Insight Magasine Winter 2013

8/12/2019 Insight Magasine Winter 2013

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issue 7, winter 2013insightedinburgh.org - BALANCE -

page 4

Time for Change:Redirecting theChinese Dragon

Investigating Chinassorely needed newgrowth path

page 10

Brain Drainor Brain Gain?The Implications

Te exodus of youngindividuals from Centraland Southeastern Europe

Patent Problems:Health Epidemicsand Big Pharma

Reassesing the effectivenessof the patent system in thepharmaceutical industry

page 18

Insight - Winter issue - Monday.indd 1 25/12/2013 10:08:42


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able of contents:

ime for Change:Redirecting the Chinese DragonKenzo Muller

page 4New Kid on the Euro Block

Madara Jadviga Rudzitepage 6

Finding the Silver LiningFraser Harkerpage 8

Brain Drain or Brain Gain?Andrea Schmidtovpage 10

Robotic Bees and Holographic reesPhilip Duffypage 12

Te Land of the Free and UnequalMelissa Parlourpage 14

Habitat for Humanity:Te Struggle for Environmental ProtectionBriana Pegadopage 16

Patent Problems: Health Epidemics and the

Pharmaceutical IndustryRosie Stock Jonespage 18

Has George Osbornes Plan A worked?Joshua Collinspage 20

Salaries by the DozenCecilia Mihaljekpage 22

Indian Economy from the Window of the

Gyanodaya ExpressAlfio Puglisipages 24

Healthcare Reform in the United States:Good Intentions, Bad imingSibel Malpages 26

AnotefromtheEditor-in-Chief

Welcome to the 7th edition of Insight. It has been an exciting few months with a complete

change of staff and many new features including the CRCC Asia Writing Prize and the writerssection on our website.Economics is the study of Humans and how we produce, allocate and manage scarce re-sources. However, the Human aspect is frequently buried in a barrage of esoteric, seeminglyirrelevant terminology and ideas. Tis edition aims to reverse this trend and fully demonstratethe Human impact of Economic concepts.I hope you enjoy this publication and that it inspires you to become part of the Insight teamnext semester.

facebook.com/insightedinburgh issue 7

Ian BillettEditor-in-Chief

Alina MikaHead of Production

Vainius GlinskisPublication Editor

Clara MascaroPublication Editor

Kati VenhoPublication Editor

Manish PrayagaSponsorship Assistant

Nikita ChuykoSponsorship Director

Director of Photography: Paul Collinshttp://collinsp.wix.com/paulalistaircollins

Cover photo: Rob Armstrong

Do not hestitate to contact us by email:

[email protected]

focus:b

alance

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IN HE WINER of 1978, Chinastop decision-making figures convenedto discuss possible reform after emerg-

ing from a decade of social unrest andpolitical restructuring.

Te Tird Plenum of the 11thCPC Central Committee emphasisedeconomic policy over ideological adher-ence, which was taken to the extremesduring the Cultural Revolution, andconfirmed Deng Xiaoping as de factoleader of the Communist Party. Knownfor his pragmatic approach, Deng Xi-aoping enacted a series of controversialreforms based on capitalist principlessuch as private ownership, investmentand trade.

Waking the sleeping giantTe opening up of China to the worldeconomy set the countrys new develop-ment path on foreign investment. Overthe next three decades, the countryunderwent economic and social meta-morphosis from a relatively isolatedcommand economy to the worlds larg-est manufacturer and exporter, raisingmillions out of poverty in the process.

In November of 2013, the Partyis scheduled to hold another thirdplenum, this time of the 18th Com-munist Party of China (CPC) CentralCommittee, under the leadership of theGeneral Secretary incumbent Xi Jin-ping. opics of discussion range fromland reform to the role of state-ownedenterprises to environmental issues.

Te plenum suggests China isreaching another crossroads in its roadof economic growth. While Xi Jin-

ping is unlikely to be as radical a gamechanger as Deng Xiaoping, his outlookis still reformist within the limits of the

current economic system.Te 18th Central Committee rec-

ognises that many of the reforms in-

stituted in the Deng era are unsustain-able and perpetuating imbalances inthe Chinese socioeconomic structure.

Widening gaps between consumptionand investment, exports and imports,as well as geographic and demographicfactors, top the agenda of the plenum.

Old habits die hardIn 2013, investment continues to playan integral part in the Chinese econo-my, accounting for over half of GDPgrowth. Yet recent economic data showa marked slowdown in growth. Quar-terly growth rebounded to 7.8% in the3rd quarter, the highest it has been for10 consecutive quarters, but still com-paratively low to the double-digit ratesenjoyed during the 1990s.

Tis can be understood intuitively;an economy cannot spend indefinitelyon investment projects such as high-

ways, airports and factories, as its re-turns will diminish over time and ceaseto remain profitable. Yu Yongding, di-

rector at the Chinese Academy of SocialSciences provides a telling example ofovercapacity in the steelmaking indus-try, of which only 70% of its capital

was utilized in 2012, generated a profitrate of 0.04% that same year. Te profitreaped from two tons of steel would notbe enough to buy a Cadburys Wispa.

Underutilization of capital and gen-eral inefficiency is a recurring theme ofgovernment designated strategic indus-tries such as the steelmaking industry

or telecommunications industry. Whilethe role of state-owned enterprises washeavily reduced by privatization reforms

enacted by Deng Xiaoping, SOEs haveseen a recent resurgence since the gov-ernment provided a stimulus packageto safeguard these industries from theeffects of the financial crisis.

Global expertiseExports are also a shaky foundation tobase the worlds second largest economyon, as it is dependent on global demandand an undervalued currency. In fact,recent exports have been fluctuating

precisely because of these two factors.Te Chinese renminbi has appreciatedover 30% in value against the dollarsince 2005, affecting the competitive-ness of Chinese exports as they becomerelatively expensive to global importers.

With the Eurozone still stuck in itsdebt crisis and the U.S. only beginningto recover from recession, global de-mand for imported goods remains un-stable at a lower base level, fluctuatingaccording to how these major tradingpartners assess their economic outlooks.Chinas dependence on foreign demandis exemplified by the solar panel in-dustry, where 88% of all solar panelsproduced in 2011 were shipped over-seas. Tis summer, Chinese authorities

were accused by the E.U. of predatorypricing of solar panels and encourag-ing dumping practices in the Europeanmarket.

Te dispute remains unresolvedwith both parties threatening to raisetariffs on their respective imports of

solar panels and wine. While the strictdefinition of dumping is selling belowcost and thus making a loss on each unit

Time for Change:Redirecting theChinese DragonKenzoMulleranalysesthenecessaryre-balancingintheMiddleKingdom

Zhou Ding

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sold, it is more probable that Chinesemanufacturers were still able to turn aprofit at very low prices, which weresustained by government subsidies. Teprevalence of government subsidies and

state-owned enterprises in the exportindustry links the imbalance of exportsto the issue of overcapacity at home.

Summarised in one word, the pro-posed remedy to the variety of imbal-ances China faces today is rebalancing.In order for China to continue growing,albeit at a slower rate, it must coun-terbalance excessive investment withhigher household consumption. Telogic to this argument is that domesticconsumption will avert a hard landingby keeping the economy afloat, while

reining in on unsustainable investmentprojects in industries that have reachedtheir productive capacity. With higherdemand for goods and services at home,exporters will turn to domestic marketsover foreign markets experiencing di-minished demand.

aking actionTe Xi administration has already takententative steps in prioritizing householdconsumption over investment. It pledg-

es to raise dividend pay-outs made bystate-owned enterprises and transfer the

raised funds to social security programsas a direct channel of redistributingincome from firms to consumers. Tegovernment is considering reducing orfully cancelling subsidies to state-owned

enterprises in the energy sector. Tiswould liberalise the market by allowingsmaller suppliers to compete as well asreduce the implicit wealth transfer fromhousehold to firm entailed in subsidies.Te Ministry of Finance also proposesto raise funds for welfare purposesthrough a carbon tax to be enacted

within the next two years.While these policies are taking steps

in the right direction, the Xi adminis-tration should not overlook the system-atic predominance of state-owned en-

terprises in the economy. Relatively lowbank earnings suggest that the bankingsector continues to provide preferentialtreatment to SOEs through low-interestloans. In the third quarter, net interestincome only grew by 5% at the Indus-trial and Commercial Bank of China(ICBC), Chinas largest bank by assets,

which is less than a third of last yearsgrowth rate. Te banking sector illu-minates the current economic systemscontinued support for SOEs, which is

sustained at the expense of consumerswho are subject to higher interest on

their loans. One of the main challengesfaced by the Xi administration will beto make a decisive break from the SOElobby and reform the banking sector.

Tere is no doubt that China is

reaching a pivotal point on its path ofeconomic growth. Te Deng era re-forms were initially very successful inushering Chinas transition to a mixedmarket economy. However, Chinasrapid economic rise driven by for-eign investment and exports imposedimplications on its socioeconomicstructure by perpetuating imbalances.In other aspects of the economy, theDeng era reforms were reversed afterthe financial crisis and allowed for thesurvival of ineffi cient institutions such

as the state-owned enterprise. Te Xiadministration has already taken com-mendable steps in leading the transitionfrom an investment driven economy toone of more sustainable growth basedon household consumption. A trulysuccessful transition akin to that ofDeng Xiaoping will depend on the Xiadministrations perseverance in pursu-ing widespread reform, notably to re-duce the predominance of state-ownedenterprises and placing the consumer

at the centre of the economic fabric ofChina.

5issue 7 focus: balanceinsightedinburgh.org

Trevor Patt



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focus: balance6 facebook.com/insightedinburgh issue 7

BEING FROM A country no one hasheard of can be fun. From my experi-ence, people would readily trust me ifI said Latvia was a state by Ohio or didnot have electricity. For some reasonunbeknownst to me, no one seems tobelieve me when I claim that Latvia hasthe fastest internet in Europe (numberfour in the world) or holds the two onlygold medals in BMX in the history of

Olympics (the discipline was intro-duced in Beijing 2008). Despite theseaccomplishments, Latvia remains amystery for many people living outsideof Eastern Europe.

Moving onTe term Eastern Europe, however, hasbecome increasing more irrelevant. TeIron Curtain fell over 20 years ago andany communist heritage has been sweptout of everyday life. Te most impor-

tant economic division in Europe cur-rently is between the North and South;hence the PIGS countries (Portugal,Italy, Greece, Spain) and Cyprus. In

2014 this distinction will be confirmedonce again by Latvia through its entryinto the Euro zone, following Estoniasadoption of the single currency in 2011.

Te BIG question asked, of course,is What will happen? and truth betold, the question comes 9 years toolate. Te accession treaties for the 10countries that joined the EU in 2004(including Latvia) state the obligation

to adopt the Euro. Exactly a year laterLatvia joined the ERM - II (EuropeanExchange Rate Mechanism), peggingthe national currency Lats (LVL) tothe Euro at the approximate exchangerate EUR 1 = LVL 0.7. Tis, not Janu-ary 2014, was the turning point, andthe concept of Impossible rinity (orrilemma) tells us why. With a fixedexchange rate and free capital flow, Lat-via has no influence whatsoever on itsmonetary policy.

When the Great Recession struckthis small, open economy, and the GDPfell 18% in 2009, the government em-braced a tough austerity plan to qualify

for a EUR 7.3 billion rescue package.Tis resulted in a painful recovery, re-flecting the decreasing degree of bothmonetary and fiscal independence(roika or European Central Bank,IMF and EU approved the nationalbudget during austerity).

Adpoting the euroEver since then, the Euro has been

present in every household. Familieswould keep some money in Euros sothey would not have to keep convertingthe currency when Euros were needed.My father even gave me Euros ratherthan Lats to exchange for pounds whenI first moved to Scotland. Calculatingprice differences from Euro to Lats hasbeen so usual that, in order to get frompounds to Euros, it takes less time forme to go from pounds to Lats to Eu-ros than look up the original pound to

euro exchange rate. And I am not theonly one - as of September 2013, only46.16% resident household deposits arein LVL, as are 19.28% government and1.90% non - resident deposits, whilethe average overall level of deposits inLVL are 18.96% (all data from CentralBank of Latvia).

Given this, nothing will reallychange in Latvia next January. MortenHansen, Head of Economics Depart-ment of Stockholm School of Eco-nomics in Riga, and an academic

authority in Latvia, agrees that thecountry is already half way into theEurozone, and [because of the] manyeffects [that] have come already via thefixed exchange rate, joining the Euro-zone is the last and logical step. Healso claims that there will be a bit moreinflow of foreign capital due to elimi-nation of transaction fees and biggertransparency. Even though capital flowshave been positive for the last year, theyhave decreased to LVL 10.6 million in

the second quarter of 2013 from LVL23.5 million in Q1, reflecting a po-tential suspension of investment until

New Kid on the Euro BlockMadaraJadvigaRudziteexaminestheeffectsandimplications

oftheadoptionoftheeuroinLatvia

President of the European Council



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2014, when the Euro is introduced(Data from rading Economies).

Ongoing scepticismSome social anxiety remains, however.

Despite the ongoing claims by thePrime Minister and Governor of theCentral Bank that the euro is well ac-cepted in the society, 11,782 peoplehave already signed a petition againstthe adoption (10 000 is the minimumneeded to introduce a referendum).Nevertheless, under the rules of EUaccession treaty, Latvia is obliged toeventually adopt the currency. Te ra-tional reason behind this anxiety is fearof inflation in 2014 (the Central Bankpredicts 0.2 - 0.3% annually), as what

happened in Estonia (3.9% in 2012).However, the seemingly irrational pridein the national currency is reflectedin the historically high exchange rate(LVL is the most expensive currencyin Europe). When LVL was introducedin 1993 with the high exchange rate ofLVL 1 = RUB 200, the anticipated fallin value never took place, and the trustin the new country and currency result-ed in a consistent demand for Lats.

Wider impactNow, the picture gets slightly moreconfusing if you look at the effects ofthe euro in Latvia on the rest of theEMU (European Monetary Union).On the one hand, as Hansen suggests,the Eurozone is very happy to seeLatvia joining, [as] it shows that (...)there are countries that find Eurozonemembership attractive also in these cir-cumstances and highlights the integ-rity of Europe. Adopting the Euro alsoimproves the integrity of Latvia itself.

Following the offi cial announcementof euro adoption in July, Fitch Ratingsrewarded Latvia with an upgrade ofits credit rating to BBB+. At the sametime, the relatively small economy ofUSD 28.37 billion (2012 in real terms)

will not significantly contribute to theESM (European Stability Mechanism)in terms of Euros, but rather with po-litical support for united policies in theEMU and EU in general.

On the other hand, Latvias eco-

nomic independence from non - resi-dent (mainly Russian) influence is still aquestionable issue. Along with embrac-

ing Latvia as one of the democratic anddeveloped European nations, EMUhas to deal with the fact that 59.08% ofall deposits in Latvia are held by non -residents, making up 5.9% of all depos-

its in LVL, automatically converted inEUR in January 2014. Te dependenceon Russia (mainly in terms of energyimports and deposits) shadows over

what Reuters has called the playgroundfor Russian oligarchs, reflecting possi-ble volatility due to the escape from thebears hug.

Lets hope for the best, that thenew economic ties will strengthen Lat-vias economy, calm down the peoplesanxiety, increase the trust in Eurozoneas well as Latvias independence from

its big neighbour, and make this smallBaltic nation the true example of howto strive after economic hardship. But,above all, lets hope that Latvia will stayin the spotlight long enough to assessall the effects of the Euro adoption in

January 2014, taking into account theopinions of all.




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AS A BRION in Australia it washard not to feel a sense of dj vu inthe run-up to the September 7th gen-eral election. Te topics defined by theelectorate as most pressing for con-

tenders Rudd and Abbott to addressincluded immigration, carbon emis-sions and how to reignite the stagnatingeconomy. On the last point it seemedthat those down under were now fac-ing the sort of economic slump that weback home had been hit with some fiveyears earlier. Ten, Australia made useof fiscal measures to mediate the effectof the slump this time the slowdownhas a particular cause and thus requiresa more particular response.

Australian resilienceAs Figure 1 shows, Australia very muchmanaged to weather the economicstorm of five years ago. Its GDP growthmanaged to stay in the black at a time

when most other developed nationswere struggling. Te reasons given forthis resilience are numerous. Te Rudd-led Labor party will no doubt attributethis to its swift fiscal response, wherebyit increased public expenditure to boostdemand.

Tis is a view shared by Nobel lau-reate Joseph Stiglitz. In an open letterentitled Australia, you dont know how

good youve got it Stiglitz argues thatAustralia avoided recessionary condi-tions thanks to one of the strongestKeynesian stimulus packages in the

world. Te stimulus provided was ro-

bust, early and a clever combinationof short term cash and longer terminvestments. Tis provided liquidityfor immediate expenditure and confi-dence that spending would continuein the long run. Tis tactic managedto maintain confidence and optimismin the economy and a time when others

were getting cold feet.Full of praise for Australias response

at the time of the crisis, Stiglitz be-moans the electorates current fixationon austerity and government debt. o

force through excessive budget cutsnow, at such a fragile time, could leadto the sorts of macroeconomic prob-lems encountered by the likes of Greeceand Spain.

Instead of austerity for austerityssake it is of critical importance thatAustralia gets to the root of its currentslowdown. o isolate this we returnto the turmoil of 2008 to locate anyother reason for Australias economicvitality at the time and what could havechanged. Te primary reason as to how

Australia managed to ride out the stormrelatively unscathed lies not in IS-LMmodels or fiscal stimulus packages butin geography. As luck would have it,

Australia finds itself located in prime

Finding the Silver LiningFraserHarkerevaluatesAustraliasoptionsinanincreasingvolatileeconomicenvironment

Figure 1: GDP growth. Source: World Bank

Michael McDonough



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trading position with one of the worldsmajor superpowers: China.

Te Chi connectionWithout a doubt Chinas GDP took

a hit during the downturn. However,it still had levels of growth the envyof the western world. With this seem-ingly unstoppable economic growthcame manufacturing and constructionabound, with these came a demand forraw materials. Who was to meet Chinasneeds? Australia.

According to the IMF, in 2010 Chi-na accounted for roughly 40% of all de-mand in base metals. Australias miningboom was in full swing. In 2012 trade

with China made up 7.6% of Australias

economy. Te Peoples Republic had aninsatiable desire to build and Australia

was only too happy to supply. Wages inAustralias mining sector grew to neverbefore seen levels. In May 2012 the in-dustry paid the highest average wages inthe country: 63% of all workers madein excess of $2000 per week against acountry-wide average of $1328.

But as the saying goes, all goodthings must come to an end, a lessononly too real for those in a sector that is

now far from booming. A slowdown inthe Chinese market began as the full ef-fects of reduced European demand werelaid bare. Tis was fed down the foodchain leaving Australia going hungry.In August of last year resources ministerMartin Ferguson described the miningboom as over. Slowing Chinese growthhad depressed commodity prices andthe mining sector was no longer beingviewed as the coal in Australias eco-nomic engine.

What now?Te natural question from voters comeSeptember 2013 was what next? Wheredoes the Australian economy go fromhere? How does it rejuvenate, reinvigor-ate and re-balance itself towards a moresustainable future?

For some there is still untapped po-tential in China but through the bur-geoning middle-class. Tis will bringtourists to the shores of Australia withmoney to spend; Australia needs to

make sure it gives them as many op-portunities as possible to do so. But thisgoal in itself demonstrates further the

many different balancing acts simul-taneously occurring.. Squeezing profitout of tourists should be done in such a

way as not to overstretch already with-ered locals pockets. Sydney is ranked as

one of the worlds most expensive cit-ies and house prices alone are forecastto rise as much as 10% over the nextyear due primarily to Chinese residen-tial investment.

Stiglitz believes that the worldwideeconomic turmoil may have a silverlining. Low worldwide interest ratesshould be seized to make prudent pub-lic investments in education, infrastruc-ture and technology. Tis will pave the

way for a more adaptable and high-techAustralia that can change its position

from a passive respondent to a driverfor economic growth. Education is apoint in itself. Whilst a strong educa-tion system is believed by many to havehelped Australia to reach some of thehighest standards of living on the globe,achievement statistics have fuelled wor-ries that educational performance havestarted to slip. Smart investment couldreverse this trend.

Tis thought-process was the

driving force behind the Education In-vestment Fund (EIF) announced at thepeak of the crisis. As part of Australiaseducation revolution it aims to builda modern, productive, internation-

ally competitive Australian economyby focusing on investments in tertiaryeducation. Five years since its inceptionthe fund has already pumped millionsinto renovating university infrastruc-ture, funding world-leading scientificresearch and future-proofing vocation-al education to provide highly skilled

workforce.It is schemes like these that have to

provide the focus for Australias atten-tion, which will spark the transitionaway from the manufacturing and min-

ing sectors towards a new service basedeconomy with science and innovationat its heart. Tis will by no means be aneasy feat. At the polls the nation wentfor Abbott and his Liberal-Nationalcoalition. o ensure success for his na-tion the new man at the helm has tounderstand the importance of invest-ment in the evolution of the Australianeconomy. As the saying goes, you haveto spend money to make money.


US Embassy Kabul Afghanistan



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HE 2004 AND 2007 enlargementof the European Union eastwards hasbrought about, among other policies,free labour mobility. Tis has been per-ceived skeptically in the old EU coun-tries which feared the so-called Polishplumber effect, meaning an uncon-trollable influx of low-skilled workersfrom Eastern Europe willing to workfor minimum wages.

However, free movement of humancapital has posed challenges for thenewcomer countries as well, in form ofa drastic outflow of young, motivatedand well educated individuals into

western countries with arguably bettercareer prospects, financial remunera-tion and standards of living. Tis braindrain poses a threat to the sustainabil-ity of long-term growth in source coun-tries. Terefore, a sensible mix of poli-cies is required to balance and partially

reverse the lost high-skilled labour inEastern Europe.

Brain drainOutflow of high-skilled labour has beenobserved over multiple phases, starting

with the exodus of British scientists tothe U.S. in 1950s. Upon becoming of-ficial members of the EU, the relativelyunderdeveloped countries of the East-ern European region harmonized theirmigration policies with the rest of theUnion. Tis relaxation of rules set the

ground for brain drain.Such loss of highly skilled workers

is generally considered to have strictlybad effects on the source country rang-ing from lost productivity, to public re-sources wasted on higher education ofpotential migrants, especially consider-ing that university education is heavilysubsidized - if not free - in most of theEastern European countries. Te braindrain negatively affects the potential ofthe home economy and adversely im-

pacts public finances, however, there isa positive side to that story.

It has been empirically proven that

if a small, open economy is comparedto that with severe restrictions on mi-gration, the former enjoys greater levelaverage human capital which in turnsupports higher productivity and in-creased long term growth. Tat is pos-sible because in a closed economy, ca-reer opportunities are limited and thusincentives to invest time and resourcesinto education are limited. However,

if there is a positive probability of mi-gration in the future, optimising indi-viduals choose higher levels of invest-ment into human capital in the light ofhigher returns to human capital avail-able abroad, a so-called ex ante braineffect arises.

Tere is a significant level of uncer-tainty of future migration. Factors tobe taken into consideration involve the

time lag between making the decisionto engage in higher education and theactual execution of migration. A personmay not move abroad in the future be-cause of changes in migration policies,family circumstances, or simply thatindividual preferences evolve over time.Out of all the people who decided toinvest more in education, some willemigrate (ex post drain effect) and some

will decide not to, meaning that the av-erage level of human capital increaseseven in the presence of brain drain.

Brain gainConsequently, a higher average level ofhuman capital in the current genera-tion also translates into a higher level ofhuman capital in the next generation.Such intergenerational transmission is a

Brain Drain or Brain Gain?AndreaSchmidtovdiscussestheexodusofyoungindividuals

fromCentralandSoutheasternEuropetoWesternEurope



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form of beneficial brain drain and haspositive effects on long-term growthand sustainability.

Te other positive effect on thebrain drained economy arises when

high-skilled workers return fromabroad, which induces higher invest-ment into human capital and higherproductivity as they bring along newlyacquired knowledge and skills. Tismight be because of personal rea-sons and ties to the home country orbecause of unraveling of the foreignlabour market with asymmetric infor-mation. Employers abroad may lackthe framework to assess individual pro-ductivity and skills of migrants upontheir arrival and so they offer them the

same wage. As soon as they are able todistinguish the relatively higher-skilled

worker from the rest, a wage differen-tial is introduced which may serve asan incentive for some workers to returnhome. Another reason for coming backmight be that foreign employers favourtheir own citizens who are fully assimi-lated in case that the immigrants havenot completely overcome cultural andlanguage barriers, which naturally ariseupon moving from country to country.

Te right incentivesAlthough brain drain has some positiveeffects on the source economy in formof higher average level of education, itis important to incentivize the best andbrightest to either stay in the countryor return after they gained experienceabroad in order to fully exploit the po-tential of free borders. An ideal policydesign would induce brain circulation the international exchange of knowl-edge. Such proposal should minimize

the push factors which force people tomove abroad and maximise the pullfactors incentivizing the return of high-skilled labour.

A related case study has been con-ducted on recipients of OSI scholar-ship, which offers the most talentedgraduates free tuition at prestigiousuniversities abroad under the condi-tion that they must return to homecountry for a given period of time to

work. Te respondents have identified

the push factors as limited career pros-pects, wage differentials, administra-tive obstacles, outdated infrastructure

and deteriorating prestige of scienceand creative activities in Eastern Eu-rope. Te most important pull factors

would be improved working and livingconditions, international engagement,

investment into research and develop-ment and an overall better intellectualclimate.

Terefore, the governments shouldoverhaul their strategies in line withthe proposed push and pull factors, forexample in terms of investment intoscience and education and fosteringtheir contacts with respective diasporas(the scattered population from a com-mon origin) to encourage knowledgeexchange. A temporary positive dis-crimination of returnees in the areas of

tax, employment or housing could alsoinduce reverse migration. In order to re-tain the educated youth, policymakers

should also consider taking actions thatwill induce foreign direct investmentwith added value and that will makeit easier for potential entrepreneurs toset up a business, including a stable and

reliable political and judiciary systemand a sensible taxation system to namea few.

Te currently ongoing global battlefor the best and brightest should notbe about winners and losers. Te idealeconomic outcome would arise whenknowledge is shared and exchangedacross borders and labour put to itsmost productive use. Migration shouldcertainly not be hindered, as for mostcountries people with tertiary educa-tion have the highest migration rates.

Above all, it is not a problem if the tal-ented people leave, only if they dontreturn.


David Sim



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HE NEED FOR government inter-vention to protect our environmentgenerally receives acceptance by mostmajor political parties and the public atlarge in the UK. A pivotal componentof the value is its biodiversity value.Biodiversity, simply defined as the to-

tal variation in life-forms, can providea plethora of ecosystem services whichenhance human welfare. However, ithas been internationally recognisedsince the early 1990s that the stock ofglobal biodiversity is rapidly decliningand attempts to halt this decline havefailed to dent this damaging trend. Inresponse to the failure of the UK toreach its target to reduce the rate of bio-diversity loss by 2010, the Departmentfor the Environment, Food and Rural

Affairs (DEFRA) have designed and arecurrently piloting a new initiative - Bio-diversity Offsetting - which they hope

will reverse the decline of the UKs bio-diversity stock through the creation ofa quasi-market mechanism for the ex-change of biodiversity offset licences.Te offset concept is viewed with suspi-cion, with some branding such schemesas a license to trash nature. Others seeit as a pragmatic way for businesses toaddress their wider social costs andprevent negative outcomes for future

generations.

Why protect biodiversity?Unlike the benefits of reducing waste orcarbon emissions, the benefits gainedfrom reducing the rates of biodiversityloss are often less tangible. A useful con-ceptual tool is to think of the services

which, if not provided by the environ-ments biodiversity, would need to beprovided by society at considerable cost.Such services include water purification,

pollination, nitrogen cycling, flood pre-vention - to name but a few. Crucially,the value from all of these services are

not traded in a market with a definedprice. Biodiversity is thus a pure publicgood. Some categories of natural capitalcan be substituted relatively efficiently

with other forms of capital. Society asa whole can potentially compensatefor depreciations in mineral wealth by

building up wealth in other areas suchas physical, financial and intellectualcapital. Tese ecosystem services cannotbe feasibly replaced by physical infra-structure or financial assets; we requirea minimum level of natural capital toprovide for human well-being into thefuture.unless we can picture a future

where agricultural crops are pollinatedby robotic bees and trees in public plac-es are replaced by holograms.

However, the benefits of economic

growth, development and job creation(the creation of non-natural capital) areperceived by economic agents as greaterthan the cost of losing biodiversity (theloss of natural capital). Recognition ofthe environmental costs of develop-ment did become more of a concern inthe latter half of the 20th century, withthe legal requirement for environmen-tal impact assessments (EIAs) being in-troduced in many countries. It is clear;however, that the effect of these regula-tions has not stemmed the depreciation

of the UKs biodiversity stock. Althoughan EIA will identify areas where a de-veloper can minimize its biodiversityimpacts, a residual net loss will almostalways occur from any development.Tis is where the case for biodiversityoffsetting can be made.

A biodiversity offset is a measurableconservation outcome resulting fromactions designed to compensate forsignificant adverse biodiversity impactsfrom project development after appro-

priate measures have been taken. Off-setting will not replace, but rather com-plement, existing legal requirements for

developers to minimize environmentalimpacts on site. Te aim is to create adomestic market for offsets in which de-velopers can purchase a given quantityof biodiversity units, equal to (or greaterthan) the loss caused by the develop-ment. However, even if creating a simi-

lar trading scheme is seen as desirable, itis theoretically more complicated. Un-like similar markets for environmentalgoods where measurement of impactsare relatively straightforward, settingup a market for biodiversity will pre-sent more of a challenge because of theproblem of measurement of differenthabitats and environments how can

we compare apples and bananas with-out prices?

Counting the costDEFRAs offset initiative presents anobjective framework for quantitative as-sessments of biodiversity value. A pro-vider of biodiversity units (in theory, anylandowner) will first have to set aside anarea of land and assess its quality to givea reliable estimate of baseline biodi-versity value. Te provider would thenplan what actions he/she would take toimprove the biodiversity value from thisbaseline over a given time period. Tedifference between the baseline biodi-

versity value and the projected biodiver-sity value represents an addition to theoverall stock of biodiversity, which canbe then sold to a developer to offset anyloss of biodiversity the developer incurs.

Areas are given differing scores depend-ent on the size of the offset area, the dis-tinctiveness of the habitat, an independ-ent assessment of the condition of thehabitat and the difficulty of restoringthe given habitat from the baseline.

Potential pitfallsTere is a worrying potential for moralhazard on both sides of the market.

Robotic Bees andHolographic TreesPhilipDuffyreviewsthepotentialofbiodiversityoffettingintheUnitedKingdom




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Providers of offsets are not required tohave delivered the offset before they arepaid by a developer. Biodiversity unitscan be awarded in expectation that acertain outcome will be met. Tus,

there is a very real danger that providerswill renege on their commitments andthe supposed offset will be jeopardised.Clearly, biodiversity offsets will onlyachieve results for conservation if theyare adequately designed, implementedand enforced, which will prove muchharder than it initially seems.

A second problem lies in the meas-urement of biodiversity. Unlike carbondioxide, quantifying a biodiversityunit will be subjective, costly and po-tentially oversimplified. Tere is an

evident trade-off between the qualityand cost of a biodiversity assessment.Extensive surveys would come at sub-stantial cost which would have to beborne by businesses in the form of in-creased red-tape and regulation, or bygovernment departments and agencies

which are facing the longest period ofsustained budget reductions in moderntimes. On the other hand, biodiversityvalue could be determined very simply

with a few vague variables, quite similar

to DEFRAs actual proposals. I believethat DEFRAs proposal is more work-able than a more extensive series ofsurveys, but it does come with its owndrawbacks.

Tere is a risk that companies mayconsider certain habitats to be particu-larly diffi cult and thus costly to offset,leading to an incentive to focus insteadon less complex ecosystems that maybe cheaper to conserve. Because biodi-versity value (as defined by DEFRAsproposals) only takes into account eco-

logical aspects, there is a possibility fora geographic imbalance of offsets. Tescheme could have a detrimental effecton green-belts around English cities,for example. Housing developers, whoat the moment are buoyed by the gov-ernments Help to buy scheme, couldpotentially put pressure on governmentto relax building restrictions, whilstpromising to offset their impacts bybuying biodiversity units. Much moreresearch has to be done in ensuring both

ecological and human benefit equiva-lence in measuring biodiversity units.As recently highlighted by the Project

Wild Ting, biodiversity value has animpact on human welfare. As concernsgrow over nature deficit disorder inchildren brought up in high-density ur-ban places.

A viable solutionDespite these potential drawbacks of thecurrent DEFRA initiative, these couldbe addressed through careful policy de-sign. Tere are essentially three positivearguments for biodiversity offsetting.Firstly, it is a well-established practice forcompanies who are granted temporarypermits to disturb land (such as miningcompanies), to commit to restore dis-turbed land to its original state after ac-tivities cease. Society should prefer this

money to be spent, not in aiming forperfection in the area disturbed, butrather to see that budget used to pro-tect more biodiversity or biodiversity ofhigher conservation value in other areas.Biodiversity offsetting would provide amechanism through which a more effi -cient allocation of such funds could beachieved to protect the maximum bio-diversity value possible.

Another benefit is the potential to ad-dress a negative and unintended conse-

quence of conservation legislation. Forexample, by making it illegal to harmendangered species, one effect of lawssuch as the Wildlife and Countryside

Act has been to turn endangered species

and biodiversity into potential financialliabilities limiting the potential land-uses of assets.

However, with the ability to sellendangered biodiversity as offsets, the

presence of endangered animals or aparticular habitat will be converted intoa financial asset in itself, giving privatelandowners the rights to the social valueof their assets and an incentive to pro-tect these assets. Finally, biodiversityoffsetting will be an important step inembedding the environmental costs ofdevelopment and economic growth intogovernment decision-making. With anobjective assessment of biodiversity, thecosts of development can be successfullyoffset without the need for draconian,

ineffi cient and costly case-by-case as-sessments of project proposals.

At a time of fragile economic recovery,the pressures to kick the environmentalissues such as the protection of the bio-diversity value into the political long-grass in the UK seem more intense thanever. However, biodiversity offsets offera potential compromise between thedual priorities of economic growth andenvironmental stewardship. By trans-forming attitudes to environmental

protection from the realm of businesscosts and red-tape, to one of tradablefinancial assets, biodiversity offsettingis, in my opinion, an idea whose timehas come.


Laura Billings



14/28

DEMOCRACY IN HE UnitedStates began with the words We thepeople, for the people but the UnitedStates has begun to fail on the pillars ofits foundation. through the allowanceof severe economic rents and the contin-ued ignorance of the richs manipulation

of the economic system, creating ineffi-ciencies throughout. Tis raises thequestion of the role of government increating a balance between economicgrowth and managing inequality.

op heavyCurrently in the United States the top1% holds over 40% of all national

wealth, seeing their average wealth in-crease from $1.1 billion to $3.8 billionfrom 1982 to 2011. Additionally from

2009 to 2012 top 1% incomes grew31.4% while the bottom 99% grew byonly 0.4% thus the top 1% captured95% of all income gains in these threeyears following the Great Recession.Tis symbolizes the shift away from trueentrepreneurship and the idea that thegrowth of the few will aid the growth of

the many, towards the concept of therich manipulating the system for theirown gains.

Tis manipulation is permitted bythe US government through the rentseeking of the rich. o put it simply rentseeking is the way in which the current

politics allow the wealthy to take at theexpense of the masses without addingvalue to the overall economy. Tis in-cludes, but isnt limited to, direct trans-fers or subsidies from the government,laws that make the government lesscompetitive and laws that allow envi-ronmental degradation for the benefit ofa corporation. Rent-seeking thus is dis-torting resource allocations and makingthe economy less efficient.

Crippling inequalityInefficiencies are found among societieswith high levels of inequality and cou-pled with a large rent seeking culture,doesnt maximize economic growth.Tis is most evident in countries withlarge, visible inequality such as those inemerging markets where growth is not

reaching its full potential.In China, for example, the incoming

money from abroad is filtered throughinefficient state industries. Similarly,Russia and India are both socially polar-ized countries because money is earnedfrom family connections and the exploi-

tation of their economies, as opposed toentrepreneurial activities. Tis is evidentto a certain extent in the US economy

where the rich divert revenues from thegovernment who could redistribute tothe poor. Tis is seen through tax eva-sion where the US government approxi-mates an annual loss of $400-$500 bil-lion in revenue.

Inequality is also highly inefficientbecause without sustained widespreadgrowth more people are pushed into the

bottom levels of poverty. In South Africafor example, even if they continue theircurrent growth it is predicted that they

will have an additional million peoplepushed into poverty by 2020.

As the people in the middle class arenot receiving a fair amount of income,they are unable to contribute to theeconomy. Tus, not only are they beingpushed down into relative poverty, butalso are being strangled by the cost ofthe pleasures of the rich, guised as thecost of economic growth.

Balancing regulation and growthGovernments around the world thenface the dilemma of how to balance theregulation of inequality whilst promot-ing economic growth. As they aim tohelp the people, most employ a form of

welfare to minimize poverty, but alsoincentives to maximize economicgrowth. Tese incentives often includetax relief to the rich if they invest in theeconomy, or the issuing of industrial

revenue bonds to businesses, which pro-vide the firm with money to invest incapital and supplies. Additionally,

The Land of the Freeand UnequalMelissaParlourdescribestheissuesraisedbyincreasingeconomicinequalityintheUnitedStates


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through tax policies each attempts toestablish a distributive system of socialbenefits to those who need them whileproviding public goods to the entirety ofthe nation.

One of the main arguments againstthe increase in taxation is that it willharm the current rate of economicgrowth. Te logic is that the govern-ment is taking money away that couldbe more productive in the economy.Historically, however, this idea aboutstunting growth is untrue. Under Rea-gan and Tatcher, the US and UK dra-matically reduced tax rates, but theeconomies did not grow any faster thancountries such as Germany and Switzer-land whose tax codes remained un-

changed. While the economies differ,the countries that maintained theirhigher tax rates did not seem to havebeen adversely affected.

As the government seeks the properbalance, the question is how will it at-tain a more equal society while creatinga more effi cient economy?

A more equal society?Inequality provides incentives whichdrives economic progress promoting in-

novation and creativity. Yet inequality isnatural and helpful only to a certain ex-tent, which is where the governmentcomes into play. Even though inequalityis natural in the market, the govern-ments role is in the creation of a fairmarket place where the laws are clearand enforced. Tus the government de-termines not only the establishment ofinequality but also the continuation of itthrough inaction. Te government thusneeds to find the balance between whatthey allow in the name of economic

growth and the limits they provide onthe exploitation of the market.

Te United States currently needs toadopt a three faceted approach to man-age the growing inequality. Troughtaxation, government spending, andregulation the government can gain abetter grasp on the ever-increasing gapbetween the rich and the rest of society.

First off, through progressive taxa-tion the government is trying to pro-mote the growth of opportunity among

the entire population. However, sincethe 1960s the US has seen a sharp de-cline in progressive taxation due to a

drop in corporate taxes and combinedwith a drastic change in the compositionof incomes at the top; away from solelycorporate gains to personal income esca-lations through excessive bonuses. Byamending the tax code to become moreprogressive not only will the govern-ment increase revenue, but also reducethe rapid growth of personal incomes atthe expense of the poor.

Secondly, government spendingneeds to refocus to the wellbeing of theentire country. Currently in the US, thehousing subsidy to the top fifth throughmortgage-interest relief is four times theamount spent on public housing for thepoorest fifth. If the US was to refocus itsefforts on the entire population not only

would it benefit the poor through ex-panded welfare programs but also helpspur economic growth through extend-ed investment in public goods, such as

infrastructure and education.Tirdly, as the government increasesregulation to reduce the loopholes ex-ploited by the rich, the economy be-comes more effi cient as this limits eco-nomic rents. Economic rents are definedas the amount paid in excess to the op-portunity cost of producing a good orservice. In a perfectly competitive mar-ket it does not exist as competitionbrings prices down until it equals theopportunity cost of production. Eco-nomic rents symbolize ineffi ciencies in

the market and are the result of individ-uals abusing the market which is notperfectly competitive. As the

government implements stricter controlon corporations and the top one percentof the nation, they will ideally no longerbe able to manipulate the system andtake advantage of the less well-off allow-ing a broader base of economic growth.

Around the world many countrieshave started to implement similar tacticsin hopes of managing inequality, butnone have fully adopted the three facet-

ed approach. Latin America, plaguedwith inequality, has begun investingheavily in their school systems and incash transfers to the poor, which isshowing hope of lessening the gap be-tween the classes. Similarly in India andIndonesia the governments are cuttingback on fuel subsidies in hopes of reduc-ing economic rents in that industry.Even in countries with less inequalitysuch as Sweden and Britain, the govern-ments are setting reform into motion to

aid education and simplify their welfaresystems.Contrary to the commonly held be-

lief that in order to achieve a better socialstate the government needs to grow, itsimply needs to adjust its focus and at-tack the manipulation that is perversethrough American politics. By allowingdistortionary economic policies andmonopolistic powers to emerge, thegovernment is not only promoting ine-quality but also weakening the economy.By addressing the exploitation of the

poor by the rich, the government canhelp not only the less fortunate, but alsothe economy by reducing ineffi ciencies.

Glen Halog




16/28

HE ISSUE OF balance surfaces inmany sectors within the world econ-omy, but the need for balance is most

pressing in relation to the ecosphere,given that our taste for excess and con-suming more than we need has led to animbalance of sorts in the earth system.

Te world can be thought of as aliving system comprised of different butpurposeful natural processes. Te plan-et supports these processes- the trans-formation of carbon dioxide to oxygen,the water cycle, the cycle of animal

waste into fertilized soil and fossilizedresources like petroleum. Many specu-

late as to whether humans have had asignificant and negative impact on thenatural cycles of this living system.Some theories argue humans could po-tentially have little or no impact sincetechnology could simply be employedto correct any issues that arise. Te en-vironmentalist movement, however,promotes the idea that humans have farsurpassed the natural store of resourcesof this earth and are moving quickly to-

wards our own demise.Te environmental movement it-

self, however, needs to find a balance orstable compromise in order to be suc-cessful. When it comes to environmen-tal destruction, many environmentalistsbelieve that there cannot be compro-mise if we want to secure our futureand avoid reaching an irreversible tip-ping point.

However, in order for it to be suc-cessful, environmental policy must bal-ance out competing claims. Environ-mentalists seeking radical change must

realize that this change can only occurwith the cooperation of those who donot recognize that change is needed in

the first place. In order to accomplishthis, environmentalists need to meetpolicymakers in the middle to make an

economic case for environmental policyto convince nonsubscribers in power tomake a change

Te beginningsTe 1960s sparked the environmentalmovement in the United States and si-multaneously in the rest of the world.Rachel Carsons Silent Spring strik-ingly brought our attention to the en-vironmental destruction that we werecontributing to in our own backyards.

Conservationists like John Muir wereleft behind as activists began to raiseawareness of environmental destructionin the public consciousness.

Large organizations like Green-peace, Friends of the Earth, and otherenvironmental groups establishedthemselves in the 1970s, with the aim of

protecting and defending the environ-ment at all costs. Simultaneously, othergroups surfaced that have been likened

to the category of ecoterrorism, whichhas further polarized and demonizedmore radical groups within the environ-mental movement. A popular exampleis the Earth Liberation Front which hascontinuously used arson as a form ofprotest.

Te environmental movement hasslowly and gradually effected a changein peoples consciousness. In the last20 to 30 years, there has been a shiftin consumer preferences towards more

socially conscious and socially respon-sible products and services. Campaignsto raise awareness about issues such asfair trade, organic, low impact, locallysourced and environmentally-friendlyproducts have been increasingly suc-cessful. On the supply side, majorcompanies have changed their tactics

Habitat for Humanity:The Struggle forEnvironmental Protection

BrianaPegadoadvocatestheneedforbalanceintheenvironmentalmovement


Laura Prager



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as some of their more destructive pro-duction methods have been revealed tothe general public- such as productionfacilities dumping hazardous materialsinto local water sources in developingcountries.

Marketing leads the way?Te turn of the century saw thesechanges reflected in advertising andmarketing, bringing with it a turn in

interaction with the consumer. Ma-jor companies launched their Corpo-rate Social Responsibility strategies asa response to international outcry, ascompanies were found to be profitingfrom lenient environmental regulationsand labour laws, exploiting inexpensive

work forces in developing countries,abusing natural resources by usingthem ineffi ciently, and capitalizing onvulnerable land. Recently, the corpo-rate sector has been forced to approachtheir socially responsible strategies in a

more comprehensive fashion becauseof continuously changing consumerpreferences.

Some companies like Coca-Colaand Unilever boast attempts to reducetheir companies and their custom-ers environmental impact, targetingsustainable sources of raw materialsfor their products, reducing waste intheir supply chain, while providingeducation on good hygiene in coun-tries where they produce their prod-

ucts. Against this trend, many arguethat certain barriers exist to promotinga sustainable supply chain such as the

high costs associated with more sustain-able methods, arguing that this oftenmakes coordinating corporate-sustaina-bility systems more complex and oftenineffi cient.

However, these costs are minimizedin the long run when more effective andeffi cient infrastructure is put in place.Te issue here is changing corporateculture to incentivize corporations toinvest in infrastructure to save moneyand allow them to make more of aprofit in the long term. Effi cient supplychains allow for the more effi cient useof resources.

UMICORE, identfied by Forbes asthe most sustainable company in the

world, follows the ethos that what is

good for the environment is good forthe company. An entire cohort of sus-tainably-run and minded corporationsfall under the B Corp framework. Tesecompanies work to benefit society along

with its shareholders by addressing so-cial and environmental problems. Tisframework has supported the completereshaping of a normal companys objec-tive to simply make a profit. Compa-nies with a B Corp seal mostly engagein business practices that focus on social

and environmental responsibility. Moreand more companies have reached BCorp status and the framework helpsset a precedent for sustainably-focusedcompanies.

Further than corporate frameworksare social movements like Economy forthe Common Good started by Chris-tian Felber in Germany in 2010. Temovement, including more than 1000companies, advocates cooperation and

working towards a common good bal-ance sheet that showcases whether a

company has abided by values such aseconomic sustainability, human dignityand solidarity. Beyond the focus of BCorporations, Felbers idea pushes forvalue-based businesses whose aim isnot only to seek profit. Tese new val-ues and their focus on responsibility areoften unattractive to large businessesbut if they want to adjust to a new so-cially conscious market they will haveto adopt a bottom line that also accom-modates social consciousness.

Public consciousnessTough these social movements and

frameworks do appeal to a socially-minded businessperson, the questionis whether or not they appeal to thegeneral public. Change in public con-sciousness is slow and limited to certain

sectors of the population, in certainregions of the world. Most nationalpollsters and politicos understand thatmany people vote with their pockets.Te positive public opinion of a Presi-dent or Prime Minister is most oftendirectly correlated to the state of theeconomy. If small companies and busi-nesses, larger corporations, and influ-ential sectors do not believe that it willbe in their best interest to invest in theenvironment, why would they?

But as energy resources become

scarcer, it will become more expensiveto produce certain consumer prod-ucts. As people begin to realize thereare alternatives to energy-intensive and

wastefully produced products, theirhabits will change. Consumer behavioris becoming more pro-environmental.Trough their choices, consumers arebeginning to put more pressure oncompanies to make more energy-effi -cient and environmentally responsiblechoices. Te old business tradition that

hints towards an unwillingness to in-vest in longer term and more effi cientproduction methods does not cut itanymore.

In the end, it is not simply aboutenvironmentalists appealing to theeconomists. It is about all of us makinga conscious decision to have a positiveimpact on our future. Economists callthis an effi cient use of resources that

will strengthen our economies but weneed to completely rethink the struc-ture of our economy.

Tis issue goes further than climatechange and environmental destruction.Tis issue goes further that what clean

water resources we will have available inthe future and whether we will have torely even more on technology to pro-duce our food. Tis issue reaches be-yond a few inches of rising sea level anda few degrees of temperature changethat will wipe out species that throughthe food chain fuel the animals we con-sume. Tis issue goes beyond a low

carbon economy and reducing CO2emissions. It comes down to a trade-offbetween the present and the future.

Cameron Incoll




18/28

18 facebook.com/insightedinburgh issue 7comment

HIV/AIDS WAS FIRS recognisedas a disease in 1981, and by 1987 Azi-dothymidine (AZ), a drug to treat thesymptoms of HIV/AIDS and proven tosignificantly prolong life, was approved

for sale by the US Food and Drugs Ad-ministration (FDA). Burroughs Well-come held the patent, and patents werein force in the western world as well asin several African countries includingin South Africa, who at that time hadmore citizens living with HIV/AIDSthan any other country.

Spreading epidemicIn the early 1990s there was exponen-tial growth in HIV contractions, two

thirds of which were in Africa, a con-tinent which houses just 11% of theworld population. As a result of highdrug prices, and low health insurancecoverage, approximately 6000 Africans

were dying every day from AIDS due tolack of accessibility to Retrovir, the AZ

drug.As early as 1997, the South African

government passed the Medicines andRelated Substances Control Act, allow-ing the government to import cheap ge-

neric AIDS drugs. However, the threatof the withdrawal of US developmentaid meant that countries like South Af-rica were still reluctant to import gener-ics. Eventually, as a result of a lengthybattle fought by the many victims of

AIDs, and inspired by the USAs useof a public health emergency clause tobypass patents during an Anthrax scarein late 2001, African countries began toimport generic drugs from India, whocould then supply the poorest patients

with lifesaving medication for a sym-bolic $1 a day.

Patent problemsTe patent on AZ expired in 2005.However the issue of international drugpatenting remains pressing. Tere arestill second and third generation HIV/

AID s drugs to consider, and these willbe affected by the WOs rade RelatedIntellectual Property Righsts (RIPs)agreement which is being negotiated aspart of the Doha Round that began in

2001.Te original RIPs agreement quite

clearly extended patent flexibilities tothe 48 least developed countries, al-lowing them to opt out of patents fornational health and other reasons. How-ever this is now something that the USAand Europe are much more reluctant toagree on.

Furthermore, in a 2012 meeting ofthe RIPs council, countries such asCanada, Switzerland and the EU at-

tempted to get generic or counterfeitdrugs produced by countries like India,Brazil and China classified as fake and

spurious drugs in order to cast doubton the quality of generics, which infact is usually very high. Te EU is alsostill seizing generic drugs from India ontheir way to South America or Africa at

European airports, and is attempting toget them classified as pirate goods.

Patents have been around in oneform or another since at least the 15thcentury, and are intended to combatthe public good characteristics of in-novation. Innovation tends to be non-excludable, in that once someone hascome up with an idea, the marginalcosts of its reproduction are typicallyvery low. In competitive markets, pricestend to marginal cost, this means that

the innovator, after paying large Re-search and Development (R&D) ex-penses, will receive a very low price fortheir product and will be unable to re-coup their fixed costs.

In addition, innovation is largelynon-rival; one extra firm using thechemical AZ to produce a drug willnot prevent others from doing so. As aresult, innovation is considered a miss-ing market: according to economic the-ory, without intervention, all firms havean incentive to free ride.

Troughout history, the most com-mon solution to this problem has beento create a market with enforceable in-tellectual property rights, where the in-novating firm is rewarded with definedproperty rights for their product, grant-ing them a monopoly for a given lengthof time. Te legal form of these intel-lectual property rights are known as pat-ents, and the monopoly profits gainedallow firms to recoup their, often large,R&D costs.

Te welfare cost of this device is thatit creates a monopoly and monopoliesare widely considered to be inefficient

Patent Problems:Health Epidemics and thePharmaceutical IndustryRosieStockJonesevaluatesalternativestothepatentsystem

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19issue 7 commentinsightedinburgh.org

as they produce a lower quantity at ahigher price than competitive markets.

William Nordhaus, writing in the late1960s on the optimal life of a patent,argued that if in doubt about the length

of patent lives it is best to err on the longside, as for run of the mill inventionsthe losses from a monopoly are far out-

weighed by the gains from the existenceof the product itself.

But this is not the case for medicinaldrugs, which are not ordinary inven-tions and for which it is not so obviousthat these monopoly losses are out-

weighed. In the case of life saving drugssuch as AZ, monopoly prices do not

just mean reduced consumer surplus,they mean death.

In addition, the 2007 research pa-per Stagnation in the Drug Develop-ment Process: Are Patents the Problem?

written by Dean Baker for the Ameri-can Centre for Economic and PolicyResearch (CEPR), claims on the basisof economic theory and anecdotal evi-dence, that it is plausible that perverseincentives created by patent monopoliesare causing research costs to rise andprogress to slow as a result.

If this is true, then the patent system

as it currently stands could be substan-tially slowing the process of drug devel-opment by operating with higher coststhan necessary and hence reducing thevolume of research carried out per $1put in. And this is on top of the fact thatpatents also restrict other researchers ac-cess to new information, and so alreadyslow down the innovative process to acertain extent.

Lack of R&DTe pharmaceutical industry has often

been accused of spending very little ofits profits on R&D: a British Medical

Journal study in 2012 revealed that forevery dollar spent on basic research, $19is spent on promotion and marketing

which has seen revenues rise by over$200billion since 1995. Whilst drugcompanies still spend a higher percent-age of their sales on R&D than othercompanies (the average is around 15%for drug compared to a 1.5% average inthe Global Innovation top 1000), giv-

en the entire point of patenting in thepharmaceutical industry is to fund re-search, 15% does not seem like enough.

Moreover, it is not just businesses

that fund pharmaceutical research; itwas calculated by the Association ofMedical Research Charities that in2011/12 UK charities contributed over1billion to the research of new drugsand via the Department for BusinessInnovation and Skills the governmentprovided the Medical Research Council

with 759.4 million. Te governmentalso indirectly funds much researchthrough subsidising Higher EducationInstitutions which have been spending

increasing amounts on R&D in recentyears.It would be incorrect to say that

most UK medical research is currentlypublicly funded. However, seeing aspublic money funds a significant por-tion of research, it is irrational thatcompanies take all the rewards, makingpatients and taxpayers pay the premiumfor what they may well have funded.

Another CEPR paper from 2004projects that if the Free Market Drugs

Act, which would have granted the

US government the patent of publiclyfunded research so that drugs could besold at generic prices, had been enacted,then states would have saved at least50% on drug expenditures by 2013. InNew York savings would have been $9.3billion, and this high figure highlightsthe ineffi ciencies of the patent system.On top of these concerns, there is theadditional problem that there is little in-centive for businesses to spend moneyon developing drugs for diseases that

are predominantly found in developingcountries, no matter how many peoplethey affect, as patients in these countries

are unlikely to be able to afford the high

prices and bring in as much profit aslifestyle drugs.

An alternative approachIn response to these issues, Nobel laure-ate and economist Joseph Stiglitz has ar-gued for an alternative system of prizesrather than patents. Instead of reward-ing drug companies with monopolypower, he suggests that the reward bemonetary, with funds being redirectedfrom governments and charities, who

are already spending a lot on R&D,to a prize fund, used to pay businessesback their costs so that drugs can thenbe competitively and cheaply sold. Headditionally suggests tapping into for-eign assistance funds for those cures thathave widespread benefits in developingcountries.

As the UK government does notalready spend as much on medical re-search as states do in the US, wherearound half of all research is publiclyfunded, the jump to full government

funding may not be feasible here. How-ever it may work to run a prize systemalongside an augmented patent one.Tis would reduce any uncertaintyrelated to the ability of governments,charities and international organisationsto pay out that may firms less likely toinvest and could allow public bodies tofund research seen as socially valuable,

without paying for, or eradicating cos-metic R&D, which there is of coursestill a place for.

Reforming the industryTe pharmaceutical industry is rife with

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comment20 facebook.com/insightedinburgh issue 7

distortions; big companies like Pfizerand GlaxoSmithKline do not includethe number of lives saved in their profitcalculations, yet the sizeable amount that

we donate to charity each year - 11.6

billion in the UK in 2010/11, suggeststhat this is something that society values.As a result, the marginal social benefitfrom the invention of life saving drugs islikely to be far higher than the marginalprivate benefit. It therefore makes senseto try and internalise these externalities,

which is something that the monopolyincentives created by patents do not do.

A prize, such as Stiglitz suggests, wouldwork more like a subsidy and could betailored to reward innovations with thelargest public health benefits, bringing

businesses private incentives in linewith public values.

Te validity of pharmaceutical pat-ents has been called into question in the

past, most noticeably in the case of AZin South Africa. Tis issue is still an on-going problem as the RIPs agreementis set to enshrine the current version ofproperty rights in international law and

as disputes about generics are affect-ing international relations with BRICScountries.

Whilst there is an economic basis forpatents, in the case of the pharmaceuti-cal industry it appears that monopolycosts, the disparity between social andprivate values, and the large public con-tribution to medical research mean thatpatents are an inefficient mechanism.

As a result, an alternative solution suchas the introduction of publicly fundedprizes for pharmaceutical research that

enhances social welfare could has-ten the invention of important drugsand improve access to these in poorercountries. Tis could be run alongside

a much shorter patent system in better-off countries to avoid the creation of off-putting uncertainty for firms.

Without the intervention of gov-ernments, patents would not exist at

all, and as a result, governments shouldhave the power to change the way thatthey work. Te existence today of aninternationally interdependent com-munity complicates the issue. However,this complication should not mean thatpatents become black boxed regard-less of how destructive they are. Teinternational community has both thepower and means to combat patent in-efficiencies and externalities, so agree-ments such as RIPs, which effectivelyenshrine patents in international law,

should not pass without a serious eco-nomic re-evaluation of the costs andbenefits of patenting in the pharmaceu-tical industry.

DURING HE RECESSION of2008/9 the GDP of the United King-dom contracted by about 5%. Now theeconomy is once again expanding; hit-ting 0.8% quarter-on-quarter growthin July-September 2013. Tis has ledmany, including George Osborne, toclaim austerity has been justified. Tisinference is too simplistic and a moredetailed analysis indeed shows that it

is false. I will look at the argumentsboth for and against austerity, as well ashow the narrative on austerity has beenshaped and why it is so powerful.

Dealing with the deficitWhen the coalition came to powerin mid-2010, following the financialcrisis, the UK had a record peacetimefiscal deficit of around 8% of GDP.Te Office for Budget Responsibil-ity (OBR) estimated that in 2010/11

over two-thirds of this deficit wasstructural. In principle, there is a struc-tural deficit in the government budget

when expenditure is systematicallyhigher than income and therefore thisdeficit would not disappear even if theeconomy picked up again. One of themajor priorities of the coalition wasto reduce the structural deficit, and sothey announced both spending cutsand tax rises. Austerity means reduc-ing government deficits particularly inadverse economic conditions and so

Osbornes Plan A(usterity) began.So why might fiscal deficit be a bad

thing? Firstly, a large deficit can call intoquestion a countrys ability to pay itsdebts and thus raise the cost of borrow-ing. Tis can lead to a full-blown sover-eign debt crisis, as seen in Greece. Sec-ondly, if there are no idle resources inthe economy, such as underemployed

workers or unused capital, a deficitmight crowd out private sector spend-ing, leaving total output unchanged.

Tese two points formed the basisof Osbornes Plan A. He stated that theUK was risking its ability to borrow

at low rates, especially with the highlypossible Eurozone breakup hangingover market sentiment. He also arguedthat fiscal contraction could be expan-sionary, by lessening crowding out andsubsequently increasing spending in theprivate sector.

Such a bad thing?If a government is able to borrow and

there are idle resources, many econo-mists support running a fiscal deficit inorder to boost demand and keep theeconomy at full employment. As re-gards creditworthiness, the UK gov-ernment almost certainly could haveborrowed more over the last 3 years fortwo main reasons. Firstly the UK has itsown currency, the Pound Sterling, in

which the vast majority of its debts aredenominated in this. Terefore, despiterhetoric, the UK has been safe from the

capriciousness of the bond markets andthe deficit could be funded throughselling bonds to investors and the Bank

Has George Osbornes Plan Aworked?JoshuaCollinsassessestheChancellorsgrowthstrategy



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of England. Secondly, before the crisis,the UK did not have a particularly highdebt-to-GDP ratio and still is very farfrom levels it has reached before. Inter-est rates are at their lowest since the

1960s and the debt to GDP ratio isnowhere near historical highs.Tere is also strong evidence that

there are idle resources in the economy.Figure 1 shows the UK unemploymentrate is still well above pre-recession lev-els. In addition, the average number ofhours worked and capital-usage havedropped. It is hard not to conclude thatoutput in the economy is still well be-low its potential; the OBR, which pro-vides the figures for the government,corroborates this fact in their report on

the UK economy.Terefore, the coalition both should

and could have avoided austerity. How-ever, cutting spending currently hasstrong public support. So, if the prima-ry economic arguments behind Plan

A are flawed, why has it gained suchstrong support?

Proliferation of austerityTe first reason is that debt invokes apowerful and negative personal com-

parison for many people; especiallyafter many consumers overloaded onpersonal debt before the financial cri-sis and several debt-fuelled bubblespopped around the world followingthe years of easy money. Politiciansplay on this by using analogies such as,running an overdraft or putting it onthe credit card to describe the nationaldebt and deficit. Tis is misleading; anincrease in government expenditure

will not linearly lead to an increase ingovernment debt. A more appropriate

analogy would be a solvent individualexperiencing hard-times and refusing toborrow money to buy food, ultimatelycausing unnecessary damage and suf-fering to one self. Tis analogy cap-tures the crucial fact that governmentexpenditure affects the health of theeconomy, not just the fiscal budget.

Te second reason is the failure todifferentiate between the short termand the long term. Te economic de-bate over austerity should be focused

on the short term, on whether auster-ity will depress output now. Proponentsof austerity, however, often point out

more long-term issues, such as a lownational savings rate and a large pub-lic sector and argue that fiscal stimulus

would worsen these and hence shouldbe avoided.

While increasing economic pro-ductivity in the long-term requiressupply-side improvements, such astechnological development, this doesnot mean that the short-term effects ofeconomic policies should be ignored.Keynes famously made this point: Butthis long run is a misleading guide tocurrent affairs. In the long run we areall dead. Economists set themselves tooeasy, too useless a task if in tempestuousseasons they can only tell us that whenthe storm is long past the ocean is flatagain.

Misleading measuresIt is again misleading to imply thatrecent recovery in economic growth

means austerity was good for theeconomy. Nobel-prize winning econo-mist, Paul Krugman, provides a simple

metaphor to illustrate this point, Imean, I could keep hitting myself in thehead, then slow the pace of the punish-ment, and I would start to feel better.Does this mean that hitting myself inthe head was good for me? Auster-ity was not expected to be the end ofgrowth, simply a dampener on it.

From the economic standpoint Iam forced to conclude that Plan Ahas not worked for the economy. Alarge structural deficit must, of course,eventually be addressed, but cuttingspending and increasing taxes in adverseeconomic conditions is reckless and hasprobably damaged an already weakenedeconomy. However, from a politicalstandpoint it could be argued Plan Ahas worked well for George Osborne; ithas large support from the public, eco-nomic growth has (seemingly) returnedbefore the next election and it has creat-ed an environment in which to achieve

other long term goals of the Conserva-tive party such as shrinking the publicsector and cutting business regulation.

Alltogether Fool



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comment22 facebook.com/insightedinburgh issue 7

DISCUSSING YOUR SALARYIn public may be in bad taste, but inSwitzerland, it stopped being a privatematter several months ago. Tis is nota reflection of bad etiquette, but a reac-tion to a federal initiative by the YoungSocialist Party (JuSo). Te leftist groupis proposing a new labor regulationnicknamed 1:12, dictating that thehighest wage within a firm cannot ex-ceed twelve-fold the lowest.

While the initiative may seem out-landish to an international observer,Switzerlands largest radio and televisionbroadcaster SRF recently carried out apoll in which 44% of voters were in fa-vor, and 44% were against. If the unde-cided 12% tip the scales in favor of 1:12on November 24th, this would not only

jeopardize the enviable internationalstanding of the Swiss economy, but alsothe welfare of average Swiss citizens. Infact, the proposal would harm those it

wants to help the most.

Executive scrutinyempting as it may be, it would bemistaken to assume that there is a na-tionwide political tendency towardsthe left: this September, a referendumeliminating military conscription wasrejected, and working hours for shops

were liberalized. But while JuSo doesnot maintain a strong voter base on oth-er issues, they have managed to cleverlytake advantage of the electorates grow-

ing skepticism towards banks and bigcorporations.

Following the 2008 crisis, there wereseveral international legal battles overSwiss banking secrecy, and numerousscandals around managers high salariesand CEOs severance packages. Predict-ably, reports of Novartis (a pharmaceu-ticals company) awarding their ex-CEOa severance package of CHF 72 millionor 49 million (with an approximate1,5:1 CHF to pound sterling exchange

rate), or Roches (ditto) CEO earning261 times his lowest-paid employeeswage, have led to feelings of alienation

and intimidation across the politicalspectrum.

Earlier this year, Swiss voters alreadypassed an unusually restrictive law calledgegen die Abzockerei (best translatedas Referendum Against Rip-Off Sala-ries), affecting all companies listedon the stock exchange. Shareholdersnow have stronger voting rights allow-ing them, among other things, to de-termine the aggregate earnings of the

board and management. Board mem-bers are subject to annual elections andcannot receive compensation other thantheir salaries, and are held accountableby company statutes every penny theyspend. If the new legislation does notsound drastic enough, the punishmentgiven for not following it can lead up tothree years imprisonment and a fine ofup to 6 years remuneration. Yet manyare still searching for an even strongerantidote to Abzocker a uniquely

German word originally meaning some-thing along the lines of con artist, butnow almost exclusively used to charac-terize high-salaried corporate executives.

Battle for hearts and mindsTe media campaign leading up to theNovember 24th vote resembles that ofthe Abzockerei referendum: differentinterest groups are taking every op-portunity to engage in fear mongering.But these corporate con artists areneither as common nor as problematic

as JuSo would like us to think. Onlytwelve companies were in the spotlightfor their extremely high wage ratios (allabove 1:100), or accession and sever-ance packages (with the records at CHF26 and 72 million respectively). All ofthese companies are globally active: sev-en rank 268 or higher in Forbes GlobalFortune 500.

Within a global context, intra-firmwage inequality can be rationalized,if not justified. However, most of the

Swiss population is employed in smalland medium-sized enterprises (SMEs),which make up two-thirds of domestic

companies, and can hardly be comparedto giant global corporations. Tese smalland medium-sized firms cannot oper-ate with high wage ratios purely due totheir size: revenue is not high enoughand there are not enough levels of man-agement to accommodate, or validate,such a wage structure.

Carl Elsener, the CEO of Victorinox(the manufacturer of the iconic Swissarmy knife) earns CHF 300,000 annu-

ally, six times more than the lowest-paidemployee in his firm. For comparison,Nestls CEO Peter Brabeck earns CHF7 million annually, which is 215 timesmore than Nestles lowes-paid employ-ee. But Nestl employs 350,000 world-

wide and brings in revenues of CHF 98billion, equivalent to over 16% of SwissGDP, whereas Victorinox employs only1,800 people worldwide and brings inrevenues of CHF 500 million a year.

Tese figures illustrate an immense

gap between the two CEOs responsi-bilities. It seems reasonable that theirsalaries should do so as well. Moreover,in Universum studies most globallyoperating Swiss companies are deemedideal employers: three are in theglobal top-50, and ten are in the Swisstop-100. In other words, global firmsemployees are happy with their jobs andearnings even with high intra-firm wageinequality.

Unintended consequences

In its attempt to solve an imaginedproblem, the 1:12 initiative could havesevere unintended consequences. JuSoschoice of 1:12 is arbitrary (they haveeven contradicted themselves by citinga University of Zurich study claiming1:20 is an ideal ratio), thus involvingfirms outside of the target Abzockergroup.

For instance, the partially privatizedrailway company (SBB) operates witha relatively moderate 1:23 wage ratio.

rains are not merely a means of trans-portation, but a cornerstone of Swiss so-ciety: most low-waged employees live in

Salaries by the DozenCeciliaMihaljekinvestigatesSwitzerlandscaponexecutivepay



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World Economic Forum

the suburbs and work in cities, relyingon trains rather than cars for their dailycommute. It is necessary for SBB to at-tract highl

Insight Magasine Winter 2013

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