Category: Wealth

The article by Shai Bernstein, Josh Lerner, and Antoinette Schoar is devoted to the issues of sovereign wealth funds (SF). The authors use the history of SF and analyze the current situation through original quantitative research.

The authors begin with an overview that demonstrates that there exist up to 70 SF, with the 20 biggest ones encompassing 90% of the total SF asset (Bernstein, Lerner, and Schoar 220). SF are founded on various sources, including resources (like petroleum), state-owned property selling revenue or trade surpluses. SF are characterized by rapid growth (have grown ten times in the past two decades), a great part of which is attributed to the oil prices (the article was created in 2013).

The goals of an SF are often multiple: it is a reserve of capital meant for the future generations (which is particularly important for the resource-based SF), a stabilizing tool for the government revenues (similarly important for undiversified economies and in the crisis situations), and as a “holding company” for the government’s investments (Bernstein, Lerner, and Schoar 222). The authors also point out the potential of the SF to accumulate the “sudden” wealth and prevent its mismanagement.

The issue that the authors mention in relation to SF deals with the fact that SF is often used to support various domestic businesses, which introduces the challenge of making a politically and economically correct decision. The authors analyze the publicly available data for 29 SF and come to the following conclusions concerning this challenge. The SF with politician involvement are indeed more prone to making economically less attractive decisions, that, however, tend to be “strategic”, that is, aimed at the country’s industry development at large. This factor is reflected in the tendency to invest in home industries and, especially, in the underperforming ones.

At the same time, these tendencies are not totally universal, and some variations do exist. As such, some SF are aimed at long-term development, and others are concerned with short-term objectives (for example, the acquisition of companies). Still, in either case, long-term return maximization is not characteristic of politically-driven SF, and this is the primary conclusion of the authors. Apart from that, SF can be managed externally, and in this case, the author claim, SF are more likely to invest abroad and their preferences are more economically attractive.

Having demonstrated the effects of political influences on economics-related choices in SF, the authors mention other challenges of the funds. One of them is transparency that is being demanded nowadays by the public (due to the increasingly public transactions of the funds and their growth), and that is being avoided by the government (possibly, as a result of fear of imitation or the understanding of the importance of the related decisions).

The other difficulty is concerned with the effective management of the growing SF and their returns, and it primarily stems from the enormous size of SF that puts it in a specific position and demands specific strategies. The authors mention the following coping strategies: avoiding illiquid markets and alternative assets (which lowers the required skill of the investor) as one extreme, heavy exploitation of private funds and direct investment as the other one, and building a structure of smaller funds for different investments and experimenting as an option that combines the two previous ones. Still, according to the authors, the question of the most attractive strategy of dealing with the SF issues remains open.

Works Cited

Bernstein, Shai, Josh Lerner, and Antoinette Schoar. “The Investment Strategies Of Sovereign Wealth Funds.” Journal of Economic Perspectives 27.2 (2013): 219-238. American Economic Association. Web.

UK Unemployment Trends

Most people have viewed unemployment as being an indicator of economy showing the number of individuals in a particular economy who have a will and ability to work but they have no jobs. If a person is found in this situation, then that person is unemployed. Individuals who lack the will of working for any reason are not categorized as being unemployment, but they are just economically inactive.

Economists have concluded that in case the levels of unemployment are too high in an economy, then that particular economy is just struggling to maintain its population. Under this situation, then the economy is not utilizing its resources in the best way possible.

From the graph of UK unemployment 1950-2001, in 1950s and 1960s, unemployment rates in UK were very low. According to Politics.co.uk par1 this amounts to about 3% on average. This was attributed to what is referred to as Post-war boom.

During Second World War, those individuals who served as servicemen in military were promised to be given full employment after winning. At this time, there was no government that was ready to break this promise.

It has been stated that, advancement in technology along with international trade that was stable and “the success of Keynesian economics and the stability of the Phillips Curve created a situation which did approach full employment – although of course, at that time the majority of women remained in the category of the economically inactive” (Politics.co.uk, par. 6).

Moreover, in 1950s to late 1960s, the interest rates were very low; there were lots of incentives for those carrying out research and development as well as on general investment. As a result, there were many investments springing up month after month due to the above mentioned escalator mechanisms. Though this strategy worked in those times, in the current times the strategy is ineffective.

This is because, in the current times, this strategy will make government budget to increase, the government has no additional sources of revenue. In case the government tries to increase tax, it will affect consumption as well as investments negatively. As a result, it will be very important for the government to raise PSBR with the aim of countering this problem.

On the other hand, the current UK government can increase tax, and ensure that it’s spending also increases at the same rate. This balanced budget multiplier will helps the government to increase its national income in general. This is because not all extra money paid inform of tax will be spend. This extra tax will be as a result of increased investment and consumption.

In 1970s, unemployment rates in UK started to increase. This has been attributed to the collapse of orthodox boom. This was caused by the energy crisis in 1973, and the ‘generated stagflation’ in 1979. These impacts resulted to high inflation rates as well as high unemployment rates in Europe. In 1972, unemployment rates topped a million for the first time in history.

This is because; labours through unions were demanding more salary rates. In around 1979, there was a situation referred to as ‘winter of discontent’, where even grave diggers protested pay freezes by calling for a strike. At this time, unemployment was a 1.1 million. This was the time the Labour party was swept out of power by the Conservatives in the name that the labour party was not doing anything to deal with the situation.

When conservatives were in power, it was thought that unemployment rates will decrease in 1980s, but to peoples’ surprise, unemployment rates escalated further. At this time, the number of unemployed people clocked 3 million, which was about 12 percent of the population that was working.

However, this was just an average because in some parts of the country, the number was even higher. For instance, in the northern parts of Ireland, unemployment clocked 20 percent of that population that was working. Moreover, those areas that declining industries dominated, for instance coal mining industries, unemployed population was even very large.

Early 1990s experienced a fall in unemployment percentage. And by late 1990s, that is 1999, the number was still bellow 2.2 million individuals. This kind of trend went on till 2005, with official figures putting the rate at around 1.398 million individuals. Nevertheless, in the last two years of Blair’s era, unemployment rates went up again.

In 2008, when Gordon Brown was dealing with global recessions, figures of unemployment clocked 1.79 million, which has been considered as being the highest in the last decade. In May 2010, by the time the coalition government was coming to power, unemployed population was clocking 2.5 million people.

However, the current Prime Minister, (David Cameron) has promised that unemployment rates are expected to fall in the coming years under his government. He said, “At the end of this Parliament unemployment will be falling” (Politics.co.uk par. 4)

Moreover, there was a fall in unemployment rate in early 1990s because most industries moved from manual production to technological production. It is clear that, though there was slight unemployment, but those who remained working ended up receiving higher salary rates as a result of increased production, hence increasing aggregate demand for money.

Moreover, increased technology led to lower production costs; hence UK commodities gained lots of competitive advantage on global market, hence increased government revenues through tax. These two effects led to unemployment rate reduction in UK (Anderton 1993, 56).

However, according to civil societies, unemployment has been rising month after month. For instance, between June and August 2011, unemployment has increased to 2.57 million individuals, which has been considered as being the highest since 1994.

To explain this trend, it has been shown that in the entire history, policy makers have been holding a view that macroeconomic advantages of having high unemployment rates are much more as compared to its negative effects on the economy and social openness.

This is what happened in 1980s. On the other hand, the government has not been having a will to allow high unemployment rates of unemployment as a result of its effects on social environment, the economy, as well as public costs.

Moreover, figures of unemployment in UK just explain a partial story of what is happening in UK. This is because, for many years, there have been structural differences among UK regions making some parts of UK to experience higher percentages of unemployment as compared to others.

For instance, unemployment in Wales and Scotland is much higher as compared to other developed areas like London and South East (Curwin & Slater 67). This has been due to the fact that, there are some regions having fewer employers as well as business closures like the closure of mine industries in the 1980s.

The recent one has been in Birmingham, where Longbridge plant was closed down. This issue has brought lots of devastating situations in such areas.

The figures of unemployment in UK have been rising as a result of other complexities. For instance, “prevalence of unemployment amongst ethnic minorities, women, disabled people, young people, and people who have been unemployed for long periods of time” (Anderton 243), all of these people are grouped together, they make the current figure to be much high.

However, this group in early 1950s to early 1970s were still being considered as inactive, hence were not considered as being unemployed. However, the situation has changed since 1980s, as they also add up to the unemployed population.

Moreover, according to Begg, Fischer & Dornbusch 126, during election times like in 1997 and 2001, the number of unemployed people goes down, but this might not be true, as a result, the afterwards years the unemployment rates increases again.

This strategy was used by Labours party to gun up votes. This strategy has been successful due to the fact that there are two principles of measuring unemployment, namely Labour Force Survey and the Clamant Count. As a result, in some situations, Labour Force Survey has been used as it has the ability to minimize unemployment number for political reasons.

Moreover, in 1980s and around 1994, UK experienced higher numbers of unemployed individuals. This is because many workers were moving from one job to the other. According to Anderton Allan 78, most people were moving from military jobs to other jobs, and the period between the two jobs, was being considered as being unemployment.

In addition, this was the time workers were demanding higher salary rates, as a result, most workers were reluctant pick the first job they were being offered.

Some reasons which led to this reluctance include occupational and geographical immobility, which made some areas to experience higher unemployed rates as compared to others; people were also having higher expectations for higher salary rates, hence many people needed well paying jobs, hence people were reluctant in picking jobs that offered low salary rates (Grand & Vildler 200).

However, in around 2003 to 2008, the government did much to reduce this reluctance among people. For instance, the government introduced working trials where by individuals were being given temporary jobs to ensure that in case one gets satisfied with it, then he/she picks it up.

In case one is not satisfied, then is moved to another temporary job. Other measures that had been implemented by the UK government to reduce this problem include making some improvements in training and lowering people’s expectations by lowering the working hours. Though these were difficult measures to implement, but they really helped the UK government in reducing unemployment due to reluctance.

Between 1994 and 1996, and between 2008 up-to date, UK has been experiencing and is still experiencing real wage unemployment. This is because salary scales had been raised to a level that some industries were making losses hence closed down. Other factors which led to real wage unemployment are setting minimum salaries and high levels of benefits.

Moreover, these trends can be explained by Kondratieff wave, which provides prediction of economy success and economy failure as well as world events. According to this theory, unemployment exists for about 10 years due to industrial and trade falls. However, after that, trade and industries picks up again leading to lower employment rates.

Moynihan Daniel & Titley Brian 3 has argued that in early 2000, unemployment rates in UK were very low because the government as well as industries had minimized real wage unemployment. In doing this, the average real wage had been levelled to Market-clearing wage. To ensure that labour accepts this wage rates, inflation rates in UK were kept very low.

As a result workers salary rates were kept constant, but in real sense they were falling in value. However, this strategy worked till 2007 where workers started realizing the effect of falling value of their salary rates. As a result, in 2008, the worst effects of inflation were experienced.

For instance, commodity prices went higher as well as exchange rates. To date, this has not been dealt with, as workers are still demanding higher salary rates as unemployment rates goes higher.

It is due to high unemployment rates that led to the public demonstrations against the coalition government in mid 2011. This unemployment has been as a result of UK economic recession and high population. The strategy to deal with this situation has been very difficult in the current complex labour market.

This is based on the fact that, though the government has been trying to ensure that workers accept lower salary rates, but due to trade unions salary rates have remained artificially high.

Sloman, Hinde & Garrett 45 argue that, the main issue that is leading to high unemployment rates in UK is not really lack of job opportunities, but many employers are not willing to take those who have been unemployed for a long period of time, though this group has a will to accept employment at a lower salary rate.

Employers claim that such people lack up-to date skills and experience. In dealing with this, though the Coalition government has tried to initiate retraining programs, but it seems it is not working to employers’ satisfaction.

Using Philips Curve to Explain Unemployment in the UK

The curve representing the relationship inflation and the unemployment rate is referred to as the Philips curve. According to this curve, unemployment is inversely proportional to inflation (Phillips 283).

This curve can be used to explain unemployment in the UK because by the time unemployment is high in the UK, there have been chances that wage rates increases slowly, and when unemployment is low, UK has been experiencing rapid increase in wage rates. This was experienced in 1960s

This is because in 1960s, unemployment rates were low, the labour market in the UK was very tight, and as a result, faster industries ended up raising wage rates with the aim of attracting the scarce labour.

However, during high unemployment rates, this pressure is abated. According to the classical view of inflation in UK, inflation is as a result of money supply alteration. In case money supply is high, commodity prices also goes higher.

Most economists like Phelps 265 have challenged the theoretical understanding at the height of the Philips curve. It has been observed that employers and workers who are well informed and rational concentrate majorly on the “real wages—the inflation-adjusted purchasing power of money wages” (Phelps 265).

As a result, real wages are usually adjusted with the aim of adjusting labour supply to ensure that it is at equilibrium with the labour demand. As a result, unemployment will not be associated with real wages (natural rate of unemployment).

In addition, the Philips curve calls for the governments to start trading high inflation rates with the aim of achieving lower unemployment rates. This is a theoretical advice that no government will ever aspire to borrow.

Take it for instance that unemployment rate is at a natural rate and real wages are also kept constant in UK. At this time, workers expecting certain price inflation end up demanding higher wages to prevent their purchasing power erosion. In case the UK government uses monetary in an attempt to lower unemployment bellow its natural rate in the region.

There will be an increase in demand which will make industries to increase prices at higher rates as compared to what UK workers anticipated. Since prices will be higher, companies will start having more revenues hence taking more employers at the old salary rates and even might decide to raise such salary rates a little bit.

For a short period, employees will be suffering from what is referred to as money illusion, hence they will supply more labour since their salary rates had increased, leading to unemployment rate drop. However, such employees will not realize that there has been erosion in their purchasing power because prices have increased at a very high rate than what they anticipated.

However, as time goes by, workers will start anticipating higher price inflation. As a result, they will start supplying less labour but still insist on the wage increase to keep up with price inflation rates.

This will lead to a situation that “the real wage is restored to its old level, unemployment rate returning to natural rate. But the price inflation and wage inflation brought on by expansionary policies continue at the new, higher rates” (Sheffrin 56).

This analysis can be of great help in distinguishing ‘short run’ and ‘long run’ Philips curves. As a result, given the fact that average inflation rates will remain constant in the UK just as what happened in 1960s, and then it is true that inflation rates and unemployment will have an inverse proportionality.

However, in case inflation rates will change regardless of the direction, particularly when decision makers try to lower unemployment rates below its natural rate, after sometime, unemployment will come back to its normal state as inflation rates remain high. This means that after labour has had enough time to adjust, natural rate of unemployment will withstand whatever the inflation rate.

This short run and long run relationships have been combined to mean ‘expectation-augmented’ Philips curve. From this, it is clear that. “the more quickly workers’ expectations of price inflation adapt to changes in actual rate of inflation, the quicker unemployment will return to natural rate, and the less successful the government will be in reducing unemployment through monetary policies” (Friedman 5).

This issue of ‘expectation-augmented’ was experienced in most countries in 1970s, where countries experienced both high inflation as well as unemployment. According to Philips theory, such state will never happen. At this time, rates of inflation rose from 2.5% in 1960s to about 7% in 1970s. On the other hand, instead of unemployment rate dropping, it increased from 4% to about 6%.

This made most economists to accept the principles presented by the analysis of Friedman and Phelps. All these imply that after price inflation, employees and employers start considering inflation as a whole.

These considerations will “result to employment contracts that increase pay at rates near anticipated inflation, Unemployment would then begin to raise back to its previous level, but now with higher inflation rates” (Phelps 268).

Friedman and Phelps argued that, there as a certain rate of unemployment which when maintained, unemployment rate and inflation rates will be compatible. This rate is what many economists have referred to as “non-accelerating inflation rate of unemployment” (Friedman 10).

GDP as A Measure of How Well-Off a Country and Its People Are

In most scenarios, GDP has been used in measuring market value of all products and services that have been produced within a particular country in a given time. It is considered as being the most appropriate way of looking at the economy performance of various countries.

However, GDP accounts for some things which are not helpful in assessing well-being of the country population. Such parameters include “depreciation, income going to foreigners and regrettable like security expenditure” (Layard 126).

GDP was not meant to measure how well-off a country and its people. The main objective that led to the development of GDP is measuring market value of final services and goods that are produced in a particular country. In general, GDP has four major shortcomings when used in measuring how well-off a country and its people. First of all, GDP encompasses depreciated capital replacements.

However, depreciation does not contribute to peoples’ welfare in any way, in addition, the process of replacing old capital means that there is nothing that has been happening. From the chart, it is clear that GDP does not help people in any way; instead, it goes back to the replacement of physical capital.

Another thing is that, GDP is used in measuring income that is produced within country, but it does not consider people’s income in that country. There is there are some income which do not go into the pockets of the country citizens, but in the pockets of foreigners.

Thirdly, due to the fact that GDP only considers monetary transactions, it does not put into consideration other activities that are of more value to the country’s people, like children. The measure also does not consider the value of leisure time that people spent with their families or relaxing with friends.

This is a very important parameter when measuring how well-off a country and its people. It also ignores the significance of clean and quality air and water. As a result, any important measure of well-being of citizens in a particular country has to consider the above stated parameters.

Last but not least, GDP accounts for a lot of features that not in any way care for peoples’ well-being. For instance, in case earthquakes or hurricane comes and destroy the entire region, the efforts input when reconstruction process is taking place is usually considered as being a boost to GDP. This may even count when the efforts are directed towards replacing something that existed previously.

Moreover, costs incurred when preventing crimes as well as setting security measures adds up to the country’s GDP, but this expenses are incurred just with the aim of creating a peaceful environment.

Nevertheless, medical expenses incurred in the process of dealing with health effects which arises as a result of pollution also boost GDP. On the other hand, if this reasoning is taken to the extreme, then basic needs like food and clothing are not included in GDP. As a result, there is need for other measures.

Alternative Measures

According to Frey & Alois 43 and Lyubomirsky et al.120, GDP cannot be used in measuring welfare of people. As a result, he proposes ‘Measure of Economic Welfare’ that includes household services values and leisure to GNP. It minuses capital cost consumptions, as well as bad things like pollution and police services in dealing with crimes.

It is true that, “A very comprehensive and thorough Index of Economic Well-Being comes from the Canadian Centre for the Study of Living Standards” (Frey & Alois 409). This measure considers the consumption of both the government and the private sector, though it ignores household work. It also considers the human and physical capital that is owned by the residents of a country.

In doing this, the measure puts into consideration stocks of all productive resources that can be managed sustainably to ensure that they can utilized by the coming generations. Thirdly, this measure considers inequality as a Gini coefficient as well as the intensity of poverty.

Lastly, this measure considers aggregated components of security like rates of divorce and unemployment rates as well. In determining people’s well-being, a weighted average of the above stated parameters is calculated.

From the table provided, Norway is seen as having the highest economic welfare amongst 28 countries provided. However, though Sweden is considered as being the second, but based on GDP, it is number 17. As a result, this ranking greatly differs with the ranking based on GDP. As a matter of fact, this system favours those countries having high income levels, high equality and low levels of insecurity.

There are other methods which includes more measures of human welfare. It is clear that such methods consider wealth, security consumption, and equality among other parameters. As a result, these measures include other parameters as compare to the previous method.

They are based on the fact that “We have failed to see how our economy, our environment and our society are all one. And that delivering the best possible quality of life for us all means more than concentrating solely on economic growth”( Layard 125).

Amongst those methods, ‘The United Nation’s Annual Human Development Index’ is the best known, though it is considered by many as being very narrow. This Index puts together life expectancy levels, education as well as GDP in measuring how well-off a country and its people are.

This method is not far from the Measure of Economic Welfare because, it places Norway in the first position, followed by Sweden. However, this is because of higher education levels in such countries. However, countries like China, India and Ireland have gained more because of their high GDP.

Whoever, the most comprehensive method of measuring how well-off a country and its people are is ‘Weighted Index of Social Progress’ appreciated as WISP. The index calculated in this method considers many dimensions of people’s well-being.

It looks at “income, education, health, role of women, environment, social peace, diversity and welfare – although data limitations admittedly lead to the inclusion of some peculiar measures” (Kahneman et al 133). However, in ranking, this method does not differ greatly from The United Nation’s Annual Human Development Index and Measure of Economic Welfare.

This is because, though the two placed Norway as being the first, this method places Norway in the third position bellow Sweden and Denmark which were slightly below Norway in the previous methods. However, the rankings from these methods differ greatly from the ranking based on GDP.

Moreover, A Happy Planet Index (HPI) on the other hand considers life expectancy in a country apart from looking at their happiness without environmental destruction. It puts data collected from life expectancy, life satisfaction along with natural resource like energy consumption.

This index differs greatly from other methods as according to it, Vanuatu is placed in the first position. This is due to their environmental conservation. Countries around the equator are usually favoured by this method. It is used mainly in determining best destinations for holidays (Danziger & Taussig 501).

Measure of Domestic Progress is another method developed in UK with the aim of measuring its welfare. It is stated that “From economic indicators subtract social costs like inequality, accidents; environmental costs and the loss of natural resources. The overall result is an indicator that peaked in the mid-1970s, declined until the mid-1980s and has not yet regained that peak” (Frey & Alois 410).

Genuine Progress Indicator is just like Measure of Domestic Progress, but it considers individual consumption, the households work value, net fixed investments, and consumer durable values. Te index also puts into consideration commuting costs, environmental destruction costs and costs of depleting finite resources.

The indicators of well-being should show a wider picture of the society state as compared to what GDP provides. However, such methods have not explained how satisfied people are. As a result, the process of measuring happiness ought to take a different approach as compared to the indicators or methods described in the previous section.

According to the 2004 survey, “Swedish said they were very satisfied with the life they lead – the highest share in the sample. Only 17% of Germans and just 4% of the Portuguese felt the same way, as chart 11 shows”(Kahneman et al.130). In the past 15 years, studies have indicated that though per capita income has increased, satisfaction with life has not changed greatly.

Research in Europe has indicated that happiness in this region does not depend on per capita income, but on other factors like football matches and results. For instance, in France, most people were happy in 1998 the year they hosted the world cup and won it.

Moreover, in Europe, individuals get satisfied with life if their compatriots are trustful. As a result, it is very difficult to manage life satisfaction sustainably in Europe. So basing on income levels alone can’t explain happiness in Europe.

Works Cited

Anderton Allan. Economics, London: Cousseway press, 1993. Print.

Anderton Allan. Economics; A New Approach. Staffordshire: Collins Education, 1990. Print.

Begg David, Fischer Stanley, Dornbusch Rudiger. Economics, New York: Mc Graw-Hill. 2003. Print.

Curwin John and Slater Rebeccah. Quantitative Methods a Short Course, (5th ed), London. Thompson, 2004. Print.

Danziger, Van der Gaag. & Taussig, Smolensky. “The Direct Measurement of Welfare Levels: How much does it Cost to Make Ends Meet?’ Review of Economics and Statistics, 66.3(1984):500-505.

Frey, Bruno & Alois Stutzer. “What can economists learn from happiness research?” Journal of Economic Literature, 40.2(2002): 402-435.

Friedman, Milton. “The Role of Monetary Policy.” American Economic Review. 58.1(1968): 1–17. Grand Steven & Vildler Craig. Economics in context. Heinemann Educational: London, 2000. Print.

Kahneman, Daniel., Krueger, Alan. Schkade, David., Schwarz, Norbert. & Stone, Arthur “Toward national well-being accounts”. American Economic Review. 942 (2004):429-434.

Layard, Richard. “Happiness and public policy: A challenge to the profession”. Economic Journal 116(2006): 124-133.

Lyubomirsky, Sonja., Kennon, Sheldon & Schkade, David. “Pursuing happiness: The architecture of sustainable change”. Review of General Psychology. 9.2(2005):111-131.

Moynihan Daniel & Titley Brian. Economics: a complete course. Oxford: Oxford University press. 2000. Print.

Phelps, Edmund. “Phillips Curves, Expectations of Inflation and Optimal Employment over Time.” Economica, n.s. 34.3 (1967): 254–281.

Phillips, William. “The Relation between Unemployment and the Rate of Change of Money Wage Rates in the United Kingdom, 1861–1957.” Economica, n.s. 25.2 (1958): 283–299.

Politics.co.uk. Unemployment, 2011. Web.

Sheffrin, Steven. Rational Expectations. Cambridge: Cambridge University Press, 1996. Print.

Sloman John, Hinde Katherine & Garrett David. Economics for Business, (5th ed). London: Prentice Hall, 2010. Print.

Introduction

The idea of gaining wealth, as well as power and social status that go with it, has been seen as the embodiment of the American Dream for several centuries, yet the recent developments in the social environment of the U.S. have shown the tendency for change. In the current social climate, where the problems faced by marginalized communities from economically disadvantaged backgrounds have been placed at the forefront, being rich becomes nearly a source of guilt. However, the privilege that rich people have over a less fortunate part of the American society may become the lever for introducing justice into society. In her 2019 article “I’m Part of the 0.1 Percent and I Want a Wealth Tax,” Meghan Bell explains that the lack of understanding of the nature of their privilege in wealthy circles makes it nearly impossible to challenge the status quo.

A range of evidence offered by the author supports her initial statement quite well. The willful ignorance of the upper class becomes apparent once considering rich people’s reaction to the idea of discussing their privilege. Apart from offering the examples from her family, Bell also mentions the response of her classmates to the idea of discussing the problems of lower-class social problems: “The question was hedged and the topic swiftly changed” (Bell, 2019).

Analysis Introduction

The general impression left by the article is mostly positive, although there are certain issues fto address. Bell (2019) does a stellar job at outlining the core reasons for the current status quo to remain in its place, decrying the willful ignorance of the upper echelon of American society. With minor adjustments to the delivery of the argument, the discourse in question would represent a powerful call for action.

Thesis Statement

The need to introduce social and economic awareness to the environment of the upper class is currently conflicting with the unwillingness of the target audience to accept responsibility of their privilege due to the associated negative emotions and the necessity to carry additional burden. The described situation calls for a compromise implying a change in the attitudes of the upper class so that its members could prompt the creation of better conditions and opportunities for success for those from disadvantaged backgrounds, which requires the discourse with logos and tone focused on the need for equity and more adequate wealth distribution.

Article Analysis

Logos

The use of logos in the article in question is one of its doubtless advantages. The author incorporates her personal experiences and the observations made while she explored the environment of the privileged class with quite impressive accuracy. For instance, Bell’s (2019) commentary on the lack of perspective, self-awareness, and the understanding of the dire situation in which poor people are stuck constitutes one of the primary issues: “many privileged kids assume they could have bootstrapped themselves out of poverty if they’d only had the opportunity” (Bell, 2019, para. 8). The astute observation above points directly to the problem with the upper class and its attitude toward the poor, namely, that one of contempt. Having the advantage of being born into wealth, the 0.1% of the U.S. population fails to recognize the hardships and obstacles that poor people have to overcome in order to provide for themselves, not to mention to advance in society.

Pathos

What does not seem to work for the author of the essay is the application of pathos as one of the means of appealing to the target demographic. The specified criticism does ot mean that the representatives of the upper class are devoid of sympathy; nor does it suggest that pathios should not be incorporated in the specified statement at all. Quite the contrary, the appeal to emotions is one of the strategies that will anchor the key arguments and serve as the attention-grabbing device for the upper echelons of American society to pay attention. However, for pathos such as “they seem to embrace victim blaming” to work, its intended audience needs to develop a certain amount of awareness about the subject matter, namely, about the problem of poverty and the challenges that impoverished people face (Bell, 2019, para. 8). Without the specified context, the promotion of social justice and the attempt at introducing the upper class to the idea of charity and the focus on those in need is unlikely to work.

Therefore, granted that Bell’s (2019) argument comes from the right place, it fails to tug on the heartstrings of her readers mostly because of its straightforwardness and the uninhibited demand of remorse form the intended audience. Since privilege serves the purpose of a shield from emotion-driven criticisms such as the ones that Bell (2019) uses, the end result falls rather flat, failing to impress its readers: “When rich kids get scholarships, they talk about how good it will look” (Bell, 2019, para. 10). Therefore, when reconsidering the use of pathos, one might suggest that a more cold-minded and less emotionally fuelled approach should be used, with the focus on the need for equity as opposed to the attempts at converting the audience to a more righteous mindset.

Ethos

Finally, the ethos-related side of the argument presented by Bell (2019) represents the spirit of the era in which the piece in question was written rather accurately. The ethos of the article represents the detail that adds the air of naiveté to it, simultaneously slightly devaluing the message for its readers: “It is incomprehensible to me that we live in a country where some people have indoor swimming pools and others do not even have clean drinking water” (Bell, 2019, para. 21). As a result, the article may impress the audiences belonging to the generations of Millennials and Zoomers, who are vastly driven by the morals and ethics of social justice, yet it is likely to fall flat as a piece supposed to foster a more responsible attitude in older generations. Namely, the focus on seeking moral retribution and the promotion of equity in society as the main focus of the contemporary social justice movement aligns with the passionate message that Bell infused into her article.

Nevertheless, the article produces a generally positive, if slightly naïve, effect. By balancing out the elements of logos, ethos, and pathos in her essay and mostly using ethos as the key tool in convincing its target readers, Bell (2019) has created a piece that will resonate with some and encourage others to contemplate the problem of isolation of the 0.1% of the population from major social issues, including poverty. As a result, premises for social change may be created.

Conclusion

Although the application of pathos in Bell’s 2019 article could use certain improvements, the application of ethos and logos, particularly, the analysis of the impediments for the upper class to understand the needs of the lower one, serves a perfect job of conveying the need for change. Thus, Bell’s (2019) essay creates the sense of urgency and the necessity to subvert the status quo. Despite minor issues in implementation, the piece in question provides enough substance for further discussions and represents a powerful call for action.

Reference

Bell, M. (2019). I’m part of the 0.1 percent and I want a wealth tax.The Walrus. Web.

Income inequality is one of the most troublesome macroeconomic factors in modern national economies, an element that is both unsustainable and creating severe social tensions. In the United Kingdom, which will be the focus of this report, economic inequality is high in comparison to other developed countries. This policy brief will attempt to discuss means to reduce inequality by addressing the core of the issue through the establishment of regulations on corporations and redistribution of wealth and resources towards supporting improvements to human capital.

Issue

The issue at hand is wealth inequality, which is an economic term for unequal distribution of assets among residents of a specific area. Otherwise known as the wealth gap, it inherently demonstrates the difference in economic inequality between the poorest and richest layers of the population. In the UK, income inequality is extremely high. The majority of households maintain the £17,000-18,000 bracket with benefits, which is lower than the median £27,300. Furthermore, the bottom 20% has an average of £7,383 original income and £12,478 disposable income which is significantly smaller than the £88,776 original income in the top 20%. As a result, the richest fifth of the population holds 40% of all income in the UK while the bottom fifth holds only 8% (Figure 1; The Equality Trust n.d.).

It is important to consider that this does not consider the ultrarich populations. These levels have remained steady since the early 1990s despite some growth in median household incomes. The Gini index, which is commonly utilized in economics to represent inequality, stands at 33.2 for the UK, which is higher than most EU and developed countries, particularly with similar populations (McGuinness & Harari 2019). While the poorest suffer the immediate effects of income inequality, it is damaging to the national and global economy as well. Inequality restricts the growth and development of human capital by limiting access to education and health behind a paywall. It has been associated with reduced innovation as well. Evidence suggests that in OECD economies, inequality has led to stunted prosperity and a decrease of 4.7% in cumulative GPD (Brian 2015).

Policy

The primary policy will focus on addressing the core issue of income inequality, which is the rich and corporations accumulating more wealth at the cost of all other income brackets. It is suggested to introduce a policy that will limit the distribution of wealth to executives, investors, and shareholders as well as corporate expenditures to a set annual total. Furthermore, that condition will be accompanied by incentives such as raising the ceiling if the company will invest in the following aspects:

1. Job training and specialization programs for lower bracket incomes;
2. The increase year over year salaries to non-executive workers;
3. Hiring a set percentage of workers whose household income is lower than the national median.

At the same time, the policy will change the government’s approach to its programs. Funds will be redistributed from programs that offer benefits and tax cuts for the middle class and potentially some for the poor. Unemployment payments will be limited to extraordinary events. Funds will be redistributed to incentivize participation skills and job training, as well as holding down a job. Finally, the government will introduce a gradual rise in the minimum wage, for hourly employees as well as salaried ones, to avoid loopholes. All regulations will be accompanied by strict auditing and high fines for non-compliance.

Economic Reasoning

Wealth inequality has been largely attributed to the business approach in corporations that have taken place since the 1980s. It follows the idea introduced by Milton Friedman, a Nobel Laureate in economics, stating that the primary purpose of any business or firm is to make money for itself. Fast forward to the modern-day, and corporations, executives, bankers, investors, and anyone involved in these high echelons of business has adopted the ideology. However, this has come at the cost of innovation and the regular consumer as the primary indicator of a corporation’s health has become its ability to maximize shareholder value, at whatever the cost (Denning 2019). Thus, the first part of the policy seeks to address corporate oversight, in the attempts to limit these payouts to a particular total. The free market will remain untouched to dictate price and demand, but the interventionist policy will focus on the corporate business practices and attempt to disincentivize it, but rather invest in public development.

Inequality is a vicious cycle that follows the famous maxim “the rich get richer, the poor get poorer” (Leung 2015). The concept underlies the economic theory of wealth concentration which suggests that in realistic economic conditions, newly acquired wealth simply accumulates in the top income brackets, allowing create new wealth. Furthermore, inequality is based on what is theoretically known as the ladder of opportunity. The poor lack the opportunities to achieve the best education, training, paying for supporting resources which all eventually reflect on the tier and quality of the job that one receives. Therefore, it is the role of public policy to establish equality in the ladder for individuals to receive an education and receive a reasonable opportunity in the economic niche (Greenlaw & Shapiro 2018). Also, the minimum wage raise stimulates consumer spending on these resources and provides further opportunities for development.

Populations Affected

As mentioned, the policy will benefit the lowest income brackets of the population by offering opportunities for job acquisition and specialized training. It will benefit regular consumers as well since corporations may be willing to reduce profits to lower prices. It will affect almost everyone in the workforce by ensuring a greater income and possibilities for career growth, which is a significant factor in overcoming financial issues. The policy would negatively affect the top income bracket, particularly the ultra-rich. Highly specialized professionals should not be affected but executives and shareholders who manipulate their wealth to acquire more will be greatly limited.

Potential Effectiveness

Unfortunately, in industrial countries, previous efforts to regulate corporations often failed or did not reach the full potential. The most successful attempt at predatory practices by banks and corporations was achieved in the United States in the aftermath of the 2008 financial crisis. The Dodd-Frank Act was a piece of legislation that was able to effectively protect consumers and prevent financial organizations from taking advantage of the lower-income brackets to their advantage. It also greatly influenced corporate financing, requiring disclosure and much greater transparency, while placing minor limitations on unjust wealth acquisition (Parrino 2016). Most Western countries have attempted measures to reduce inequality through fair tax brackets, raising the minimum wage, and offering programs. While some targeted groups do see benefits, the general economic tendencies remain the same at the national level (Saez 2016). Without the participation of the private sector, the government simply lacks the resources to make a significant impact on the issue.

Conclusion

Income inequality is a serious economic issue in the UK. In the long-term, it is unsustainable and to protect the economy and ensure future economic growth, policy interventions are necessary. It is suggested that placing regulatory measures on corporations, inciting human capital investments and redistribution of public funds are potential solutions to the crisis. Although not politically popular, such interventionist policy measures consider long-term outcomes rather than short-term benefits.

Reference List

Brian, K 2015, OECD insights income inequality: the gap between rich and poor, OECD Publishing, Paris, France.

Denning, S 2019, ‘How to solve America’s $100 trillion problem of wealth inequality’, Forbes, Web.

The Equality Trust n.d., The scale of economic inequality in the UK, Web.

Greenlaw, S & Shapiro D 2018, Principles of economics 2e, OpenStax Economics, Houston, TX.

Leung, M 2015, The causes of economic inequality, Web.

McGuinness, F & Harari, D 2019,Income inequality in the UK, Web.

Parrino, RJ 2016, ‘SEC adopts rule to implement Dodd-Frank CEO pay ratio disclosure requirement’, Journal of Investment Compliance, vol. 17, no. 1, pp. 122-130, Web.

Saez, E 2016, ‘Income and wealth inequality: evidence and policy implications’, Contemporary Economic Policy, vol. 35, no. 1, pp. 7-25, Web.

Introduction

Economics is the study of a finite world where there are unlimited wants, relative scarcity, and where choices have to be made. In specific terms, it is the study of how individuals and societies choose to employ scarce resources that could have alternative uses to produce products and services now or in the future among various groups in the society. (Glanville and Mark, 64)

In a finite world, individuals and societies are confronted by limited resources such as factors of production, time, budgets, technology, information, and knowledge. The resources are labor, land and capital, and entrepreneurship ability. The alternative resources are matter, technology, time, and energy. The scarcity of the resources that arise in an economic system forces people to make choices. These choices in a finite word have ‘opportunity cost’-this is the value of the next best alternative sacrificed. (Glanville and Mark, 67)

Economics is the social aspect that can be used to study human behavior and institutional arrangements in societies that influence the processes by which the relatively scarce resources are allocated to alternative sources. Economists view things in a unique way. The same people will deliver and apply the principles about economic behavior at two levels i.e. macroeconomics and microeconomics. The microeconomics which forms the basis of this discussion looks at the specific economic unit. All the details of the economic unit are converged in microeconomics analysis or the very small segment of the economy.

Firms, households, and industries are analyzed individually. Economists tend to solve the dilemma of the big question of how the society can be organized in a way that the liberty and autonomy of an individual can be protected yet at the same time provide for the commonweal. The above statement forms the basis of our study in which we shall examine the main concepts of economics related to income and wealth inequality and methods to measure such. In this study, we shall use the Lorenz curve and the Gini Coefficient, which originated in the early years of the twentieth century (1995) by Max Otto Lorenz. (Glanville, 22)

Inequality Analysis

In economics, the inequality analysis is supported in terms of the apparent important groupings in the population. This method chooses a particular defining characteristic that should be a determinant of inequality in some sense and partitions the population into groups according to the value of this population. E.g. sex as a characteristic can form a partition group of men and women. (Champernowne and Cowell 119)

The Lorenz curve

When constructing this curve for measuring worldwide inequality, the standard framework is built up in four stages. This curve also requires one to draw the X and Y-axis in which the X-axis represents the cumulative percent of the household measured and the Y-axis measure the cumulative percentage of wealth. The graph’s axis is closed to form a box. The second procedure requires one to order the distribution from the smallest to the largest.

This enables one to answer the questions such as, what proportion of wealth is owned by 10%, 20%, or 30% of the population. This process continues until it is certified that 100% of the population owns 100% of the wealth. In the final analysis, it is assumed that individuals live in a truly equitable society. The relation would then be such that a 10% increase in wealth would result due to a 10% increase in the number of households and that the curve would be a straight curve of 45 degrees. This is called the absolute curve. In the Lorenzo curve, a line based on the data available to an economist is inserted just below the curve and it bows away from the absolute curve. The more unequal a society is further it will diverge from the line of absolute inequality. This can be illustrated in the figure below.

From the figure above we can conclude that the poorest sections of the society command a very low proportion of the countries wealth. That means the majority of individuals are poor and own nothing compared to the rich who owns the most. The line of absolute inequality is represented as OA. The report from the World Institute of Development Economics and Research can be well explained by the use of this graph developed by Lorenzo. The study shows that 2% of the world owns more than half of all the household wealth and that the poorer half of the world’s population owns barely 1% of the global wealth. By drawing Lorenzo’s curve out of this data we can expect a large deviation from the absolute line. (Business hackers) Another different scenario is represented in figure 2 below.

The figures above represent the well-being of poor people. They are much better than in the first scenario though the rich still owns the largest. Society’s wealth is still unevenly distributed. Lorenzo’s curve has the following advantage of providing a visual representation of the information economists may wish to consider and in our case wealth inequality prevailing in the society. The study can also be used to show changes in the way in which wealth has been distributed across different counties. e.g.

The curve does not however show the degree of poverty posed by the poor people; though in most cases the poor can afford some of the luxuries products and services such as television.

The Gini Coefficient

It is a complementary way of representing inequality information. It is termed as the ratio between the Lorenzo curve and the line of absolute equality (numerator) and the whole area under the line of absolute equality. (Denominator). Having extreme values of 0 and 1 the Gini Coefficient can be represented as C/OAB.

The coefficient 0 and 1 are represented as percentages 0% and 100%. The 0% shows that there is equality in terms of wealth while the 100% shows that total inequality of wealth distribution exists. The ratio thus gives an impression that the lower the value between 0 and 100 the higher the probability of equality. The Gini Coefficient, therefore, displays a summary statistic. The coefficient can be represented as a time series trend or as a set of cross-sectional figures.

Meaning

From the preliminary above we can conclude that some countries seem to have more wealth than others. To understand the kind of data presented above it is important to have a clear logic on which to build comparisons of the inequality of distribution wealth. Microeconomics calls for a clear definition of the basic units in society explaining who is to count and also of the characteristic (wealth) whose distribution is to be described.

The explanation below for the existence of such huge decisions in wealth can be of various ways. Most of this is as a result of social change or directly economic in origin.

Different changes in the tax and benefit system

The different tax changes either directly or indirectly have contributed to the increase in relative poverty. Taxes on salary greatly affect the citizens of those countries where the percentage is much higher than where it is low. The benefits system for the disadvantaged in society has also contributed to this inequality.

Unequal distribution of resources

The failure of certain countries to make sure resources are distributed freely is another problem that puts this deviation higher in those countries. It is the work of the government to ensure that, each individual benefits from these resources and that not some few people own them.

Un employment effects

This causes poverty and an increase in income and wealth inequality.e.g. in a case where there is an increase in the No of households but is in paid employment or where a family depends only on the state welfare benefits.

The deviation because of different pays in different jobs and industries

This disparity arises as a result of some companies both in the public and private sector paying wages and salaries that differ. The lowly paid individuals being the less-skilled workers form the highest percentage of households.

Conclusion

It is apparent from our discussion that, inequality of wealth distribution in the world is a common history despite the increasing living standards in the society. Wealth distribution is partly blamed on the government which should ensure that there is equitable distribution. The governments should then be informed about the right process to take to solve this crisis. The terms wealth and income have emerged to be two different words and should not be used interchangeably. Wealth refers to a stock of financial and real assets which includes equities, property, savings in banks, and ownership of land, bonds, etc.

Income on the other hand refers to the flow of factor incomes and they include salary, wages, rent from ownership of land, and interest from banks or dividends from shares. The distribution of the wealth stock is much more unequal than the flow of income in a given fiscal year. People might have an improved wealth-income which improves their standards of living but with less wealth.

References

‘Businesshackers, Web 2.0 startups. Profitable ideas for business. Web 2.0 and life”, 1 million readers can’t be wrong, 2008. Web.

Champernowne, D G. and Cowell, Frank Alan. Economic Inequality and Income, Cambridge University, 1998.

Glanville, Alan and Mark, Stump. Economics from a Global Perspective, Oxford, 1997.

McConnell, Campbell R, and Brue Brue, Stanley L. Microeconomics: Principles, Problems, and Policies, McGraw-Hill Professional, 2005.

Income inequality has long been considered one of the main factors that significantly undermine the quality of life. Moreover, wealth inequality, which allows a handful of people to get much more prosperous at the expense of millions, is even more disturbing. At the same time, people around the world are determined to acquire wealth by entirely different means, which can even be controversial. Therefore, a dedicated analysis is needed to fully understand the importance of wealth and power in the hierarchy of human values when inequality rates are unprecedentedly high. High inequality rates diminish people’s motivation to enhance their living standards, as luxurious lifestyle becomes the primary goal that almost always stays a dream and is full of controversy.

Inequality can lead to objective hardships and diminished living standards in many parts of the world. Nevertheless, one of the notorious effects of extreme inequality is always the psychological perception of the phenomenon. When inequality is high and growing rapidly, luxurious lifestyles are hard to ignore (Frank). Moreover, money, in many cases, can easily be transformed into power in the US, as children are taught to be success-oriented since primary school. Millions of relatively poor American citizens can still afford many things that nationals of many other states rarely even dream of. Nevertheless, it is the inner sense of injustice and powerlessness that makes the perception of low income so painful for many.

In the 1920s, the rapidly increased importance of wealth led to severe changes in culture and the social sphere in general. For instance, a completely new literary genre that centers around the life of the rich became an immediate success. One of the famous novels that provide a proper understanding of the atmosphere and the rapid shifts in social norms at that time is The Great Gatsby by F. Scott Fitzgerald. The author had first-hand experience communicating with a wide range of wealthy and influential people because of marrying a rich woman.

The famous novelist provides valuable insights into the multiple psychological issues that plague the lives of the rich and make wealth acquisition a controversial goal. F. Scott Fitzgerald claims that the rich “smashed up things and creatures and then retreated back into their money or their vast carelessness, or whatever it was that kept them together and let other people clean up the mess they had made”. Moreover, the case of the protagonist clearly indicates that the original determination to acquire wealth is, in many cases, rooted in traumas and lack of attention.

The growing disproportion in the distribution of wealth has numerous long-term consequences. Parents’ wealth plays an essential role in children’s human capital accumulation (Hubmer et al., 2). Therefore, millions of children are deprived of the chance to fully enjoy meritocracy, which has long been considered one of the US cornerstones. The diminished importance of equal opportunities points to a structural problem in modern American society. For instance, between 1978 and 2018, the share of wealth owned by the top 0.1 percent increased from 7 percent to 18 percent (Saez and Zucman, 4). Therefore, it is crucial to find the proper means of redistributing wealth in a way that ensures the provision of high-quality healthcare services and education to all Americans.

Current inequality rates stand behind the creation of an atmosphere that resembles that of the 1920s. The majority of the population starts admiring the lifestyle of the incredibly rich instead of focusing on the multiple means available for the enhancement of their lives. It is normal for a society to have a few Gatsbys that are ready to jump at every opportunity to get rich. Nevertheless, the situation where millions of people believe that they have lost all life chances because of the non-stop extensive media coverage of the luxurious lifestyles of businessmen and celebrities is destructive for any society. American Dream has not always been perceived by the majority as hoarding extreme riches. It was initially centered around harmonious society, freedom, and the ability to engage in any activities and enterprises.

Works Cited

Fitzgerald, Francis Scott. The Great Gatsby. Ch. Scribner’s sons, 1925.

Frank, Robert H. “When the Rich-Poor Gap Widens, ‘Gatsby’ Becomes a Guidebook.” The New York Times, 2006.

Hubmer, Joachim et al. “Sources of US Wealth Inequality: Past, Present, and Future.”NBER Macroeconomics Annual, vol. 35, no. 1, 2021, pp. 391–455.

Saez, Emmanuel, and Gabriel Zucman. “The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macroeconomic Accounts.”Journal of Economic Perspectives, vol. 34, no. 4, 2020, pp. 3–26.

Introduction

A world financial services company, Lehman Brothers was involved in the banking business, trade, and research, managing investment among others. It declared bankruptcy in 2008. It was a prime trader in the treasury securities (market) of the United States. The firm’s many subsidiaries are headquartered in New York (International Business Times 1). The company filed for bankruptcy in the year 2008, a thing that virtually led to the global financial (system) meltdown following the fact that individuals in the entire world had hugely invested in this firm. It was the United States of America’s biggest filed bankruptcy case which caused an estimated loss of jobs for 25000employees and $613 billion in debts (Kelly & Saito 9).

Bankruptcy

This can be termed as a lawfully announced impairment or inability of an organization or an individual to reimburse its creditors. Creditors may institute a (bankruptcy) petition against a corporate debtor or a company with the aim of recovering a section of what they are to be paid or commence a restructuring but in the greater part of cases; however, bankruptcy is instigated by the debtor.

The uniqueness of the housing bubble was that it also entailed a new faction of (economic) actors: individuals who managed to buy a home at least for the first time. Contrary to the conventional way of an individual purchasing a home and drawing out a mortgage, these innovative players could only part with their money on the condition that the market (housing) kept moving up. He further notes that the case could be renegotiated and the new actors would go on with owning their homes.

The instances where the market declined, nonetheless, they would be forced to close out; and the securities attached to this form of mortgage would no doubt trade at a loss. It was established that even observers had the same opinion that the fall (of Lehman Brothers) was a turn around. Commentator Robert Lucas observed that the collapse of Lehman had a major significance (Zingales 10). Blinder, a famous economist, everything went down with the demise of Lehman. After the bankruptcy of this firm, no other investment appeared viable to the populace. Lending was stopped, and the economy was in turmoil.

Lehman’s bankruptcy elicited panic that resulted in intimidating not only the financial system of the United States but as well the (financial) system of the entire globe. Some writers argue that the downfall of Lehman Brothers was as result of its very hard line (leverage) policy in the perspective of a main financial crisis while others are of the opinion that the cause of this crisis was a result of poor regulation, absence of transparency, and market contentment resulting from good returns occurring in a number of years.

In the case of Lehman (and other investment banks), Zingales (12) explains that this problem was aggravated by two factors: the extremely high level of leverage (asset-to equity ratio) and the strong reliance on short-term debt financing. Financial leverage is a measure of how we use debts and equity to finance our assets. As our debts rise so does our financial leverage. most of the managers prefer using equities due to the less risk involved an easier way of calculating financial leverage is by dividing the net assets by shareholders equity.

Adrian and Shin(14) states that the balance sheet of Lehman Brothers as of November 2005 that short positions were around quarter of the asset while share holder equity was around 4%this raised leverage to around 25 bringing to the conclusion that Lehman Brothers were doing their business using debts which was risky. Short term debt financing also called repos are types of lending agreement the borrower finances the purchase of a financial security using the security itself as the collateral but incase the price of collateral declines it forces the borrower to absorb the losses accumulate if the debt burden is so heavy it can encourage them to default. Lehman brothers tried to reduce their over reliance on the two factors above but there was nothing they could do to reverse the situation. (He, Xiong,21).Lehman succumbed (Zingales 12).

How Lehman Brothers Bankruptcy impacted on Individual Wealth

Facts has it that stock initially held by Lehman’s hedge fund customers (preceding the bankruptcy) experienced unpredictably huge liquidity declines subsequent to the bankruptcy weighed against the otherwise (similar) stocks not embraced by hedge funds but exposed to the Lehman brothers. The overall price impacts of trade in these stocks rose as did their bid ask spread. Liquidity overall dropped sharply for all stocks but evidence shows that the effect of Lehman fund holdings was greatest among the relatively less liquid assets.

Lehman Brothers’ hedge fund customers were unable to fulfill this stabilizing role because they were constrained in their ability to trade their positions as shown in figures 1 and 2 (Aragon and Strahan 28). Thus, most of the individuals who had invested in this firm made huge losses as a result of the filing and this made them lose sizeable wealth.

The main problem with those who used their assets as collaterals when borrowing from Lehman Brothers did not know that the company used the same assets as collateral when seeking for debts from other companies and thus in the end your assets had more than one party to lay claim to. Everyone passes around the security, then the music stops, the company is in verge of collapse there is one chair to sit on and too many people who want to sit on it thus crises sprung up.(International Business Times 4).

However, linking the failure of Lehman to the level of asset prices is less clear. If liquidity is a priced risk factor, then shocks to market liquidity could lower asset prices, and raise expected returns going forward (Viral & Pedersen 5). But in the Lehman case there is anecdotal evidence that some hedge funds faced a short squeeze because securities lenders exposed to Lehman recalled their loans, forcing those borrowers to repurchase shares and putting upward pressure on prices (Aragon and Strahan 8).

As evidenced by Aragon and Strahan (28) the hazard analysis he conducted showed that the hedge fund failure rates increased across the board in 2008- the year 2008 indicator enters with a co efficient of 1.5 higher meaning that failure rates increased by at least 50% in 2008 relative to the earlier years as shown in Table 1. This increase goes beyond what one would predict based on the performance which itself was very poor during that year (Aragon and Strahan 14).

This market meltdown did not only cause losses to the shareholders and customers of the organization but also caused huge losses to the company executive officers who had invested much in these companies. Evidence given by Bebchuk, Cohen and Spamann (11) shows that the chairman of the board and CEO of Lehman held, directly or indirectly, 10.8 million shares as of January 31, 2008.

When Lehman filed for bankruptcy on September 15, 2008, those shares became worthless. Compared to the peak stock price of $85.80 on February 2, 2007 this amounted to a paper loss of $931 million. Ending up with such losses shows that CEOs failed to perceive the risks their firms faced thus their risk-taking must have been driven entirely by excessive optimism or even hubris, not by perverse incentives (Bebchuk, Cohen and Spamann 5).

Other evidences of such huge losses are as documented by the Press Release by Dave Mandelkern for the San Mateo county treasurer where they made a loss of 155 million American dollars due to the concentration of Lehman Brothers bonds held in the Pooled Investment Fund managed by the San Mateo county treasurer- tax collectors office. This loss was devastating to the many agencies investing their surplus funds in good faith with the county treasurer-managed pooled investment fund as required by the law. Included in this loss was 38 million US dollars which belonged to the K-12 school districts throughout San Mateo County thus the loss was felt throughout the country and the rest of the world (Bebchuk, Cohen and Spamann 8).

Among the many known losses due to bankruptcy, the state of Florida was among the major victims. More than 440 million dollars vanished from the pension (fund) that reimburses benefits for someone million public workers and retirees. These losses could lead to permanent loss or delay in the payments of salaries and benefits and this affects these citizens’ well beings.

The overwhelming impacts of the collapse (of Lehman Brothers) spread like bush fire to various regions of the globe. In the UK, for example, more than five thousand workers lost their employment, while nearly twenty thousand in the United States suffered the same fate of losing their source of livelihood. Close to 2,500 (Lehman) workers in India will also lose their jobs in the near future. The glory in (global business) for Wall Street is no more. Three of its main (autonomous) brokers have gone underground with only two left.

Market price impact: This was experienced in the entities active in capital markets even tot hose with no direct relation to Lehman’s brother because the filing of the bankruptcy intensified pressure of the entities to reduce their balance sheet. The extent of the exposure made banks to seize the group collateral and attempt to liquidate resulting in further downward pressure on the assets that in turn forced leveraged institutions to liquidate to meet margin calls putting further pressure on assets. This aggravated the huge losses that were already made by investors.

Lehman’s filing for bankruptcy had a more dramatic impact on money funds. On September 16th, 2008 primary fund, a $62 billion fund announced that because of the total loss it suffered on its$785 million holding of Lehman Brothers debt it was forced to put a seven day freeze on redemptions, since the net asset value of its shares fell below $1(Lingales 14). As asserted by Collins, a consultant on investment matters, this bankruptcy as well impacted on the pension fund such that the extensive (market) disruption was expected to be experienced in assets engrossed in changes implementation in the strategy.

He further notes that there are a number of more precise knock on issues that affected the pension funds going by where they were invested, which incorporates issues such as cash funds operation among others (Collins, 1). With the firm operating through out the world its difficult to cover every individual and now, Lehman’s orderly resolution will take some time, and it is unclear who the real losers were and how much was lost. In business the loss of an important player could offer franchise-enhancing and profitable opportunities to those that survive.

Conclusion

The conclusion of is that the value of the remaining holdings is essentially zero for Lehman because common shareholders are unlikely to receive anything from the bankruptcy estate, as reflected in the near zero stock price of Lehman when it was delisted (Bebchuk, Cohen and Spamann 30). Joseph Stigiltz a famous economist proposed that governments should restrict leverage that financial institutions can assume and executive compensation should be more related to long term performance and also that they should re-instate the separation of the commercial (depository) and investment banking (International Business Times 6).

With the firm operating through out the world its difficult to cover every individual and now, Lehman’s orderly resolution will take some time, and it is unclear who the real losers were and how much was lost. In business the loss of an important player could offer franchise-enhancing and profitable opportunities to those that survive.

Figures and Tables

Table 1: Hazard Model predicting exit of hedge funds from the market.

This table reports a hazard model that relates the survival rate of each hedge fund to its performance and its use of Lehman Brothers as prime broker. The sample included all hedge funds in existence as of 2002, as well as all hedge funds formed after 2002 (based on TASS). Hedge funds were assumed to have failed if they dropped out of the TASS database. A coefficient greater than one indicates an increasing relationship between the co-variate and the survival probability; a coefficient below one indicates the opposite. We report a Z-statistics that are asymptotically normally distributed under the null that the coefficient equals one.

Robust Z statistics in parentheses + significant at 10%,*significant at 5%,**significant at 1% (George O Oragon et.al. Pg 37, 2009).

Works Cited

Adrian T, Shin H.S. liquidity and leverage. Federal Reserve Bank of New York & Princeton University, 2008. Web.

Aragon O. George and Strahan E. Philip. Hedge funds as liquidity providers: Evidence from the Lehman Bankruptcy. New York: Arizona State University; Boston College, 2009.

Bebchuk A. Luciana; Cohen Alma and Spamann, Holger. Wages of Failure: Executive compensation at Bear Stearns and Lehman 2000-2008. Harvard Law School, Discussion Paper No. 657, 2010.

Collins, Noel. Impacts of Lehman Brother’s bankruptcy on pension funds. 2010. Web.

International Business Times. Lehman Brothers. 2010. Web.

He. Z, Xiong W. liquidity and short term debt crises. 2009. Web.

Kelly Jason and Saitto, Serena. Lehman said to cancel ex-employees’ severance. 2008. Web.

Viral, Acharya and Pedersen, Lasse. Asset Pricing with Liquidity Risk. National Bureau of Economic Research, 2005.

Zingales, Luigi. Causes and Effects of the Lehman Brothers Bankruptcy. University of Chicago Graduate School of Business, National Bureau of Economic Research and Center for Economic Policy Research, 2008.

Introduction

Financial crimes and problems remain highly relevant topics in the field of criminal justice due to their vast negative impact on the quality of life globally. Among them, embezzlement of public funds and unequal distribution of wealth are some of the most pressing issues. In the United States, despite relatively low levels of corruption, these problems are still prevalent. Ultimately, the current essay examines the problems of public funds embezzlement and unequal distribution of wealth and provides two solutions in the form of capital punishment and financial redistribution.

Embezzlement of Public Funds

Embezzlement of public funds occurs when people in power intentionally use organizational resources and money in their own interests. It is a relatively common type of fraud in the private sector, but it is particularly threatening when criminals utilize public funds to their benefit. In the United States, the government mitigates this issue via the Sarbanes-Oxley Act implemented in 2002 (Nazarova et al., 2020). This policy implies a preventative audit of public companies to ensure that they use their money in the interests of regular people and the government. Nevertheless, despite the efforts, embezzlement of public funds remains a relevant issue in the United States. The primary challenge with the criminal justice system in America is the length of time required to procure a prosecution, causing a delay in the dispensation of justice. Lastly, this issue is detrimental to society because public funds are meant for various projects to benefit the citizenry. These initiatives include education, healthcare, social services, security, investment, and trade. Embezzlement of this money makes it difficult for the government to fulfill its mandate to the people and leaves the citizens suffering.

Proposed Solution

The current paper proposes a radical solution by making the punishment for public funds embezzlement more rigorous. The United States utilizes capital punishment or the death penalty only in the most severe cases. However, several Asian countries implement this form of punishment when politicians or people in high positions of power are found guilty of stealing from the public (Wicaksono, 2022). The research proposes that this method can significantly reduce the level of public funds embezzlement in the country (Wicaksono, 2022). Nevertheless, it requires a thorough investigation to confirm the accusations and avoid unnecessary deaths. If suggested in the United States, the proposition is likely to take at least five years before it becomes debated and passed as law. Moreover, it contradicts some of the local State regulations that outlaw the usage of the death penalty in the United States.

The government should be involved in this process to ensure the enforcement of this rule and its passage as legislation in the first place. Congress ought to participate in the drafting and passing of this motion and its ascent into law by the president. The next step is empowering the judiciary by guaranteeing full independence to ensure they can dispense the law against influential individuals. The various independent institutions in the country can additionally benefit from adequate backing through finances. It would enable them to add to the voices that condemn public funds theft, ensuring better systems for the American people.

Potential Failures and Crime Theory

Potential failures with this law include failure of its legislation at the level of Congress. The people found culpable of embezzlement are primarily politicians, the same people entrusted with drafting laws of the land. It is doubtful they would oversee laws jeopardizing their lives without a massive push. Moreover, the death penalty is likely to cause chaos within the country due to its impact on high-profile individuals. The accused might threaten to blackmail the court officials, hindering them from making the ultimate decisions. Embezzlement of public funds directly relates to the Social Strain theory, which suggests that people might commit crimes to acquire a certain social status (Kolthoff, 2020). In the United States, wealth is the most recognized symbol of success, frequently making people commit crimes to gain more money (Kolthoff, 2020). According to the research, it occurs even when people already have sufficient funds for a living but are still pressured to acquire more wealth (Kolthoff, 2020). Hence, this theory explains why politicians might steal from public funds even if they are already rich.

Unequal Wealth Distribution

Unequal wealth distribution implies the drastic differences in wealth between the richest and poorest people in the country. This problem has partly been necessitated by the capitalist ideology which dominates the market. People accumulate wealth at the top of the pyramid at the expense of those in the lower section (An et al., 2022). Currently, the United States has the most acute wealth inequality among G7 developed countries, making it a central national problem (Schaeffer, 2020). People who struggle financially frequently have to work extra hours with meager pay to survive, while the wealthiest people have billions of dollars of net worth. This issue negatively affects society as the quality of life and the number of opportunities are significantly lower for people at the lower section of the financial pyramid.

Proposed Solution

The solution for the wealth crisis in the country requires the redistribution of wealth and property from the wealthy minority to the poor majority. This approach is critical to ensure that people on the lower end have sufficient resources for basic necessities, such as shelter and food (An et al., 2022). Government intervention is essential in changing the current system and making wealth distribution more equal and similar to other developed G7 countries that promote democracy and equality. The government can achieve wealth redistribution by introducing tax regulations and influencing the public perception of wealth status. Moreover, the voice of influential people such as the president and various cabinet officials is vital in guaranteeing the initiative’s success. The proposed solution does not break any rules, but it requires a radical shift in how the government perceives the wealthiest people in the country.

Potential Failures and Crime Theory

The initiative to redistribute wealth from the rich minority to the poor majority is a gradual process that may require many years to implement. It is a problematic issue due to the vast influence of the 0.1% wealthiest people on politics and public perception (An et al., 2022). Failures in this process might arise at the legislative stage, with various politicians potentially losing their political influence and personal wealth. It will result in a conflict of interest between the national objectives to reduce wealth inequality and the greed of individuals. As mentioned before, according to the Social Strain theory, many people want to acquire wealth not because they are poor but because they want to increase their social image. It is particularly relevant for the 0.1% richest people in the country who do not want to lose their status (An et al., 2022). It is unlikely that there will be chaos before a worthwhile change, but there will be a substantial backlash from the wealthiest individuals in the country.

Unequal wealth distribution can be explained by the Social Strain theory and the Conflict theory. While the former revolves around the social status of the wealthiest individuals, the Conflict theory explains the differences between the rich and the poor in general. The model states that each group has unique interests and usually perceives the gains of the opposition as personal loss (Kühne et al., 2019). It means that if the government implements additional taxes on wealth, the richest people will perceive it as a direct threat to their well-being, even though the quality of their lives will not worsen (Kühne et al., 2019). As a result, they will try to stop it by any means possible to preserve their money and status. According to the Conflict theory, this problem is a relevant issue that will most likely contribute to potential failures in wealth redistribution policies.

Conclusion

Embezzlement of public funds and unequal wealth distribution are relevant problems in the United States, which significantly decrease the quality of life of the vast majority of the population. The proposed solutions, such as capital punishment and wealth redistribution, might be highly effective, even though it will take years to implement them, and there are several side effects. The death penalty, in particular, is a radical measure that might prevent corruption and embezzlement but make people scared of the government. The two theories that explain these issues are the Social Strain and Conflict theories. They imply that people, especially in the United States, perceive wealth as an essential element of success and are ready to commit crimes to acquire it, even if it does not improve their quality of life. Moreover, the Conflict theory suggests that the richest people will perceive wealth redistribution as a direct threat and will put effort into stopping this change. Ultimately, for both solutions, the government needs to become more involved in the issues and focus on economic equality.

References

An, L., Lou, D., & Shi, D. (2022). Wealth redistribution in bubbles and crashes. Journal of Monetary Economics, 126, 134–153. Web.

Kolthoff, E. (2020). Criminological responses to corruption. In A. Graycar (Ed.), Handbook on corruption, ethics and integrity in public administration (pp. 434-448). Edward Elgar Publishing.

Kühne, O., Weber, F., & Berr, K. (2019). The productive potential and limits of landscape conflicts in light of Ralf Dahrendorf’s conflict theory. Società Mutamento Politica, 10(19), 77-90. Web.

Nazarova, K., Mysiuk, V., Gordopolov, V., Koval, V., & Danilevičienė, I. (2020). Preventional audit: Implementation of SOX control to prevent fraud.Verslas: Teorija ir praktika/Business: Theory and Practice, 21(1), 293-301. Web.

Schaeffer, K. (2020). 6 facts about economic inequality in the U.S. Pew Research Center. Web.

Wicaksono, B. S. (2022). The urgency of death penalty implementation for corruptors on corruption social assistance fund in Indonesia. Rechtenstudent Journal, 3(2), 147–159. Web.

Division of Labor and Wealth

Division of labor is specifically the need to have a specialized labor force in a country an organization or institution. This makes it possible for a person to be an expert in a certain field according to Smith. In a country where this is the case, there is greater wealth than in countries where it is not. According to smith division of labor and specialization has an effect on efficiency. This makes it possible for an organization or a country to produce goods that are high quality and highly competitive in the market for goods and services otherwise known as the goods market.

Increased efficiency saves time and labor. This is because continuous input of labor in a particular field increases one’s expertise and makes him or her have greater effectiveness while doing it. This reduces the unit time allocated to the production of a unit service or good which leads to more products within a short period of time. Massive production means that costs are reduced and hence gods and services are sold more cheaply compared to other goods in the market. Increased consumption in effect means that workers are paid well and this increases their purchasing power.

This pulley belt effect leads to more demand for goods and services and creates employment. The final sum is that the country benefits in terms of competitiveness in the market, production quality and unmatched production quantities that make it increase its wealth considerably. Although it is sometimes criticized for it will bring boredom and hence redundancy, Smith points out that governments have a role to play in training workers to have a clear view towards employment and to have up-to-date information regarding their field of expertise. This will greatly reduce boredom and create the very important motivation needed to make workers remain engaged (Smith, 46).

Division of Labor and Exchange

Smith’s assumption was that consumers always choose the minimalist prices while buying commodities. This is not always the case as different customers may be looking for different things in a product including status, satisfaction and their tastes and preferences. The exchange value of a commodity, according to Smith is measured by the input in terms of labor that has been put into it. When labor is divided, therefore, the cost of a unit commodity is highly reduced.

This reduction in the price of commodities affects an individual in many ways over time. First, it creates more deposable income as income increases and the cost of buying reduces. This increased purchasing power means that a person will want to spend more and may want to save more. This savings according to economists constitutes investments in the short and long run. In essence, it means that an individual will invest a bit more due to the division of labor and the benefits that it comes up with.

Labor creates a surplus that might be invested again into the future is the bottom line that smith reached. He was interested in determining why diamond which had little demand than water was that valuable. He concluded that the amount of labor that is required to obtain a single unit of diamond was enormous as compared to the labor needed to obtain a unit of water. Therefore over time, it is important for an individual to weigh the value of commodities that he intends to buy and to have a clear look at disposable income (Smith, 40).

Extra Credit

The exchange value in the current economic world is not static. It keeps on fluctuating and creates a situation of uncertainty in the goods and monetary market. Therefore in the neoclassical economic reality, the thoughts furthered by Adam Smith are rendered inapplicable. It is especially impossible to have just a specific skill and to remain competitive in the job market. The job market requires more than just a special skill in a certain field. To be and remain relevant, one has to have a number of skills that fit together to form what is required by employers the world over. Mangers are required to have accounting, human resource skills, management skills and a host of other proficiencies to be able to control the docket awarded to them.

Technology has also played a major role in redefining the concept of economics. Some labor inputs are quite technical and are highly paid than others though common goals are been sought in the marketplace. The medium of exchange also varies from country to country. This variation means labor is not and cannot be priced similarly in as much as production is similar. Hence in the neo-classical economic theory, Adam Smith’s view faces many challenges. The money market which forms the basis for the exchange value of currencies is highly volatile and has very high unpredictability levels. Therefore division of labor may work in the current economic situation but much is a hindrance that it becomes almost impossible to control its applicability.

Work Cited

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. London, United Kingdom: W. Strahan and T. Cadel, 1776. Print.

Executive summary

This paper studies the phenomenon as to why the presence of huge amounts of oil in a country has not helped to transform their economies into prosperous ones. This paradox which is not apparent to most people has several reasons. There are several countries rich in oil that have developed or developing economies. There are others who are not rich in oil, but still have managed to have a well developed economy or is in the process of having one.

Then there is the paradox of countries rich in oil, but poor in economy. It is clear that it is not the presence of oil that is the criteria for development. There are many factors like polices, infrastructure, literacy, quality of labour force and a stable governance to achieve this. To study this, a general analysis is done and a further analysis of selected countries that appear to be in this category also is done. It is seen that the presence of oil is not a criteria for economic development. Certain relevant reasons that are responsible for this state of affairs are given. Also, suggestions as to how this might be corrected are also stated. The research methodology followed by reflections and conclusions is given at the end of this paper.

Introduction

To the general population the word ‘oil’ conjures up visions of riches and prosperity to any region that is blessed with an abundance of the product. Oil or petroleum, as everyone knows, called ‘liquid god’. So there would be a general assumption that all countries with rich oil resources are prosperous. This paper deals with facts that demystify that assumption, because in reality this is not the case. To highlight this point an example is given. The economic benefits of the new oil boom in many African nations have yet to reach the common man. A lot of money which could have been used for the economic welfare of the society is being wasted through squandering by the people concerned.

According to a report by the newspaper ‘Independent’ many African nations with a healthy GDP is not using the money in the best interests of the country. United Nations data shows Angola having a healthy per capita income, but according to the report, it is the worst performing state in Africa with respect to infant mortality. The country’s infant mortality rate up to 5 years is a shocking 25%, i.e. only four out of 5 children reach up to the age of five and beyond.

The nest biggest offender is Sierra Leon, followed by South Africa and Nigeria. It would be interesting to note that Angola and Nigeria are members of the OPEC. Bangladesh has a much better record than these countries. Corruption and political unrest are the major reasons for the unhealthy state of affairs. “Some of Africa’s biggest “success stories” are accused today of squandering money they could be using to help prevent millions of children dying.” (Butler 2008).

This is a situation that creates a paradox that can be titled ‘rich, but poor’.

The History of Oil

The general public has an assumption that oil is found in large caverns under the ground and once detected; it can be pumped out from underground. This assumption is false. Oil is found in the pores of rocks and it is the quantity of oil found in these rock beds that ultimately determine whether the oil found is commercially exploitable. Oil has been discovered more than 2000 years ago and ever since has been used for variety of purposes like cooking, transportation, power generation etc. apart from quantity, the quality of oil is also of importance in evaluating the richness of the well. Quality is ascertained by the percentage of sulfur found in the crude.

Crude low in sulfur content is of higher quality as is known as sweet crude and high sulfur content crude, considered to be of poorer quality is referred to as sour crude. Before the modern day technique of drilling for underground oil was discovered, people used it from seepages to the surface of the earth due to underground pressure. The commercial large scale exploration began almost 200 years ago in the US and is the forerunner of the giant high tech oil wells seen today. Before an analysis of facts, figures and the reason for the ‘rich, but poor phenomena, a summary of the world’s most powerful oil organization is appropriate.

The Organisation of Petroleum Exporting Countries (OPEC)

The OPEC was formed in 1960 in Baghdad, Iraq by its founder members consisting of Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Initially, its headquarters was situated in Geneva in Switzerland, but after a period of four years it was shifted to Vienna in Austria in 1965. Libya (Socialist Peoples Libyan Arab Jamahiriya) and Indonesia became members in 1962. The United Arab Emirates became a member in 1967, followed by Algeria in 1969. Nigeria entered the picture in 1971. Ecuador formed a part in OPEC in 1973, but it was expelled for a short period form 1992 to 1997, after which it rejoined in October 2007. Gabon joined in 1975, but lost its membership in 1994.

The latest entrant into this elite group was Angola which became a member in 2007. The organisation started with the five founder members and later on added another nine members. The present strength is thirteen since Gabon was expelled not taken back to till date. The organisation has three types of memberships, namely founder members, full members and associate members. Full members include the original five founder countries plus other countries whose membership has been approved by the OPEC. Associate members are admitted with certain conditions set by the organisation.

Then there are the observer members and the OPEC currently recognises Egypt, Sudan and Equatorial Guinea as such. With regard to controlling the price of crude oil, the OPEC is a powerful body. It sometimes decides to restrict crude oil output to maintain or hike the price of crude oil in the world market.

The power of OPEC in the world can be seen from the following estimate of crude oil reserves owned by OPEC and the rest of the oil producing world. “The OPEC Statute stipulates that: “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the Organization, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members.” (Who are OPEC Member Countries? 2007).

With today’s hunger for oil, the price and demand for the same is growing steadily. Both these factors indicate more wealth to nations who have these resources. Wealth leads to power, greed and corruption. Oil becomes inexplicably linked to politics and all these can create many problems for the economy otherwise.

Literature Review

In the industrial age oil was, and is a source of power for those who own or control it. The first instance when oil was used a ‘weapon’ was in the six day war when the oil producing countries of Saudi Arabia, Kuwait, Iraq and Libya put sanctions on selling oil to the United States and UK. The review first gives a picture of the world oil scenario, the major producers, exporters, consumers and importers and selects nine countries that fall into the category of oil rich, but poor. Certain social and economic indicators prevailing in each country is given, based on which the core analysis will be given.

Causes of poverty in oil rich economies

Exploration and extraction

Exploring and extracting usable oil reservoirs involves technology intensive operations and hence very expensive. This is another paradox of oil. Many countries rich in oil reserves do not have the funds to discover, let alone extract this resource and is one of the main reasons why many countries blessed with this abundance are unable to harness commercial gain from this. A large number of wells have to be explored and tested before a commercially viable one can be found. Chance or luck plays a major part in finding the right well.

Oil companies and the oil producing country – The early days

Many of the oil rich countries lost valuable earnings which could have been of enormous benefit because of the way by which oil exploration was carried out from the beginning of the nineteenth century. As mentioned earlier, most of the oil rich countries did not have the resources to exploit their oil reserves. In many instances the country was not even aware of the existence of oil on land and their territorial waters. It was up to the multi national oil companies to take up this task. Most major oil rich countries were, with the exception of a few, economically backward. Discovery of oil seepages to the surface made such countries aware of possible oil reserves.

Such countries were then approached by large oil companies and were made to accept their offer of exploring the find. The agreement generally would give the oil company a lease of up to 90 or 99 years and a percentage of profits ranging from 10 to 12% of the profits of the company. The end result was that the oil companies earned high profits from their concessions while the host country ended up with practically nothing. They also lost control of the oil fields till the lease period ended. Things began to change in the 1960 when the producer country woke up to this fact and agreements were made or changed that were more favourable to them.

In the 1950’s the Venezuelan government standard agreement was to allow an exploratory period of six years and a lease period of thirty years, a dramatic decrease form the ninety year leases of the early 1900’s. But the unease between the producers and the oil company remained which ultimately led to nationalizations which started after 1970, except for Mexico in 1938 and Russia in 1920. Utilised properly, such lost earnings could have transformed such economies into developed ones had the situation been more favourable to them. “Essentially, two situations occur simultaneously: the build-up of a country’s oil industry and the country’s build-up of frustration toward the oil companies.” (Falola & Genova 2005, p.46).

Corruption

Corruption has turned out to be the single biggest factor hampering economic welfare in the twenty first century. The injustice meted out to oil producing countries in the ninetieth century has all but disappeared. Corruption in such developing or underdeveloped economies is rampant in the government and bureaucracy. Transparency international has also given low score for in honesty in government to the following counties who are members of OPEC.

They are Angola, Iran, Iraq, Libya, and Venezuela A large proportion of benefits arising out of exploitation of natural resources is negated because the money is channelled to the hands of company executives, middlemen and government servants. “In these countries, public contracting in the oil sector is plagued by revenues vanishing into the pockets of western oil executives, middlemen and local officials,” Eigen said in the news release.” (Corruption Undermining Global Anti-Poverty Fight, Group Says. 2004). It has been estimated by the Berlin based Transparency International that governments worldwide loose about USD 400 million in because of rampant corruption.. It was not that corruption started after investment involved in oil exploration started to come in. This practice had existed even before that.

Developing economies worldwide lack transparency in operations. A lack of transparency lessens the chance of being apprehended for corruption charges. This lowered risk in turn encourages corruption Incentives for honest behaviour is outweighed by the prospect of earning more through accepting bribes. This situation is further hampered by the fact that in such situations, selection of honest officials and investing companies become difficult. Resource rich countries face another problem that encourages corruption. Such a country will be focused more on exploitation of resources than other methods of economic growth like developing skills and industrialisation. Exploiting natural resources requires a large number of unskilled workers, but few numbers of skilled workers. This will result in high disparity of income which promotes corruption.

Damages to rural areas

Oil wells may be found on land or under sea beds. Undersea exploration causes little or no disturbances in the life of the common man. But land based wells, depending on its location, could be found near populated areas like villages and small towns. Presence of oil in close proximity to large cities prevents its exploration because of the massive relocating involved. But this is not so in the case with villages where people have no means of protest. Explorations near villages can cause disruptions and damages to the village community collectively or individually

Nigeria – A case study

A few instances of the consequences of oil drilling operation in Nigeria is given so as to illustrate the point abut how village communities are negatively affected by such operations. In the first case, the supposed damage was caused by underground blasts for conducting seismic surveys by the oil company. The plaintiff claimed that certain buildings in the village were damaged as a result of such explosions. A representative from the oil company inspected the site and agreed that some damage had occurred. The company retracted its stand in court and denied that any such damage had occurred.

The lower court ordered the company to pay damages, but this order was later reversed by the Supreme Court and consequently no damages were paid. In another instance, damage to ponds and well caused by dumping of oil waste caused extensive damage to plant life and the aggrieved persons had to approach the court to claim damages. Construction of approach roads to and from the drilling site, clearing of vegetation used for agricultural or grazing by the villages are other problems that oil exploration causes to village communities. Getting a court verdict in the villager’s favour is time consuming and most of them do not have the resources or knowledge to go about it.

Proving and assessing the damage is again a problem for the villagers. Apart from the damage caused none of the villagers benefit in any way by the presence of these companies.” But the case suggests that, even if the damage has convincingly been proven in court, oil companies may continue to adversely affect village communities without paying compensation.” (Frynas 2000, P.162).

Intellectual Capital: Intellectual capital refers to the quality of labour available in a country. This is turn is dependent on the quality of education that a country is able to provide for its citizens. Lack of centres of higher education will result in the country being saddled with unskilled labour that is unqualified for technical work. As mentioned earlier, exploitation of natural resources requires more unskilled labour than skilled. An oil rich country is not motivated to create a pool of skilled labour, since money would come into the economy even with the existing quality of its labour force. Moreover, setting up institutions for technical learning involves long term investment and vision, and monetary returns for the same would take at least a decade to become a reality.

This is evident when economies of countries like Korea and Japan are compared with those of Nigeria and Angola. Both the former countries are not resource rich, but have economies that are far more advanced than those of the two African States. “Surprisingly, nations with few natural resources demonstrate greater economic growth rates than OPEC countries. Japan’s economic growth, driven by technological superiority, outpaces that of Saudi Arabia; South Korea is growing faster than oil-rich Nigeria; and Taiwan’s economy has moved well beyond that of oil-rich Venezuela.” (Emeagwali 2007).

Technology

Most oil rich or resource rich economies that still remain poor are unwilling or unable to invest in technology and research. This result in unavoidable out souring of technology, as and when the need arises, resilitn in more resources have to be spent. This would not have been the case if they had a highly skilled or qualified labour. As revenues form oil sales increase, expenditure for infrastructure development will also increase.

But all technical expertise required for this will have to purchase at higher cost form other countries. Even relatively prosperous economies like Saudi Arabia and Kuwait, two countries rich in oil reserves spend very little of their GDP on research. This is because they feel that they have enough capital that can be generated though its available oil reserves. “Saudi Arabia, Qatar and Kuwait spend about 0.2% of their gross domestic product (GDP) on science — less than one-tenth of the developed-country average of 2.3% and about a third of that spent by less wealthy Iran.” (Giles 2006).

Wastage of natural gas

Many oil producing countries waste natural gas the extremely valuable by-product of crude oil production. It is estimated that all the oil producing countries waste about 150 billion cubic meters of gas annually. This figure is comes up to 25% of gas consumption in the United States and 30% of gas consumption of the European Union. A close cooperation between the respective governments and the industry has to be worked to be able to make use of this gas instead of it being burned or flared off. This gas if utilized properly could be used for domestic proposes, a major source of energy for households in many developing countries, thus bringing revenue for the producers.

This is part from helping to reduce harmful emissions that contribute to global warming. Even though some attempts have been made to find a solution, not much progress has been made. “About 300 representatives from major oil producing countries and companies are coming together for the next two and a half days to share best practices, learn about new technologies and identify opportunities for further gas commercialization and market development that will allow them to reduce the burning or flaring of natural gas.” (Oil Producing Countries, Companies Need to Step up Efforts in Reducing Gas Flaring. 2006).

The World Oil Scenario: A list of the top fourteen oil producers, their exports, consumption, and imports are given below.

Top World Oil Producers, Exporters, Consumers, and Importers, 2006 (Millions of barrels per day).

It can be seen that Saudi Arabia is retains the top spot, both in terms of production and exports. In terms of consumption it holds 10^th place. It does not import any oil. The country does not import any oil. Russia is the second largest producer and exporter and holds fourth place in terms of consumption. This indicates that both the above countries have surplus production and is earning considerable revenues through export of oil.

The United States is the third largest producer. But its energy requirements are so huge that it is forced to import oil and achieves the number one position among oil importers. It is also the number one consumer of oil in the world. This shows the enormous power and size of the US economy. Iran is the fourth largest producer and retains the same position for exports also. It does not figure among the top consumers of the world indicating a low level of industrial development. Mexico does not import any oil. Mexico comes at number five in terms of production and number ten in terms of exports. It shows that its economy is big enough to warrant a big consumption of oil. In terms of consumption it ranks eleventh below Saudi Arabia, but has enough surplus to eliminate the need for import.

China stands at sixth place in terms of production, but like the US, it is unable to export any of the same. China is the second largest consumer and the third largest importer. Canada is at seventh place in production and due to its requirements does not have surplus oil to export. It ranks seventh in terms of consumption, showing that it is self sufficient in this area. The United Arab Emirates (Abu Dhabi, Ajman, Dubai, Fujaira, Ras el Khaimah, Sharjah and Umm al-Qaiwain) is the eighth largest producer and sixth largest exporter. It does not figure in the list of top consumers and importers. The ninth largest producer is Venezuela and is the sixth largest exporter. It is not a top consumer and does not import oil. Norway it the tenth largest producer and third largest exporter. This country is not a major consumer and does not import oil.

Kuwait holds eleventh position among producers and seventh position in exports. It is not a major consumer and also not an importer. Nigeria stands at twelfth place in production and eight place in exports. It is not a major consumer an imports no oil. Brazil is the thirteenth largest producer, but does not export oil. It is the eight largest consumer, but is at present self sufficient in oil. The last place among the top fourteen major producers is occupied by Iraq. It used to be the twelfth largest exporter, but the invasion of the US and coalition forces have the changed the equation, at least for the time being.. Iraq has sufficient oil not t warrant an import, but does not figure among top consumers.

The following is the abstract from the above table of countries who figure in the list of top exporters, but is not among the top producers. This is an indication of extremely low oil requirements. The top place in exports in this category is Algeria, and is the ninth largest exporter in the world. This is followed by Libya at 11^th place, Angola at thirteenth place and Kazakhstan at fourteenth place. None of these countries are top consumers nor do they import any oil.

Next a list of top consumers and importer who are not in the list of major producers is given. In terms of consumption, Germany ranks fifth, followed by India at number six. The ninth largest consumer is South Korea, and France and Italy holds twelfth and fourteenth positions.

Another category is a list of countries who are not major producers, but figure among the top importers. Japan holds the top spot in this category and is the second largest importer after the US. Germany comes next at fourth spot and South Korea at 5^th place. India, Italy, Spain and Taiwan hold the next positions in that order.

A critical analysis

Oil Consumption

Requirement for oil is an indication of consumption requirements, which in turn is an indication of economic activity. So a high requirement of oil indicates that the nation is either industrially and technically advanced or is going though this process. The purpose of this analysis is to select countries that seem to fall into the category of ‘oil rich, but poor’ economies for the purpose of individual study.

It is interesting to note that out of the top fourteen consumers, eight are not among the top producers. Those countries are Japan, Germany, India, South Korea, France, UK and Italy. This is again a proof that being resource rich is not a prerequisite for economic growth. One nation that stands part here is India because all the rest fall in the category of advanced economies. This indicates that even though India is not an oil rich country, it does not stand in the way of economic growth.

The first criteria is to select countries that are among the top producers but do not figure in the list of top consumers. They are Iran, Iraq, UAE, Venezuela, Norway, Kuwait, and Nigeria. Norway can be excluded because it is an advanced economy. This indicates that all the other countries, namely Iran, UAE, Venezuela, Kuwait and Nigeria do not have much demand for oil, and hence low industrialisation.

The second criteria is to list countries that do not feature as top producers, but can be found in the list of tope exporters. It indicates that those countries have moderate production, but still have surplus oil to export, here again indicating low industrialisation and advancement. They are Algeria, Libya, Angola and Kazakhstan.

To sum, selection has been made in the manner given next.

1. Countries who are among the top producers, but do not appear in the category of high consumers. The countries are Iran, UAE, Venezuela and Nigeria. (Norway and Kuwait eliminated for reasons given above). The UAE is not taken up because it is a conglomeration of small independent countries.
2. Moderate producers of oil (that do not appear in the top producers list), but feature among top exporters list. The countries are Algeria, Libya, Angola and Kazakhstan. Kazakhstan is not included because it is a relatively young country.
3. This selection can be further validated buy the table given below. The table shows how dependent these countries are on petroleum exports for running their economy. Countries having more than 50 % dependence are selected. Saudi Arabia is not selected because it features in the list of high consumers. It can be seen that the only country not included in the list is Qatar. So this country too has been included for individual study.

The final list comprises of Libya, Kuwait, Iran, Nigeria, Iraq, Venezuela, Qatar, Algeria, and Angola

Libya is a dictatorship and its economy is strictly government controlled in this country. Business freedom in Libya is very low at 20%. This means that free enterprise is limited which results in accumulation of wealth in the hands of the few who manage to run private institutions. Its trade freedom at 39% is below average mainly due to its high import restrictions. Taxes are extremely low, with the highest rate being just 15%, and this accounts for its very high rank in fiscal freedom.

Government expenditure is very high coming up to 34 % of its total GDP. Inflation is low at about 2 and a half percent per annum and hence its high monetary freedom. Investment freedom is relatively low due to heavy restrictions on FDI. Property rights score is very low because very little property is privately owned and there is always the risk of government nationalising property. Private practice of law is banned. Corruption is very high indicated by its low score of 27. High restrictions on employment make job seeking difficult and unemployment levels are very high.

Kuwait

The economic indicators of Kuwait do not make it appear to be oil rich but poor. There is reasonable business freedom and very high trade freedom. With zero income tax, its fiscal freedom is one of the highest in the world. Corruption is quite high. Fiscal freedom is high due to heavy government spending up to 29 % of its GDP. Foreign investment is very relaxed in some area like water, power generation, communication, tourism etc. Monetary freedom is very favourable due to low inflation rates of around 3%. With few restrictions on labour, the country’s labour freedom is high at 82%.

Iran

Starting private enterprises is quite restricted which given this country an economic freedom of 55%. Import restrictions, high tariffs cumbersome regulations etc give Iran a moderate score of 57% in Trade freedom. Fiscal freedom is low due to a reasonably heavy rate of personal income tax and it stands at 81%. Heavy government spending of up to 22% of GDP gives a very high value on Government size which stands at 81%.

Investment freedom is low and many areas are restricted. Privatisation is not encouraged which gives it a low score of 10%. There is no private banking sector in Iran, and percentage of credit by money lenders is high. Low respect for intellectual property rights and ineffectual legal system gives a low score of 10% in property rights. Corruption levels are high, indicated by a low score of 27%. Labour is highly regulated and finding employment is difficult, which gives the country a relatively low score of 43.8%

Nigeria

Existence of restrictions on starting private enterprises gives a average score of just 52.6% for Business Freedom. Even with liberated foreign trade policies, high duties, lack of uniform policies etc gives Nigeria an average score of 63.4%. Reasonable tax rates give Nigeria a high score of 84% in fiscal freedom. Government spending of 32.6% of GDP is quite high and government size gets a score of 68.1% only.

High inflation, unstable prices and lack of market mechanisms gives a poor score of 73% for monetary freedom. 100% FDI is allowed only for oil industry. Corruption, poorly formulated laws, infrastructural problems, violence etc gives a low score of just 30% for investment freedom. Reasonable availability of credit gives this country a score of 40% for financial freedom. Problems in the legal system like delays, corruption etc has been the reason of a low score for property rights. Rampant corruption is the reason for a score of just 22% in freedom from corruption. Very low restrictions of labour gives Nigeria a high score of 90.5%

Iraq

The ten economic freedoms cannot be given because it is unavailable due to political problems existing in that country. A run through without corresponding figures is given here. Moreover this is not the appropriate time to grade this country because of the nature of the problems faced by this country is not long lasting. Private investment situation has improved slightly, but there is room for improvement. Business freedom cannot be judged accurately, but trade tariffs are low at can give this high ranking for trade freedom. The current rate of direct tax is fixed at 15% which would give Iraq a high score for fiscal freedom.

But it cannot be estimated as to the rates that might be fixed, once normality returns to the region. Current government spending is estimated at 95% of GDP and will affect Government size negatively. This figure cannot be considered as realistic since heavy spending is inevitable for rebuilding this country. Understandably high rates of inflation of 46% exist in Iraq. Even though this is not a long term trend, this figure would negatively affect its monetary freedom.

Investment freedom should be very high because of the need for FDI in Iraq is required for reconstruction. New policies on banking and finance could positively affect its financial freedom At this juncture, property freedom cannot be judged even with a fair degree of accuracy. Even though no figures are available, existence of corruption is very high. Labour freedom could get a high rank because of the need for labour for ongoing projects will force any nation to ease its labour laws.

Venezuela

Restrictions on starting private enterprises is very high in that country, resulting in a poor score of 51.4%. Trade freedom at 54.6% is low due to corruption, lack of transparency, adverse tariffs, confusing labelling regulations etc. A high personal tax rate of 34% has given a bad score of 74.5% for fiscal freedom in Venezuela. High inflation rates of 14.9%, coupled with high protection to agricultural prices give an adverse score of 60% for monetary freedom. FDI policies are not investor friendly. There is also a risk of nationalisation of companies engaged in exploitation of natural resources exits. FDI of only 20% is allowed in many areas.

There are also regulations on the number of foreign workers employable in hat country. All this gives a very low score of just 20% for investment freedom. Even though there are private financial institutions in that country financial freedom gets a score of just 40%. Government controls as to the areas of finance is causing problems and the number of foreign banks operating in that country is coming down. Holding of private property is difficult, there is low respect for intellectual property rights and partiality towards foreigners in its legal system has given a low score of just 10% for property rights,. Corruption levels are high indicated by the low score of just 23%. Rigid regulations regarding labour has restricted job opportunities and its score regarding labour freedom is just 35%.

Qatar

Reasonably heavy restrictions as to starting private enterprises gives a modest score of 60% for business freedom. Even with high tariffs, restrictions and strict regulation a score of 70% for trade freedom exists in Qatar. Like most Gulf States, Qatar too enjoys a very high fiscal freedom of 99.8% mainly due to the absence of direct taxes. Government spending of more than 30% of total GDP has given an adverse figure of 72.1% for government size. Even with price controls, inflation is high at 10.6% giving this country moderate monetary freedom f69.4%. 100% FDI is permitted in areas like agriculture, tourism, health etc.

The government has strict controls as to ownership of share in Qatari companies to prevent take over and share of ownership in local commonages is limited to 49%. Heavy infrastructure areas like steel do not allow FDI. All these restrict the country’s investment freedom to just 30%. Qatar’s strict foreign policy and economic policies that are comparable to international standards have given financial freedom a score of 50%. Problems in the legal system, like bias towards locals, lethargy and legal bureaucracy has given a moderate score of 50% for property rights. Qatar is reasonably corruption free. Even though transparency is a problem, freedom form corruption gets a decent score of 60%. Points like lack of minimum wage restrictions and the presence of a large number of worker from other countries gives a good score of 60% for labour freedom.

Algeria

High protection is given to investors who start business in Algeria. Even though getting licenses is quite difficult the score for business freedom is quite high at 72.7%. Trade tariffs are quite high at 10.6%. Attempts are being made to bring about a better investment atmosphere. Procedures are cumbersome and time consuming and all of these give Algeria a trade freedom of 68.8%. Algeria’s personal tax rate is high at 40% and its corporate tax rate is an attractive 25%.

This gives a score of 77% for fiscal freedom. Government spending is 29% of GDP and this gives government size a score of 74.6%. Inflation rate is very low at just 2.5% and price satiability mainly through subsidies and government interference exists. This gives monetary freedom a high score of 80.2%. Procedural difficulties give Algeria a relatively low Investment freedom score of just 40%. Heavy regulation and interference in the financial sector gives a low score for financial freedom at 20%. Inefficiency of the judiciary gives low score in fiscal freedom which stands at 30%. Corruption levels are high and as a result score for freedom form corruption is only 31%. Rigid regulations of labour are obstructing employment opportunities. The score for labour freedom is a moderate 52.3%

Angola

Obstructions to set up business in Angola are very high and hence it gets only a low score of 36.5% for business freedom. The country’s trade tariffs are low at 6%. But other difficulties such are obstructive regulations and lack of transparency exist. The score for trade freedom is a healthy 73%. Low personal tax of 15% and corporate tax of 35% gives fiscal freedom a high score of 85.2%. With government spending at 30% of GDP, the score given for government size is 72.8%.

High rate of inflation at 18% and unstable prices gives a low score of 57.8% to monetary freedom. Strict laws with regard to capital and market, requirement of local labour in foreign owned companies and other problems give a very low score of just 20% to investment freedom. An undeveloped financial market has given a score of 40% for financial freedom. A weak legal system again is not in favour of Angola. Property rights just gats a score of 22%. Rigid employment regulations are also a negative factor and it gets only a score of 44.1% for labour freedom.

Critical Analysis

It can be seen that there are certain factors that are common among all these economies. The over riding factor is freedom form corruption which is high in all these countries except for Qatar and Kuwait. This is understandable, because both Kuwait and Qatar are Muslim nations governed by strict personal laws. Business freedom is the highest in Algeria at 72% and lowest in Libya at 20%. Almost all courtiers have high fiscal freedom due to low or absence of personal taxes.

Government spending is high in most countries and these shows in the levels of high values given to government size. Monetary freedom is good in most countries with most of them having low levels of inflation. This could also be due to government interference in price fixing. Investment atmosphere is not very conducive in all cases and this could be why investment other than in oil is not being done. Financial freedom is also poor due to difficulty in obtaining credit. Problems in the legal system like corruption and bias are high and this shows in low scores for all countries. Labor freedom is poor except for Nigeria and Kuwait.

At this stage the ‘economic freedoms’ of a developed nation can be analysed with those of the above countries.

Japan

Japan was selected because it is not an oil rich country. To start a business in Japan takes only about 17 days when compared to the world average of 34 days. Businesses are well protected and this gives business freedom in Japan a score of 88%. With very low trade tariffs of 2.5%, the trade freedom gets a score of 80%. The only thing that is unfavourable in Japan when compared to the other nations is the tax rates which are quite high at 35% and which may even go up to 50%. Fiscal freedom is rated low in comparison to the fiscal freedom of the above countries at 70%. Inflation in Japan is as low as.01%, which gives as score of 94% for monetary freedom.

High government and lack of transparency gives financial freedom a low score of only 60%. Foreign investment is welcomed in Japan, but takeover of Japanese firms is difficult and investment freedom is only at par with other countries. The legal system in Japan is efficient and non discriminatory and hence a high score of 70 is given to property rights. Corruption levels in Japan are low and freedom from corruption gets a high score of 70%. Lack of rigid regulations on labour gives a score of 79.8% to labour freedom. So, freedom to start a business, trade and import tariffs, levels of inflation, the legal system, lack of corruption and restrictions of labour are strong motivators for both private and foreign investment.

Now an example of a poor or developing economy that is not oil rich can be compared with the same set of parameters. From that comparison, it will become clear that these parameters are not the only criteria for economic growth.

India

India is a developing nation and is not oil rich. But it figures among the top consumers of oil. We can see from the parameters that India does not fare off much better or worse when compared with the oil rich nations. It indicates that there are more reasons as to why an economy is rich, developing or poor. Considerable restrictions still exist as to starting a business in India and it receives a low score of only 50%. High tariffs of 14.5% give trade freedom a poor 51%. A rate of 30 to 33% is taxed on direct income. This gives a reasonably good score of 75.7% to fiscal freedom. Government spending is high and comes up to 29.7% of GDP and its score on government size is 73.5%.

With low rate of inflation at 5.4% gives a score of 70% for monetary freedom. Finance is controlled largely by state owned banks and existence of restrictions on foreign banks gives a poor score of only 30% to financial freedom. Complex regulations and restrictions of FDI restrict the score to 40% for investment freedom. Delay in reaching legal decisions and a huge backlog of unresolved cases gives a score of only 50% to property rights. Corruption levels are high and freedom from corruption gets a score of just 33%. Labour freedom stand at 68.6% because labour regulations are not very rigid.

This clearly indicates that there are other factors that are critical for economic development. In this instance, India scores on these points rather than on the indicators given above.

How the BRIC economies prove this assumption

Pace of economic growth has shifted for west and south East Asia to other regions and this pace is not related to a particular region. The term BRIC was coined by Goldman Sachs to include the four fastest growing economies of the world. It was done after a study of the four economies by Goldman Sachs in 2003. BRIC is the acronym derived from the first letter of the alphabet of the countries, Brazil, Russia, India and China. The report does not specify the presence of oil or other natural resources as a criterion for growth and the presence of Brazil, China and Russia is not because of reasons other than oil. A brief look at the four countries would be appropriate.

India

It is surprising to know that the Indian Economy was the second largest economy in the world during the time of the industrial revolution. India could produce 20% of world output during those days (1770’). During the early 1970’s its share of global output was only 3%.

This shocking slip was mainly due to policies that were myopic in nature, stressing on undue protection for domestic business. Ever since 1984 when this country started its open door policy things began to change for the better. Adaptability to rinsing international expectations, better infrastructure and a visionary policy were the factors that contribute have been critical in the turnaround. “From 2007 to 2020, India’s GDP per capita in US Dollar terms will quadruple (one-third higher than the original BRICs projections). Indians will also consume about five times more cars (up from 3.5 times) and three times more crude oil (up from 2.3 times).” (India’s rising growth potential. 2007).

Russia

After the collapse of the Soviet Union, the economy of Russia was in shambles. There was rampant corruption, economic slowdown, and very high levels of organized crime. This change in the state of affairs started with Gorbachev’s Glasnost and Perestroika and continued during Yeltsin’s presidency. Things began to change with the advent of Vladimir Putin whose strength and vision has helped to correct the downward trend and move the nations on a path of economic stability and growth.

Putin was a man who had the support of the public and was man who could grasp and understand the workings of the market. It was his effort that changed the outlook of Duma, the Russian parliament, on market reforms resulting the turnaround seen in Russia today. “He immediately began to reverse the political pluralism that had frustrated many of his predecessor’s efforts at reform and had contributed to the breakdown of central state authority.” (Russia: A smooth political transition. 2007, p. 29).

China

Like the former Soviet Union, China is a strong follower of communist ideals. event though it still remains a communist country, the economic reforms initiated by the Chinese government was instrumental in opening up the Chinese economy and fuelling the rapid growth seen in Chins today. The rate of investment in China has been such that many experts fear that this country may not be able to keep up the pace of reforms, mainly due to the increase of non-performing loans. “One of the most widely-held misconceptions about China is that the economy contains an

over-investment time-bomb, which will soon result in a sharp correction in both investment and GDP growth, resulting in rising non-performing loans (NPLs) and in deflation.” (China’s investment strength is sustainable. 2006, p.61).

Brazil

When compared to the growth rate of the other three economies, their rate of growth is Brazil was not up to expectations. This was the opinion of Goldman Sachs, when current growth rates were compared to the study conducted in 2003. But there appears to be a valid reason for this under performance. Brazil has been laying heavy stress on market stability at macro levels, which is an important factor for economic growth. So this situation could improve after a while. Like the other BRIC economies, the change came about through the implementation of forward looking market reforms. “The main reason for Brazil’s underperformance is that, until now, the government had been in the process of implementing a stabilisation programme, with a view to achieving macroeconomic stability.” (The. B. in bricks: unlocking Brazil’s growth potential. 2006, P. 75).

Two charts showing the potential growth of these economies by the year 2050 is given below: The fist graph shows how the BRIV economies will compare with the economy of the G6 nations (United States, Japan, United Kingdom, Germany, France and Italy)

The second graph shows how the individual BRIC countries will compare with the individual nations comprising the G6 nations.

The criteria for economic growth

It is quite clear that the criteria for economic growth and prosperity are not the availability of natural resources like oil. This part deals with many of the necessities of economic growth that has been followed by many countries that have been proved successful. If the oil rich economies can emulate it , they too can reap the rewards of growth with the additional advantages of the huge natural resources they have been blessed with. The next common thread is low business freedom with Libya having the lowest freedom at just 20%. The highest freedom in this category goes to Angola at 73% closely followed by Algeria at 72%.

Economic policies

The most important factor that determines the growth of an economy is the type of economic policy that is followed by that country. Economic policies include both domestic and foreign policies. The last decade has seen a massive change in the policies of many nations, especially in the areas of foreign direct investment. Many other factors like the collapse of the Soviet Union and the unification of Germany has had an impact on the rest of the world, financially, politically and ideologically. The fall of the Soviet Union speeded up the change in economic polices of China to an area that is favourable for attracting foreign direct investment. China has been a communist country with rigid domestic and foreign policies for a long time. Even without changing its communist government, China has been able to bring about massive change to it economy. The formation of the European Union is another example of how countries are forming regional groups in pursuit of economic and political stability.

Infrastructure

One important factor that needs to be present is the right infrastructure that will attract investment, both domestic and foreign. There should be adequate, power, facilities for transportation like roads and railway, availability of problem free land for biding factories and other business institutions, availability of finance, a strong judicial system and a qualified and professional work force.

Domestic Policy

Domestic policies have an important bearing on economic growth. Policies should be formulated in such a way that it encourages private participation. Private participation is essential for distributing of the nations wealth among its citizens. An atmosphere that encourages private participation and growth will ensure that new entrepreneurs are created. This will pave the way for job opportunities which will further the economic well being of its citizens. A vibrant bureaucracy is required to ensure that investors are not discouraged. Labour laws should be formulated or changed so as to create a hassle free atmosphere, advantageous to both the explorers and employees.

Foreign Policy and Foreign Direct Investment

Once infrastructure is in place and an environment for investment is created, a country is ready to attract foreign direct investment. It can be seen from the experience of the BRIC economies to understand the importance of FDI. Some of the FDI policies followed by these economies will highlight the reasons that caused the inflow of high amounts into these countries. For example, India was a country which had strict laws regarding the entry of multinational and import of foreign good. A high level of protectionism was given to the local industry. This was a policy that it followed right from its independence to the early 1980’s.

The policy now followed by India is to allow FDI in most of the sectors of business. It even allows such investment in certain areas without government approval. “Major initiatives such as industrial decontrol, simplification of investment procedures, enactment of competition law, liberalisation of trade policy, full commitment to safeguarding intellectual property rights, financial sector reforms, liberalisation of exchange regulations etc., have been taken, which provide a liberal, attractive, and investor friendly investment climate.” (Investing in India. 2004). China also allows 100% FDI in many sectors.

Investment is allowed in the form of joint ventures, cooperatives, and even companies whose equity is fully owned by foreign companies. Is to that country’s economic advantage that almost 85% of all foreign direct investment is in the manufacturing sector. . “A majority of FDI has gone into the manufacturing industry because China possesses a competitive edge thanks to its lower costs of production and relatively powerful ability to supply supporting parts.” (Long).

The biggest advantage of foreign direct investment is that apart from receiving a steady flow of capital, infrastructure creation will also be done. Allowing of special tax incentives and forming special economic zones are steps that can attract FDI.

Stable Government

It is imperative to have stable governance to lay a foundation for economic growth. Many of the oil rich economies were until recently ruled by foreign powers. Most countries achieved independence by the start of the 1900’s and in some instances, even later. So they had had not much experience in democratically elected way of governing. Again some of these countries had a situation where dictatorships followed dictatorships.

In such a situation, it is no surprise to find a lack of stable governance. Only a strong government can enforce and maintain the necessary change that will result form an investor friendly policy, by not bowing down to internal and external pressures. A lack of stable governance will make investors unsure as to how secure their investment will be in the long run. Heavy investments need long periods to fruity into results and hence a feeling of security for the investors can only be achieved trough stability. It does not really matter whether the form of governance is monarchy, democracy or dictatorships, even though history shows a poor record of economic growth for dictatorships.

Qualified labour force

This is an important factor for attracting investments as a forerunner for economic growth. Investments without the required quality of labour will result in the country being forced to bring in expatriate labour form other countries. Such a situating will not be beneficial to creating job opportunities within the country. The infrastructure development that followed the oil boom in the gulf during the 1970,s is an example,. Lack of qualified man power in that case created an influx of skilled and semi skilled labour to the Gulf region from India, China and other developing countries from Asia.

Education

In order to create a pool of qualified labour, institutions of higher learning have to be created. This would not be problem since most of the oil rich economies do have large reserves of cash, or at least, are in a position to get capital by exploitation of their oil reserves. Otherwise, people will have to be sent to other countries where such facilities exist, at high cost and with government help. This method is expensive and not practical to create a large numbers of quality labour. Along with initiative of creating centres of high learning, primary and basic education facilities will have to be created. People, especially those from rural areas have to be encouraged to send their children to school. This is a long term goal, but there is no alternative to this policy. China and India are aggressively perusing such a policy.

Age of the population

Aggressive economic growth requires a young country. This means that the proportion of youth and middle aged people should be higher than the number of senior citizens. This is important in the sense that it is easier to train younger people. Moreover with cost of training remaining the same, the average period of service derived form younger people will be much more than from what is got from older people. With shorter service periods, the frequency of training will be much more, resulting in increased expenditure.

Bringing down corruption

It has been mentioned at the start of this paper that one of the factors of poverty in oil rich countries is the high levels of corruption that exists there. Corruption will divert funds that have been earmarked for such poverty alleviation programs into the hand of corrupt officials. If the funds marked for projects do not ultimately come down to the level of the common man, the effectiveness of such programmes will be low. High levels of corruption will result in a situation where by companies will be forced to incorporate the cost of corruption onto their goods and services. This higher cost will ultimately be borne by the consumers living in the country. It also implies lower profits for businessmen, which may discourage investment in the future.

Transparency

Low levels of transparency are a factor that is common to almost all the ‘oil rich, but poor’ countries. Such a situation will help in creating an atmosphere of suspicion among potential investors. But achieving a combination of low corruption and high transparency is difficult, especially in resource rich counties. But this has not been too serious an issue, since heavy inflow of foreign funds has happened in China and India, where the above mentioned situation exists to a high degree.

Taxation

As shown earlier there is high level of fiscal freedom due to the tax structure prevailing there. Provisions for moderate taxation will bring for funds to the government for development purposes.

Oil Conflicts

Oil as a commodity is extremely powerful. Almost every country in the world is dependent on oil, some more than others. The more industrialised an economy is, the more oil it needs. This can be seen from the fact that the United States is the world’s largest consumer of oil. In a non industrialised advanced nation like Switzerland, oil consumption is relatively low. In any case, the need for oil has given rose to conflicts since the beginning of the twentieth century. Some conflicts are regional in nature and have implications for that region only. The invasion of Kuwait by Iraq is an example. Such events become a concern of the whole world if the conquering country decided as to who the oil be sold.

It can stop oil being sold to countries that are perceived enemies. The reaction to the invasion by the United States is an instance of this situation. The US, knowing that if Iraq had control over Kuwait’s oil, knew that oil supplies form from Kuwait to the US could be stopped by Iraq. This would have developed into a serious situation for the US and would have sparked off an energy crisis in that nation. The power of oil is such that nations can go to war with each other. It is clear availability of oil is more important than the consequences of a war. There are two basic reasons why countries go to war with each other. The first reason is that it is essential to fuel an industrialised economy and the second reason is that countries with high military power need oil to run the military. The war with the United States had cost the Iraqi nation and its people dearly.

Funds that could have been deployed for humanitarian and other development; purposes had to be diverted for the war effort and the subsequent reconstruction of the nation. Such conflicts have occurred in other parts of the world like Nigeria, Sudan etc. and such conflicts have proven to be costly to the economic development of the economy. “Conflict over the control of valuable oil supplies has been a persistent feature of international affairs since the beginning of the 20th century.” (Oil Conflicts. 2004).

Theoretical framework

Oil is a natural resource like coal or iron. Three are many theoretical models that explain the factors required for economic welfare and development and an analysis has to be made whether natural resources do play a part in the economic development of a country. It would not be possible to look into all those theories because it would entail too much space. But an analysis of the major theories is done so as to give a picture as to why oil rich countries remain poor.

For more relevance theories that came into being after the mid 1940’s are given more importance. Four theories of economic development or ‘schools of economic thought’ are prominent. They are structuralism, the linear stages growth model, the neo-Marxist or dependency theory and revival of the neo-classical theories during the 1980’s.

“These schools fall under the general rubric of “development economics,” a branch of economic analysis that responded to the perceived inability of classical, neo-classical, and Marxist economics to address the economic reality that plagued the poor countries of the world.” (Contreras). For the purpose of this study, the first three theories, namely the structural theory, the linear stages growth model and neo-Marxist approach is used. The early theories of economic development stressed mainly on effective allocation of scarce resource. In this instance, resources are not scarce and hence those theories do not have much relevance in this context.

The Structural Approach

This approach argued that each country had distinctive structures and that economic development was dependent on developing or modifying the individual structure of the economy in each country. The view was that under developed economies were suppliers of raw materials for the developed world. Since they had a ready market, most countries were concentrating on attaining efficiency in getting the raw materials ready for export, virtually ignoring other aspects of growth..

This approach argues that each country should transform its local economy from an agricultural based economy to a more industrialised economy that had the capability to produce goods and not just raw materials. For this purpose, state intervention in protecting the local economy (for example, by restricting imports) is necessary. This assumption of government intervention was proved to be a fallacy, and many economies like India and China have switched over to a more open door policy. This situation is found in many oil rich countries who are concentrating in exploiting oil for export. Government intervention is also high in most of the oil rich countries.

However, the importance of this school of thought has diminished over the years. “However, as time moved on, these policies seemed to fail to yield their promised fruit, and a Neoclassical (or, more accurately, Neo-Liberal) countermovement initiated by the lone voices of P.T. Bauer, I.M.D. Little, Deepak Lal, Bela Balassa, Anne Krueger and Harry G. Johnson began to gain more adherents.” (Structuralism and its Discontents, Economic Development).

Linear Stage Growth Model

This theory suggests that every nation has to go through a predetermined linear stage during the course of its development. This linear stage of growth does not distinguish between growth of developed nations and developing or underdeveloped nations. This style of reasoning was first introduced by W W Rostow in 1960. according to Rostow, the five stages which a nations has to go through is the traditional society, preconditions for take off, the take off stage, the drive to maturity and the age of high mass consumption.

1. Traditional Society: This is the stage from which all development starts. There is no surplus of goods since all production is consumed within the society. The society will be predominantly agriculture based. Capital investment will be very low and existing industries will be labour intensive.
2. Preconditions for takeoff: Productions increase causes surplus which can be traded. This is helped by the development of better transport facilities. The economy sees the growth of businessmen or entrepreneurs. The concept of savings and investments begin to emerge.
3. The takeoff stage: The growth of industries causes high switching of jobs from agriculture to the industrial sector. But at this stage growth will be imbalanced and only few types of industries will be present.
4. Drive to maturity: This is the stage where an economy begins to be recognised as nearing the advanced stage. Technology will be widely used.
5. The age of high mass consumption: The society will have moved away form the need for basic necessities and would begin to purchase and consume items that do not constitute a basic need (e.g. consumer durables). This shift will be enjoyed by a large majority of the population since purchasing power exists.

Certain prerequisites are like heavy investment for infrastructure development. Earnings should have reached such a level that savings and its subsequent investment is possible. This process will act as a catalyst to economic growth. The limitations are that even though investment can be made possible through foreign aid, the quality of labour, level pf technology and quality of governance are not considered. This model had worked for Europe after the destruction it faced after World War 2, because it had the technology and quality of labour. Through the Marshall Plan, aid was given by the US to the tune of USD 13 billion starting in 1948.

“Between 1948 and 1951 the U.S. provided about 13 billion dollars in cash, goods and services to help Europe rebuild its war torn economies.” (E-Book Glossary). The quality of labour and technical expertise of underdeveloped economies was not on the same level as of Europe. This was the main drawback of the theory. In reality, massive aid to developing countries has not shown the desired results in developing and underdeveloped economies. “Rostow explains the development experience of Western countries, well.” (Limitations of Rostow’s Model, Development Models – Rostow). As per this theory the lack of quality education and technology would have prevented economic development of oil rich countries.

The neo-Marxist theory or Dependency theory: This is basically an extension of the views expressed by Carl Marx on Marxism. The theory basically states that poorer countries are dependent on rich countries who in turn, exploit the poor countries. Poor countries have very few items in the form of raw materials left as surplus and they depend on the richer economies for finding a market for these goods. External forces like multinational corporations and international markets influence the growth of the economies of the poorer countries. Exploitation of the poor by the rich within the country is also a factor, since this will lead to unequal distribution of wealth.

It is true that the oil rich countries had only one raw material as surplus. With regard to oil rich countries, this situation of exploitation existed early in the 20^th century, but the situation changed by the formation of the OPEC, the nationalization of oil companies and the rising price of oil. “Moreover, to a large extent the dependency models rest upon the assumption that economic and political power are heavily concentrated and centralized in the industrialized countries, an assumption shared with Marxist theories of imperialism.” (Ferraro 1996).

Research Methodology

The methodology used for research is secondary in nature. Sources of information are primarily form books and web sources. Care has been taken to see that data from web sites owned by organizations that have expertise in economics and business. There have been instances where information have been sourced from purely commercial web sites. Primary sources of data were not resorted to due to geographic distance limitation to countries relevant to this study. None of these countries are in the United Kingdom or Western Europe.

Reflections

The purpose of this paper was to show that oil rich economies need not necessarily be rich economies. It might come as a surprise to the common man to know about the existence of this paradox of being ‘oil rich, but poor’. The availability of natural resources like oil is a natural phenomenon. It is also true that availability will be evenly spread out over the surface of the earth. This makes some nations rich in resources, while others are moderately rich or downright poor. Such resources cannot be created artificially or even of done, will be commercially unviable because of the high cost of developing it. But it has to be seen whether a country blessed with natural resources is to considered to blessed or cursed.

Switzerland with little resources to speak of is economically advanced. At the same time, it is relatively or totally free from problems or conflicts that happen in different parts of the world. Even during the two World Wars, with that country being practically in the middle of action, had managed to remain neutral. Economically rich Japan had numerous and damaging conflicts in its long history, like the dropping of the atom bomb. In the gulf region, only Iraq and Iran have a long history of conflict with each other and in the case of Iraq with its neighbours. Tiny countries like Dubai or Singapore have enviable record of growth. Every country with rich resources of oil is, currently undergoing conflicts, had a history of conflicts or is near to areas where such conflicts are occurring.

The way a country is governed over a period of time is of paramount importance for the economic prosperity of its people. Proper policies with regard to education, infrastructure, transportation and trade have to be formulated and maintained. In democracies, there have been instances of a newly elected government change the policies of its predecessor not because they were poor, but due to political gain. All the oil rich countries studied here have rich resources that, if properly exploited can transform the economy positively. But it should incorporate all those changes that is required for economic growth.

Developing all this is a slow process and requires patience and persistence from those who govern them. The case of the BRIC economies is an instance that proves this. Even though all the three countries had heavily regulated economies, they had built up an infrastructure that became a huge advantage when their markets were opened. When globalisation became a reality, there were fears that the advanced economies would take financial control over weaker economies. There were protests from many quarters that markets should not be opened up. But with right policies a mutually beneficial atmosphere and cooperative atmosphere can be developed. With the increase of terrorism and unrest, such cooperation will bring greater benefits than just monetary gains.

Conclusion

Countries that still remain poor even with abundance of natural resources have to learn from others who have succeeded. This change has to come, not just form the government, but form its citizens as well. It will require hard and concerted effort. With the advancement of communication, it is no longer possible to keep realities hidden from the people. Sooner or later, they will come to know what is happening with other economies. This was not the case a couple of decades back. The government could find means of censorship of news to keep its people in the dark about the outside world.

Resentment of the citizens can be kept controlled, but not for too long. The people in certain communist ruled countries have come out in open protest against the way they have been governed. Even though many such uprisings have been quelled with brute force, there came a time when the government had to bring major changes or face the threat of major unrest or even civil war. It is still within the capacity of these countries to come out of the present predicament with the help of prudent polices. This process will be accelerated with discovery of an alternative to petroleum or when the oil available runs out. Both the advent of both these scenarios happening in the near future seems to be a distant possibility.

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