State of the Economy Conference 2013, Institute of Economic Affairs, Institute of Directors

I was very fortunate to have the opportunity to attend this very prestigious event with many well-known and famous speakers. The day was split into four sessions, each discussing a different aspect of the title of the conference:

‘Stagnation or Recovery – What does the future hold?’

Session 1 – Chaired by David Smith, Economics Editor of The Sunday Times:

To talk first was Charles Bean the Deputy Governor of the Bank of England (BoE). This was a very interesting lecture, as many people were curious of what somebody of this authority believed, regarding the current economic situation of the UK. The majority of his talk was about the dismal state of the economy following the Great Recession of 2008, including the high inflation, demise of Lehman Brothers and the impact of this on the Banking world, uneasy growth rates and the failure of many polices such as Quantitative Easing (QE). Furthermore, it was evident that the demand and supply of the UK had been significantly impacted by the Recession and this led to further economic complications. However, Mr Bean claimed that the Monetary Policy Committee (MPC), which he has some control over, would be trying to maintain growth rates amid these economic uncertain times.

The next talk was by Roger Bootle the Managing Director of the Capital Economics. Mr Bootle’s talk was on the possible solutions of the Eurozone crisis. Firstly, a brief introduction on the problems the Eurozone faced were outlined: shrinking economies, the near collapse of the economies of peripherals (i.e. Spain, Italy and Greece) and the failure of competitiveness which is a main drive for markets to keep their growth rates. Moreover, it was apparent that the banks of Europe were still very weak following the collapse of Lehman Brothers and their exposure to risks was high, such as credit risk. However, it became increasingly obvious with the facts and figures that the Eurozone might break up and that this could occur in many ways, for example a strong country, like Germany, would leave first. Furthermore, Mr Bootle touched on the point that economies were prosperous before the Euro was formed in the 1990s and that after the formation of the Eurozone, countries began to slowly suffer. So, perhaps a break up of the Eurozone would be a good thing?

The last talk of this session was by Stephen King the Chief Economist of HSBC. Mr King’s talk was regarding the dynamics of global economies, in particular China. China in the last few years has received exceptional boosts in its economy and consequentially it has helped on a global scale, as it is a significant contributor to exports in the world. In addition, there was an excellent diagram to accurately describe the reasons why China has excelled to this great economic state. It was apparent that American and other countries’ investors placed money into China, which would sub sequentially end with companies and firms with higher profits, yet in the process the economy of China greatly excels.

Session 2 – Chaired by Louise Cooper, Senior Financial Analyst of BGC Partners:

The first talk was by Antony Browne the Chief Executive of the British Bankers’ Association. The main focus of this talk was regarding how to promote financial stability. The current banking sector is very risk orientated, with substantial losses or wins being made, based mostly on chance. However, when a bank loses on a risk for a trade or deal, they need to be bailed out by taxpayers, which further negatively affects the economy. This means the culture of ‘too big to fail’ needs to be eradicated as people highly depend on banks, so when they collapse as Lehman Brothers did, there are many consequences that ensue. There needs to be many more safety procedures in place to ensure that banks are safe regardless of how risky a transaction is. For example building a ‘firewall’ so if one bank collapses others will not be affected too much. Mr Browne’s ideas and suggestions were very interesting and posed a different opinion on the anti-bank attitude that has arisen following the Great Recession.

The remainder of session 2 was a panel discussion with Professor Phillip Booth the Editorial Director of the Institute of Economic Affairs, Professor Laurence Copeland of Cardiff Business School, Antony Browne the Chief Executive of the British Bankers’ Association and Chris Leslie MP, the Shadow Financial Secretary to the Treasury and a Labour and Co-operative MP for Nottingham East. The discussion was regarding regulatory reforms in trying to maintain a strong and healthy financial sector. A shared idea was that the problem with banks in the UK was the size of these banks and that a break up was required, not to remove them all together, as most people believed. The legislation that was discussed would have evidently prevented the collapse of Lehman Brothers, as they ‘wind’ the banks back, if they fail.

Session 3 – Chaired by Edmund Conway, Economics Editor of Sky News:

The entire session was a panel discussion featuring Professor Trevor Williams the Chief Economist of Lloyds Bank Commercial Banking, Andrew Lilico the Principal of Europe Economics and Dr Kwasi Kwarteng an MP of the Conservative party. The topic of this session was how to use supply-side reforms to boost the economy.

There were many ideas and policies discussed such as: freedom of the labour market, higher interest rates to curb inflation, to improve education and training schemes, increasing the size of the labour force, by increasing the age of retirement, increasing competitiveness of markets and to cut government spending. However, there were conflicts in ideas such as government spending, it was argued that a cut in government spending would help to decrease the budget deficit; yet increasing government spending could cause the multiplier effect, which would also positively affect the economy. This panel discussion offered many views and opinions that conflicted with others and all seemed viable but none seemed to single-handedly achieve the prime economic target of kick-starting the economy.

Session 4 – Chaired by Graeme Leach, Chief Economist & Director of Policy of the Institute of Directors:

The first talk was by Simon Hayes who is the chief UK economist of Barclays bank. This talk was about the change in bond yields, equities and interest rates over the years especially over the course of the Great Recession of 2008. It is apparent that the recession had a tremendous impact on the economy of the UK, as uncertainty and interest rates were affected by this event. Furthermore, it is evident that there is now a scarcity of ‘save-haven’ assets, where consumers and firms are safe and feel safe in financial matters.

The next talk was by Thomas Mayer, Senior Fellow at Frankfurt University and advisor of Deutsche bank, regarding the impact of the Eurozone crisis. Firstly it was evident that there have been adverse consequences to the crisis of the Eurozone that followed the Great Recession, such as: public debts rising, public budget deficits increasing and the increase in labour costs. There are many solutions to these problems; however there are always alternatives and choosing one is not easy as was demonstrated in session three. Mr Mayer emphasised the importance of competition of markets but of currency too, which has been lacking in the last few years. These possible solutions could help to turn around the crisis of the Eurozone and needs to be dealt with soon, as economies could begin to collapse if otherwise.

The final talk of this session and of the day was about trying to improve prospects of growth in Europe by Ludger Schuknecht the Director General of the German Ministry of Finance. It has been apparent that weak growth has been common over the last few years, along with rising public debt in the European Union (EU). To help the economies of the EU, there needs to be three prolonged strategies, according to Mr Schuknecht: fiscal consolidation, structural reforms and the strengthening of the institution of framework. Referring to case studies of Ireland, New Zealand, Sweden, East Germany and many other countries, it is obvious these past crises have required these three reforms to successfully exit their economic depressions. Normally, these fiscal changes can be considerably large and have a tremendous impact on society and the economy. However, these types of reforms should hopefully reverse the image the Eurozone has acquired, of being an economic disaster to a prosperous alliance of countries.

In conclusion, all four session combined presented a sound and intriguing argument regarding the state of the economy. There were many conflicting opinions, such as Ludger Schuknecht believing that the Eurozone should become a strong and prosperous alliance whereas Roger Bootle claimed that the Eurozone should break up, as evidence suggests that the members of the EU were economically successful prior to the formation of the EU. All in all, the conference featured many famous and influential people and was very informative of the options that governments have to help revive their economies.

What would Hayek do to sort out this mess?, Dr. Eamonn Butler, LSE

Friedrich Hayek was an Austrian economist who later moved to the UK and was considered as the main opponent of John Maynard Keynes, perhaps the most famous British economist and philosopher. However, both these famous economists had many famous theories and ideas that could significantly help the current economic crisis we are in. This lecture provided an insight into the thinking of Hayek and what he would do to fix the economic mess the world is in, according to the theories and ideas he collated in his works.

Firstly, Hayek is most known for his contribution in the boom and bust cycles or better known as the Business Cycle. Hayek claimed the problem was the boom and not the recession that follows, according to his theories the recession that is followed by a period of economic prosperity, lasts for as long as the period of economic prosperity was for. Dr. Eamonn Butler used an excellent analogy to describe the peculiar relationship between the boom and the bust and that was the recession was like a hangover after a party which is the period of economic prosperity or boom. Therefore, Hayek warned that whenever there are years of economic boom, economists should be fearful that a recession is going to hit soon, as it is inevitable according to the business cycle. It is apparent that prior to the Great Recession of 2008, economists were unprepared for the total economic disaster that was about to ensue.

Furthermore, Hayek believed that markets should be free and not constrained by government limitation such as in the form of ‘red tape’ which is legislation that limits the flexibility of the market. He also stated that the labour market should be free which means the National Minimum Wage (NMW) should be scrapped, which would cause some outrage amongst people. However, the explanation behind these controversial decisions was extraordinary. In the case of the labour market, it was claimed that the reason why high unemployment exists is due to the NMW and if it were scrapped more people would become employed as currently some people cannot be hired as the NMW is too high for some firms to advocate to. In addition, the normal market should be free so the correct ‘price signals’ are given out. This means that consumers and firms see the correct price of a good or service in the market system, as currently taxation and ‘red tape’ can act as ‘fog’ in Dr. Eamonn Butler’s words.

Moreover according to Dr. Butler, Hayek would have believed that the ability given to the Monetary Policy Committee (MPC) of the Bank of England (BoE) to set interest rates is wrong and should be stopped, as false information is then given out to consumers and firms that they should start to spend more money, whereas they should do the opposite. Similar to the freedom that should be granted to labour markets and the markets for goods and services, should also be granted to the interest rates. This would lead to correct information reaching firms and consumers and they would know the current economic position of the UK, rather than that knowledge only being shared with the central bank, the BoE.

To conclude, Dr. Eamonn Butler offered the most likely opinion Hayek would have offered had he still been alive today. It seems as if that this could perhaps be the solution to exiting the current economic disaster we are in and that is to refer to the theories and teaching of past economists.

China’s New Leadership - Hopes for Reform and Fear of Uncertainty by Professor Athar Hussain, Dr Debin Ma and Professor Arne Westad, LSE

China is quickly rising to be one of the most influential and powerful countries in the world, in terms of their economy and grasp on the world’s markets, such as being one of the largest exporters of goods. China have also recently experienced a slight change in leadership, which raises some eyebrows globally, as China have an unprecedented amount of control in the affairs and decisions of many nations around the world. This lecture gave the analysis of these changes and their significance, from three well-recognised experts in this field.

One of the main focal points of the lecture was how this new leadership is going to deal with the prospect of China’s growth slowing down after decades of sharp increases in growth of their entire economy. This is most apparent after figures and predictions suggest that China could soon experience a slow down in growth and perhaps even the risk of economic collapse. This speculation and predictions can be measured against the graph of the Business Cycle:

The Business cycle would suggest that China would inevitably experience a downturn or in this specific graph a recession, sourced from: http://monevator.com/wpcontent/uploads/2009/05/businesscycle_1.jpg

However, as was pointed out during the lecture these predictions of China’s economy collapsing and a slow down in growth have been stated for many years, making these claims less plausible.

Furthermore, another issue that this new leadership will have to overcome is the rapid urbanisation of China with now more than 51% of people living in cities, which has dramatically increased from amount of people who lived in cities twenty years ago. This urbanisation is occurring at such a rate, due to the substantial advancements in China’s economy and technology, enabling the eradication of domestic issues such as poverty, which was rife in China a mere thirty years ago. This quick urbanisation, however may also have negative consequences, as was expressed in the lecture. It is most evident with the growing rates of inequality in China following their fast growth rates. This will obviously be a grave concern for the new China’s leadership. However in this scenario, slow growth rates could be argued would greatly benefit China, as the problem of inequality would be less of a concern.

Moreover, another issue the new leadership of China will have to face is “What will China do next?” China has evolved from a country stricken with poverty and disease to a bustling, wealthy and urbanised nation in the space of thirty years, which is extraordinary. However, in the process China has gained tremendous power, for example they export significant quantities of goods across the world and as a consequence their economy is now booming. Therefore, as was discussed in the lecture, this new leadership of China ought to consider this and the image they portray to other countries, especially their neighbours.

In conclusion, Professor Athar Hussain, Dr Debin Ma and Professor Arne Westad provided a stimulating discussion regarding the new leadership of China and the impacts of this on their economy. It is clearly apparent that China’s new leadership has many challenges ahead. However, how could the government of one of the most powerful nations on Earth, not have any challenges and obstacles?