevitable losses and if the original objective is not met. Unfortunately, market participants and Central Banks around the world have begun to factor in this. Large quantity of dollar circulating in the financial system is expected to lead to the collapse of its value. As evidence, the dollar index has fallen by nearly 11% from March to 1st of June

There is another way to look at this. Sharp rise in supply of dollar will erode its storage value. The Americans will not hesitate to spend it off immediately before its purchasing power drops further. This will reckon the force of demand-pull inflation, which may immediately pull the US economy out of recession by early 2010, but into an inflationary one. Again people will want to spend their money immediately, thus creating a supply constrain which also explains for higher inflation. The cycle will repeat itself

(2) Never-ending borrowing. At the moment, US government seems to have endless commitment. It will have to continuously spend itself out of recession by building schools, hospitals, repairing roads and bridges which aimed at jobs creation. It has to increase the size of bailout for troubled car firms and banks, funding war and not to forget paying for social security benefits and Medicare for baby boomers. If we were to take into account all these simultaneously, the national debt would be much larger than 100% of its GDP

To finance all these, US will have to increase its borrowing by issuing more bonds. While China, Japan and Middle East countries are willing to lend, there could be a limit to what extend they can be of helping hands. As the level of debts is getting out of hand, it may trigger a crisis of confidence. Lenders will be suspicious of US ability to repay. Demand for long term bonds will fall and so is the dollar

(3) Very low interest rates. Wealthy locals and foreigners, pension funds and wealth management companies began to look for other places which offer attractive yield from savings. With such large economic contraction, it is highly unlikely that the Fed will announce any interest rates increase in foreseeable future. In this case, banks in UK and Euro-land economies could be a better substitute since interest rates from savings there are around 0.5% and 1% respectively. So, it is predicted that there will be long term outflow of money and given that US is now a less attractive place to hoard cash, demand for dollar is set to fall. That is why economists predicted that dollar will nosedive in value


(1) Increase in the interest rates of bond. The government has raised the interest rates of long term Treasury securities (maturity ranging from 10 years to 30 years). The increase in interest rates can be viewed from two angles. First, US government tries to create an incentive for investors or countries to lend them more money. Secondly, bond purchasers take long term view of the economy. As they expect inflation to be higher in future, they require for higher interest rates to compensate them for the anticipated losses in purchasing power

(2) Depressing housing market. Interest rates on 30-years fixed rate mortgages are tied to 10 years US Treasury Notes rates. In May both of these rates have increased and is expected to escalate further in the future. This is definitely not a good news for an already tumbled housing market

(3) Low capital expenditure. Increase in government borrowing will create a competing demand for money by private sectors. As such higher interest rates on government bonds will act as a signal for firms to equally raise the interest rates on corporate bonds. This will however ultimately dampen corporate plans to make capital expenditures, thus prolonging recession. It is also called the crowding out effect

Why the dollar will not collapse?

(1) Vested interests. Since China, Japan and oil-rich countries have so much dollar assets, watching how the dollar is buried will be the last thing on their mind. The accumulation of dollar assets is as a result of large holding of American bonds and hefty trade ties between these nations with US. In short, these nations are being held as ‘hostage’. Like it or not, they will have to fulfil and finance the growing appetite for debts. Otherwise, run on dollar which may lead to the collapse of world largest economy will do them no good either. The Chinese economy will suffer from recession time bomb with negative multiplier effects that originate in Guangdong and Guangzhou, the manufacturing hub. The Japanese economy will gain its second title of ‘long lost decade’. It is equally bad for many oil rich countries which are not diversified economically such as Iran

(2) Commodities are quoted in dollar. The beauty of dollar is that it has automatic ‘immunity’. Even if the dollar were to fall, say against euro or sterling or any other major currencies, this implies that oil purchases will be cheaper. Demand for crude oil will go up, so does the demand for dollar as transaction is in dollar. Buying interest will send oil prices higher. Given that oil is inelastic in demand, even with higher price the demand will still be strong as we witnessed the last couple of years up to 11th July 2008, where it reaches historical high of $147 per barrel. So demand for dollar will have to increase and the cycle continues

(3) Fall against? Some suggested euro. Well I have to disagree on this. First, the euro currency is just about a decade of establishment and its long term ability to withstand economic challenges is yet to be fully tested. So, that means there is no evidence of its stability. Secondly, Euro has its own set of long-term problems such as diverging economies in recent times, declining population, very little monetary and fiscal flexibility and lastly lack of political unity. That explains for its slow growth in recent years

How about yen? Well, first it’s not commonly used in major transactions. Secondly, the Japanese economy is heading towards long term decline which suggests that its currency will also lose significance. More over investing in Japanese bonds instead of US bonds is hardly appealing since the interest rates offered is so low for such big debts (190% of GDP). Lastly, yuan is not fully convertible and has too long been pegged to US dollar to suddenly go alone.

It is also worth to take note that converting one world reserve currency to another always require decades of preparation. Sterling was replaced by dollar as the main reserve currency since 1945 although US surpass UK in terms of GDP 50 years earlier

In a nutshell, dollar may gradually weaken but obviously not collapse

Why Is There An Increase In Youth Unemployment In UK?

If one generally thinks that the current ‘Great Recession’ in UK hit all those who are in the working age group equally, then think again. It is actually those youth between 18-24 years old who are the worst hit. The recent statistic shows that youth unemployment is escalating more than proportionate compared to adult or the middle age workers

In the year to March 2009, unemployment rates for 18-24 years old already increased by 4% to 16.1% and are poised to rise further by the end of the year. The near future will be very bleak for those graduates or fresh school leaver as nearly half of UK firms surveyed, expressed no interest in headhunting

Having said so, the problem of young people unemployed in UK is not any new issue. It has been there since early 2000s. Despite combating youth unemployment is one of Labour’s core policies, nevertheless it is quite futile and many of the programs are failure. This is because, in years of robust growth the unemployment rate did not fall
Why persist?

(1) Low qualification. Every year, quite a sizeable number of students who leave school or college without at least completing their upper secondary such as A-Levels. Statistically, after a year of job hunting, less than half of them were employed. Basically it makes economics and business sense for firms to have preference over those who are more qualified. Well educated employees are generally perceived to be more independent at workplace, fast learner and able to understand complex instructions

(2) Lack of experience. Experience positively correlates with productivity. This is very true especially in jobs that requite mental skills. Those with more years serving the society are perceived as more efficient. Although paying them a higher salary, the costs will be eventually widely spread out. So, costs per unit of task will be quite low, compared to new inexperience school leavers

(3) Training costs. Most firms feel that providing training to younger inexperience workers is a waste of time and money. They may also think that some parts of production process will be affected while waiting these young people to gain on-the-job experience. In fact, they prefer to free ride on workers who already got training in their previous jobs

(4) Generous benefits. Many feel that young unemployment is partly due to the high unemployment benefits which actually put them in a comfort zone rather than pressuring them to look for jobs. This is a classic case of frictional unemployment, but could be a worse one as young people may take longer duration to land on a suitable job. It should be reduced or adjusted in accordance with how many years one has been working or paying national insurance
(5) National minimum wage. Under the National Minimum Wage Act 1998, this policy came into effect on 1st April 1999. Its core purpose is to provide those people with low income a better living and also to encourage unemployed to take up jobs. However, some employers feel that young workers ‘don’t deserve’ this scheme. They argue that early working years are to accumulate useful experience. As such, forcing them to provide minimum wage just means raising production costs unnecessarily

(6) Revamping operation. In any typical organisation, younger workers are often viewed as least valuable. As such they will be the first to go shall the firm decides to restructure the whole operation in period of recession or mergers. It follows the principle of LIFO-last in first out

(7) Hysteresis. This theory advocates that if someone is out of job for quite some time, he or she may find greater difficulty to enter the job market in the future. It is not difficult to see why. A bleak gap of two years on a CV looks bad at any age, but straight out of school, a young person can be branded as unemployable. Equally, a pile of rejection letters is good enough to damage one’s self-esteem particularly when this young workforce does not have past working experience to keep them going. Some may choose to quit altogether while some may engage in immoral activities. This will not only cause hardship in finding a job, but jump start a cycle of deprivation that are difficult to break or expensive to fix

(8) Experimental years. Arguably, younger people tend to have higher tendency to voluntarily quit their jobs than older workers. Their initial experience in labour market is likely to contain some elements of ‘shopping around’, before landing on a job which they find most appropriate. Besides, their opportunity cost of doing so is low. They are less likely to ‘need’ a job to support a family

(9) Crowding out. This could be a mix blessing from the enlargement of EU. With influx of foreign workers especially from Eastern European, local jobs have been crowded out. Firms are more willing to hire them since they are willing to take on low paid jobs & also their working attitude is much better. Also most of those menial jobs which are previously filled by unskilled young British workers are now occupied by them