Tag Archives: development

Fulfilling the ‘Indonesian Dream’

Photo: State Dept./Erik A. Kurniawan

Photo: State Dept./Erik A. Kurniawan

Last month, Joko Widodo, commonly known as “Jokowi”, helped mark a move towards the consolidation of the world’s third largest democracy by winning the 2014 Indonesian presidential election.  A former furniture maker turned politician, Jokowi’s win represents a shift away from the country’s political and military elite, which has traditionally dominated the post.  Jokowi himself has compared the victory to fulfillig the ‘Indonesian dream’ by stating “now, it’s quite similar to America, yeah?  There is the American dream, and here we have the Indonesian dream”.

However, many commentators predict that Jokowi’s tenure will be marked by a number of economic as well as political challenges.  For instance,  in the first quarter of this year Indonesia’s economic growth fell to 5.2%,  representing a new four year low.  Despite being South East Asia’s largest economy, Indonesia has struggled with a host of issues that have hampered economic growth, such as high levels of corruption, a dependence on natural resources and strained public finances, amongst others.

Many in particular have highlighted the high level of energy subsidies as a potential sticking point during Jokowi’s presidency.  Energy subsidies currently represent 16% of government expenditure and 4% of total GDP.  Government spending on subsidising energy prices is three times more than the allocation for infrastructure (roads, water, electricity and irrigation networks), and three times the level of government spending on health.  This has led a study by World Bank to conclude that Indonesia’s energy subsidies crowd out investment into other crucial areas of the economy.

This is something I find hard to disagree with.  After visiting Indonesia earlier this year, I saw first hand the country’s need for infrastructure spending – if you have ever been stuck of one Jakarta’s infamous traffic jams you too will understand this fully.  But it is not just new roads that are required.  As this article in the Jakarta Post points out, the country’s infrastructure suffers from a myriad of problems, ranging from frequent blackouts to poor internet connections.  As a result, Indonesia’s overall level of infrastructure ranks 82nd out of 144 countries in the World Economic Forum’s most recent Global Competitiveness Report .

In addition, infrastructure spending still remains under its pre-Asian financial crisis levels. With a lack of investment in infrastructure projects, some have argued that foreign companies have been deterred from making investments in the country.  Moreover, others have stated that the drag placed upon growth by poor infrastructure could lead to Indonesia falling victim to the middle income trap.  Freeing up public funds away from energy subsidies could thus have major long term economic benefits.

However, in a country where 100 million people live on less than $2 a day, past decisions to cut fuel subsidies have been met with violent protests.  For instance, only last year a decision by the government to raise petrol prices sparked demonstrations and clashes between police and protesters outside parliament.  Cutting fuel subsidies even contributed to the final ousting of the former dictator Suharto, who had been in power for more than 30 years.  Jokowi therefore faces somewhat of a policy dilemma.

Nonetheless, even if Jokowi reduces Indonesia’s energy subsidies it remains to be seen whether the country has the institutional capacity to deliver the key investments that are needed.  Corruption is a major issue in Indonesia and funds earmarked for projects are frequently eaten away by local officials and ministries.  The success of Jokowi’s tenure will therefore not be determined by solving short term issues such as energy subsidies, but by combating more systematic issues that hinder Indonesia’s long term growth, namely its weak institutions and corruption.

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Surprising statistics that may change your perception of London


So on the day that the super cars of the super rich descended on London, it was also announced that ‘world’s greatest city‘ has more millionaires than any other city worldwide.  In addition, London now accounts for 72 billionaires – almost 10 per cent of all the billionaires in the world. Some would see this as great news, a true testament of London’s economic might and status as a global powerhouse and  – you don’t have to go far to hear this kind of rhetoric from the media and politicians nowadays.

While it is true that London alone, is currently the ninth biggest economy in western Europe and represents 22.5% of the entire UK economy, there also is another side to the city.  A side where 2.14 million people (28% of the population) live in poverty and 10% of the population own 60% of the assets, and where child poverty sits at 36% and 25% of economically active young adults (aged 16 to 24) are unemployed.  These statistics (which I came across today whilst at work), among others, make for grim reading but serve as a reminder of the stark contrasts and challenges within this ‘great’ city.

The website from which these statistics are taken (www.londonspovertyprofile.org.uk), provides a great insight into the challenges faced by the city through visualisations and summary statistics – I highly recommend a visit.  From my point of view it would be interesting to see where London ranked among the world’s cities if a full range of socio-economic indicators (such as those listed on the website) were taken into account.  It might just turn out to be the case that we have to think more carefully about how we use the term ‘great’.

Photo courtesy of Simon and his camera : Neon Westminster London City – Blended Big Ben , please consult page and licence before reproducing

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Norwich North, the land that time forgot?



Whilst walking home from the city a few months ago I saw the above sticker posted in the subway by Anglia Square.  At the time it made me laugh as I have always heard comments from people regarding the north of the city and how it is fares unfavourably to the south.  Furthermore, escaping the north of the city has always been a long running joke between me and my friends.

After initially forgetting the sticker, my interest was sparked again whilst looking through the ONS Annual Survey of Hours and Earnings for a recent work assignment.  Out of interest, I scrolled down to view the statistics for the Norwich North and South constituencies.  The results indeed showed a marked difference between the wages in the north and the south of the city (see Table 1 below).

Table 1. Earnings in Norwich North and South Constituencies, 2013

Norwich North

Norwich South

Gross Hourly Pay



Gross Weekly Pay



Gross Annual Pay



Source: ONS Annual Survey of Hours and Earnings (2013)

The table shows a clear difference in the levels of earnings between the two sections of the city, with individuals living in the south of the city expected to earn on average £2,402 (gross value) more than their northern counterparts.  Furthermore, an individual in the south of the city is on average likely to earn nearly £2 per hour more than an individual working in the Norwich North constituency.

A closer look at the unemployment figures within the city reveals a much sharper divide.  Table 2 presents data from the Norwich City Council’s Economic Barometer report.  A map of the ward boundaries can be found here.

Table 2. Ward Level Jobseeker’s Allowance Claimant Count Unemployment, March 2014


% of total




Catton Grove















Mile Cross









Thorpe Hamlet



Town Close









Source: Norwich Economic Barometer (March, 2014)

The table shows that the Mancroft, Mile Cross and Catton Grove wards have the highest level of benefit claimants within the city, all displaying rates of over 4%.  In particular, Mile Cross has nearly 7 times the amount of benefit claimants (in absolute terms) than Eaton – located in the south of the city.

The lowest claimant counts can be found in the wards of Eaton, Nelson and University, all displaying counts of less than 2.0%.

Interestingly, Mancroft (the ward with the highest level of claimants) is considered to be part of the Norwich South constituency.  This is despite the fact that the area around Anglia Square and Magdalen Street, which many would consider to be in the north of the city, lies within the ward,

The graphic below transposes the values from Table 2 onto a map of the Norwich wards (click to enlarge).  From the graphic it can be seen that the areas with the highest levels of claimants are located in the north/north western region of the city, whilst those areas with the lowest are located in the south western corner.

Norwich map 2

Despite this, for many the biggest symbol of the decline of the north of the city is Anglia Square.  Described by some as an ”architectural abortion”, the area has experienced physical and economic decline for several decades.  Noticing the gradual decline the council adopted a ‘Northern City Centre Area Action Plan” in 2006, with an aim to encourage investment and growth within the area.  The belief was that the construction of new flats and offices would revamp the area and in turn attract new cafes, restaurants and shops.  However, the plan was badly hampered due to the recession and to date the only one real change, the introduction of a one way road system (St.Augustines gyratory scheme), has taken place.   In an area of relatively high unemployment (in comparison to the rest of the city), such a regeneration scheme could create a number of much needed, new jobs and opportunities.  

However, whilst the council has held out for a private investor for the scheme, other areas such as the Norwich Research Park (albeit not in the City Council’s jurisdiction) have received £26 million in state funded investment.  While no one can doubt that such an investment will bring new jobs and growth to the area, it does question the allocation of state funds by the government to a research park and area which has been prospering since the 1960s.  For now, progress on Northern City Centre Action Plan remains painstakingly slow and it remains to be seen whether the real changes required within this part of the city will ever come to pass.

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Economic growth and Boris Johnson inequality debacle

After returning from an unpaid internship in Austria for the last three months, I was very interested to see Boris Johnson’s latest comments on inequality. After reading a number of articles focusing specifically on his comments relating to IQ, I  believe many had not picked up upon another important part of his argument – the implied justification that the current level of income inequality is acceptable because it a key and necessary driver of economic growth.

The argument that inequality drives economic growth goes back to the roots of economic theory itself. The theory argues that inequality generates incentives for individuals to work hard, compete and innovate within a market economy. A level of inequality allows for there to be winners and losers from this process and drives economic progress as individuals strive to reach the top. The theory therefore predicts that more unequal countries should grow at a faster rate. However, despite the strengths of this argument there are a number of reasons why an unequal distribution of income and assets within an economy may do precisely the opposite.

Many economists argue that highly unequal income distributions can lead to a number of economic efficiencies. Firstly, when the vast majority of wealth is concentrated in the hands of the few, it means that a smaller fraction of the population qualifies for credit because they lack the necessary collateral to obtain loans. As a result they may not be able to invest in the education of their children or gain sufficient funds to start a business. Productive investments within an economy, which stimulate growth, are therefore foregone.

Secondly, a higher level of inequality may lower the overall level of consumption within an economy. This is because people with lower incomes tend to spend a higher proportion of their income than those at the top. Consequently, if most of the national income is concentrated at the top, it is argued that overall consumption may fall. Moreover, the wealthy tend to spend a higher proportion of their incomes on luxury import and foreign travel whilst they may also seek tax havens for their saving abroad. This affects the economy through a process known as capital flight, such investments do not contribute to a country’s productive resources and can therefore hinder the prospects for economic growth.

Other authors have looked at the political economy implications of high levels of inequality for economic growth. For instance, when wealth is concentrated in the hands of the few, these individuals may take measures to safeguard their assets or capture more wealth instead of increasing their own productivity. Individuals may partake in disruptive rent seeking activities such as excessive lobbyingprovide large political donations or engage in bribery. In turn, all of this leads to inefficient use of resources as they are diverted away from productive activites which could stimulate economic growth.

A more recent argument is that high levels of income inequality may precipitate credit bubbles and financial crises. Here the argument is that when incomes grow at the top and those at the bottom stagnate, the demand for cheap credit increases. At the same time there is a push by those at the top for policies that sustain and build upon their wealth, such as lobbying for looser financial regulations. As explained by an influential study by the IMF, the end result is a viscious cycle of inequality whereby more and more individuals at the bottom have to borrow to keep afloat thus increasing the risk of a financial crisis.

This point I find particularly relevant as I believe it builds upon the Marxist theory that rising inequality would lead to the ultimate collapse of an economy. The basic argument here is that as business owners become richer by applying downward pressure on wages, the economy will come to a point where no one can afford to buy what the business owners are selling. At this point the economy will stagnate and reach the point of collapse. From this viewpoint, credit is just merely just a mechanism that allows individuals to spend above their means thus postponing the inevitable credit crisis.

But what about the empirical evidence.  Take the much cited case study of the Philippines and South Korea for example. In the early 1960s, both of the countries were similar on a number of macroeconomic indicators. They had comparable levels of GDP per capita, urbanisation, population size and primary and secondary education. However, over the period 1960-1988, the per capita income in the Philippines grew, on average, by only 1.8% a year. In contrast, per capita income in South Korea grew, on average, by 6.2% a year over the same time period. However, what is most interesting about this story is that, compared to South Korea, the Philippines exhibited a significantly more unequal distribution of income over the period measured. In 1965 the Philippines’ gini coefficient was nearly 17 points higher than that of South Korea. This clearly contradicts the argument that more unequal economies grow at a faster rate.

A number of more rigorous empirical studies have also found that high levels of income inequality have a negative impact upon growth. For instance, a frequently cited study by Alesina and Rodrik (1994) finds that the gini coefficient has a consistently negative effect upon economic growth. Likewise, Deininger and Squire (1997) investigate whether initial income inequality has a strong impact upon long term growth rates. They find that link between income inequality and economic growth is not strong however they do find that inequality in the distribution of assets (in this case land) exerts a strong negative effect upon growth.

On the whole the empirical evidence on the relationship between income inequality and economic growth is inconclusive at best. The studies conducted suffer from numerous data issues. For instance, inequality is measured in many different ways across countries making comparisons difficult. Conclusions made from many of the studies available are therefore tentative at best. As a result there is no clear evidence that income inequality has any impact on growth whatsoever.

The debate has still not been won by either side. While many accept (and I do too) that a level of inequality is necessary to drive economic development, it is not justification for the significant increases in income inequality we have seen over the past few decades. Furthermore, high levels of income inequality can have far more widespread ramifications for a country besides economic growth. As this interesting lecture by Richard Wilkinson shows, high levels of income inequality can have negative impacts upon a number of socio-economic factors such as health, life expectancy and levels of trust within society. Furthermore, a number of a studies have found a negative relationship between inequality and levels of overall happiness.

Nonetheless these are issues which will not be regularly mentioned within the political sphere. There is still a strong focus on crude indicators such as economic growth to gauge the success of our economy. Unfortunately politicians such as Boris Johnson are still very focused on this narrow gauge of development and therefore fail to see the negative socio-economic impacts that the forces of greed, envy and ultimately, inequality, can lead to.

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Opening Pandora’s box – the G8 turns to Nestle and Monsanto to combat hunger

So the London Hunger Summit has culminated in a doubling of funds devoted to tackling hunger. The summit has promised to increase annual funding from rich countries to $900 million (currently $418 million) by 2020, equating to a total of $4.15 billion to tackle malnutrition. Eradicating extreme hunger by 2015 is one of the key Millennium Development Goals set out by the developed world. As of present, malnutrition accounts for 3.1 million child deaths per year, furthermore it is a major cause of stunted growth which has been shown to have implications for both a child’s future education and health prospects.

Although this agreement is being hailed as a ‘historic moment’ in the battle against hunger, the new commitment still falls short of the mark whilst creating a smokescreen for more damaging projects which have already been initiated. Firstly, the respected medical journal The Lancet claims that an extra $9.6 billion is needed to effectively reduce the level of malnutrition by 1 million. Clearly again when it comes to aid, we are falling short. For instance, in 1970 rich countries promised to give 0.7% of their total income as aid. However only 5 countries have met this target, known as the G07 these countries include Norway, Sweden, the Netherlands, Denmark and Luxembourg.

Secondly despite this lack of apparent aid there is another more worrying trend at work, governments are turning to the market to solve problems of agricultural underdevelopment. Whilst David Cameron would like us to focus on this new deal, the announcement overshadows other talks which may in fact worsen the problem of hunger in Africa.

In 2012 the G8 launched its new so called alliance for food security and nutrition. This alliance involves new deals between some of the largest multinational companies in the world and African governments. In a nutshell this initiative is designed to loosen up regulatory constraints on international capital flows and thus stimulate investment into African agriculture. The aim is to stimulate a so-called second ‘Green Revolution’ whereby African farmers benefit from improved access to inputs and regional markets.

African agriculture in general is described as inefficient by many economists. The continent has an abundance of fertile land however the sector is mainly dominated by many small farmers who produce for themselves and sell their surpluses mainly at the local markets. Consequently productivity remains stubbornly low due to a lack of capital, and the necessary infrastructure. Many multinational companies therefore see Africa as new frontier to make profits. So far companies such as Monsanto, Syngenta, Yara International, Cargill, DuPont, and PepsiCo have pledged to invest $3.5 billion in the African agriculture sector.

But hang on a second haven’t we been here before. In the past Western governments have dictated the terms of many aid agreements and promoted the freeing up of markets with disastrous results – just observe the results of previous IMF and World Bank led structural adjustment programs. Furthermore such past programs left many African governments cash strapped therefore making them more willing to accept any new influxes of investment. This means that the new alliance has undermined and bypassed democratically agreed initiatives such as Maputo declaration. This is particularly evident from the recent letter  addressed to the African Union by 15 African Farmer Federations against the new initiative. 

Likewise the takeover of thousands of hectares of land by multinational companies could have a significant impact upon farming communities. These commonly named ‘land grabs’ have been criticized for their negative impacts upon small scale farmers. In many African countries there is a lack of enforced private land ownership, a world bank study for instance found that only between 2 and 10% of the land is held under formal land tenure. As a result large land acquisitions by MNCs in the past have tended to displace small local farmers to less fertile lands or destroy their livelihoods completely. A special UN report further argues that large scale land acquisitions can heighten the problem of rural to urban migration forcing many into urban slums in search of work.

For me this new paradigm shift to the private sector represents a serious threat to international development. As argued by Sophia Murphy’s blog, companies are not charities, they are there to make a profit. Furthermore although they are bound by law they are not as Sophia argues bound by public interest. This is most pertinently shown by the one of the cooperation frameworks in Mozambique which requires the Mozambique government to,

1) Systematically cease distribution of free and unimproved seeds except for pre-identified staple crops in emergency situations.

This, as argued by a recent guardian article, condition will no doubt serve to lock farmers into buying expensive seeds from the private sector and corporate monopolies.

The proposals therefore reflect to me the burgeoning influence of large cooperations in every aspect of our policy making today. More importantly it reflects an attempt by the G8 to offload the burden of global food security and mask its failure to meet the targets it set in the past.

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We don’t make anything any more…..


One of the most common complaints which I hear working in a machinery retail outlet is that the UK doesn’t make anything any more. Looking around the store this is an easy argument to accept, indeed most of the machinery I sell including lathes, welders and circular saws all come with a ‘Made in China’ tag. Furthermore most of the media reverts to this constant rhetoric, I have seen numerous articles posted in the media over the years foretelling the final demise of the UK manufacturing sector. So what is happening? Are we in a perpetual decline where we no longer have the ability to make anything? Such statements could be no further from the truth.

To begin with here are some interesting facts from a 2009 Price Waterhouse Coopers report that might surprise you. Firstly as of 2009 the UK was the 6th largest manufacturer in world (Some more recent measures vary between 5th and 10th)this includes large global shares within individual markets – the UK holds a 15% global share in the Aerospace sector. Secondly, UK manufacturing output had reached an all time high just before the 2008 global crisis took hold. Lastly, UK manufacturing achieved a 50% increase in labour productivity over the period 1997-2007. Although struggling due to the global downturn in the recent years, the facts show that the UK manufacturing sector is far from dead.

It can be argued that this idea that the UK manufacturing sector is in terminal decline emanates from a number of relative not absolute comparisons. When the relative figures are observed one could be forgiven for believing the above statement. For instance the graph below shows how manufacturing has contributed less and less to the national economy in recent years relative to other sectors.


Service sector growth has far outpaced growth in the manufacturing sector in recent times. This has further led to a decline in the relative number of manufacturing jobs. In 1980 manufacturing accounted for 25% of all UK jobs, by 2008 this number had fallen to 10%. Combine these figures with the fact that the UK’s share of global manufacturing has dropped significantly in the last few decades and you are left with a national sense of pessimism regarding the manufacturing sector. Yet as the paper argues the UK has been punching well above its weight for the last century in terms of size and population. It is therefore inevitable that we are to be caught up or overtaken in relative terms by countries with more abundant natural resources and supplies of labour as the Solow growth model predicts (the theory of diminishing returns states that the introduction of one more unit of capital into a capital scarce country will lead to a greater increase in output than in a country which is in comparison capital rich).

Despite the relative decline of the manufacturing sector as a component of total GDP, it is a rather unheralded fact that UK productivity in the sector has grown by 48% over the period 1987-2007.  The gradual decline of manufacturing jobs is arguably attributable to such productivity increases and more broadly our natural progression to a knowledge economy. Better technologies and workplace practices have meant that we can now produce much more per individual worker. In an similar process which was seen in the agricultural revolution, these technologies and processes mean we require less manpower to produce the same amount of output compared to say, 1950. This fact should be celebrated, not frowned upon as it often is due to its impact upon jobs.

The manufacturing jobs of the future will not be based as much upon an assembly line but instead in the R & D departments where companies attempt to find a niche markets and thereby gain competitive advantages. This is where the knowledge economy comes in, although the UK is not gifted with large surpluses of labour as in China, it does retain a high level of human capital (the level of knowledge and know how an individual possesses) and this will be the driving force of growth in the long term as new innovations are made. So in this sense it is we should not be pessimistically stating we don’t make anything any more, we should be looking with optimism at what we will be making in the years to come.

Some additional facts of note.

  • The UK has the 3rd largest automotive industry in Europe.
  • The UK is home to the 2nd largest maker of aircraft engines in the world (Rolls-Royce).
  • The UK has the 3rd largest pharmaceutical company in the world (Glaxo-Smith Kline)
  • The UK has the 4th largest oil refining capacity in Europe.
  • The UK manufacturing sector attracted £30 billion of net foreign direct investment in 2010.

This is quite a short post as I have only just returned after from the Philippines after a 3 week trip to see my girlfriend. I have intentionally omitted some of the more crucial challenges that the sector faces to focus on what it has achieved contrary to popular belief. Furthermore it should be acknowledged that the transition to a knowledge economy requires a strong manufacturing base and the current economic crisis may threaten this.

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Slovenia and Luxembourg – the next victims of Cyprus contagion?


Since the debacle in Cyprus one question has been at the back of every commentators mind: who’s next? Naturally those countries with the same characteristics as Cyprus have been main contenders – those with a large financial sector relative to their economy.

Slovenia in particular has been singled out as the next potential recipient of a bail out by the Euro zone  The country has a large financial sector equaling around 130% of GDP. Although at much smaller level than Cyprus at 700%, the IMF estimates that up 20% of the loans in Slovenia’s biggest banks are non-performing or near default. This could put more pressure on the Slovenian government to help bail out the sector. The markets have already reacted to such foreseen events. Ten year bond yields rose to a record 6.8% yesterday, whilst two year yields have tripled in the past week rising from 1.2% to 4.26%. Furthermore the cost of insuring debt against default has significantly increased as shown by the graph below.


 These movements show that investors are factoring in the higher risk of government default and contagion from Cyprus. Such increases mean higher costs for government borrowing which will in turn make raising any funds to recapitalize banks harder to obtain. To further confound the situation, the IMF has predicted that the economy will decline this year by 2% and the recent political turmoil has done little to reassure investors.

Luxembourg too may become another victim of the Cyprus contagion. As the graph below shows Luxembourg’s banking assets sit above 2,500% of GDP by far the largest of any other Euro zone member.


As the Cyprus situation unravels investors will look to other euro zone economies which they may consider to have unsustainable large financial sectors. In this sense they are unsustainable because the sectors have become so large that the government would not be able to fund a bailout. Luxembourg however does have one advantage, most of the banks in the country are foreign owned subsidiaries, with domestic banks only accounting for 8% of the sector. This means in the event of a major banking crisis these banks may be aided by their parent banks. Nevertheless, the risk still exists and such support is never guaranteed especially if such parent banks are facing difficulties in their own countries.

One thing has become evidently clear from the crises in both Cyprus and previously Iceland. Promoting yourself as a tax haven for large financial companies and allowing the sector to far outgrow the size of the economy is an unsustainable development strategy. The risks of a banking sector collapse certainly outweigh the benefits as shown by the current situation in Cyprus. Furthermore promoting this strategy in a currency union further confounds the problem, when the ability to ease monetary policy is foregone.

Unfortunately the handling of the Cyprus situation, most importantly the deposit tax, has made investors even more wary of leaving their money in such countries. The Euro zone now finds that although it may have solved one crisis, the length of time and the conditions applied now mean that more crises are bound to appear elsewhere.

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