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2014 Young Economist of the Year Essay Competition

From the final shortlist of 18 essays drawn from a total entry of over 1600, the judging panel of
Charles Bean (RES President), Professor Tim Besley (London School of Economics) and Stephanie
Flanders (JP Morgan) have selected five winners and wish to congratulate them, together with all of
the other students that made the short list.
Once again the overall standard was extremely high, with a number of entries from international
schools. A list of highly commended entries and also a list of the schools and colleges from the UK
and overseas that joined in the 2014 competition is published at www.res.org.uk
This year the judges unanimously agreed that the best essay was by Kartik Vira, who addressed the
topic: Are the advanced economies in for a long period of economic stagnation?
The judges thought this was an outstanding essay that was particularly well organised, with a clear
discussion of the competing reasons as to why the advanced economies might be entering a period
of so-called secular stagnation, backed up by judicious reference to data and arguments in the
literature. This essay was notable for including an extended discussion of possible policy responses.
The judges agreed this essay would be a worthy winner of the RES 2014 Young Economist
Competition.
Second Place went to Jessica Zeng for her essay on the question: Does immigrant labour benefit or
impoverish the United Kingdom?
The judges enjoyed the clear narrative structure of this essay. The author showed a good grasp of
the analytical issues and explained them well, with a particular focus on skills and whether migrant
labour was in competition with indigenous workers or complementary to them. She also buttressed
her argument effectively with empirical evidence.
Reflecting the high overall standard this year, the judges also wished to recognise three other essays
by awarding them Joint Third Place: Viva Avasthi, who also addressed the question of whether the
advanced economies were facing a long period of economic stagnation; David Bullen, who examined
the impact of HS2; and Hannah Dudley, who considered the question of whether Scottish
independence was consistent with Scotland keeping the pound.
The 2014 Young Economist of the Year is therefore Kartik Vira, Hills Road VI Form College,
Cambridge, who will receive the glass trophy and a prize of 1,000. Second place goes to Jessica
Zeng, Withington Girls School, Manchester (500). And joint third place goes to: Viva Avasthi, King
Edward VI Handsworth School for Girls, Birmingham; David Bullen, Manchester Grammar School;
and Hannah Dudley, Toot Hill College, Nottingham, each of whom will receive 250. All winners are
invited to an award ceremony to take place at the RES Annual Public lecture at the Royal Institution
in London on Tuesday 25 November. Their winning essays will be published on the RES website.
Charlie Bean, Tim Besley and Stephanie Flanders,
31 July 2014.

The essay titles for 2014, set by the Royal Economic Society President and judges were:
1. Promoting growth and fighting poverty should be the priority in the developing world, not
reducing greenhouse gases. Do you agree?
2. Should childcare costs be deductible against tax for working mothers?
3. HS2 will blight the countryside and just lead even more businesses to locate in London. Discuss.
4. Are the advanced economies in for a long period of economic stagnation?
5. Is independence consistent with Scotland keeping the pound?
6. Does immigrant labour benefit or impoverish the United Kingdom?
The following final shortlist of applicants were chosen by a panel of teachers having considered all
1610 entries:
Anindita Nag, Tiffin Girls School, London
Danielle Ball, Nottingham Girls High School
David Bullen, Manchester Grammar School
Felix Clarke, RGS Guildford
George Bearryman, City of London Freemans School, Surrey
Hannah Dudley, Toot Hill College, Nottingham
Harry Thompson, Holmes Chapel Comprehensive School, Cheshire
James Taylor, Reigate Grammar School
Jamie Cuffe, Eton College, Berkshire
Jessica Zeng, Withington Girls School, Manchester
Joseph Ellis, Runshaw College, Leyland, Lancashire
Joseph Millard, St Pauls School, London
Kartik Vira, Hills Road VI Form College, Cambridge
Lucy Zhu, RGS Colchester
Max Brewer, Exeter School
Neil Reilly, Portadown College, Northern Ireland
Tim Rawlinson, Eton College, Berkshire
Viva Avasthi, King Edward VI Handsworth School for Girls, Birmingham

Are the advanced economies in for a long period


of economic stagnation?
Kartik Vira

At the time of writing, the signs for the advanced economies were looking more optimistic than at any
time since the financial crisis. The IMF reported that Global activity strengthened during the second half
of 2013 and is expected to improve further in 201415. The impulse has come mainly from advanced
economies (IMF 2014b). There would appear to be little support for the idea that the advanced
economies are stagnating. Yet that is precisely the argument made by a growing number of economists.
The serious discussion about long-run economic stagnation in the advanced economies was started by
Larry Summers speech to the IMF in 2013, where he argued that very rapid growth should have been
expected in the aftermath of the financial crisis, as businesses rebuilt inventories and began to use their
unused capacity. The fact that we have not seen this suggests that there is a long term problem with
growth in the advanced economies. This is illustrated in Figure 1: actual and potential GDP in the
advanced economies are both well below what was expected before the crisis. Summers refers to this as
secular stagnation. This term was first used in the aftermath of the Great Depression, most
prominently by Alvin Hansen, to explain the Americans economys weak performance. The post-war
boom largely discredited Hansens theory, but Summers argues that it is an accurate description of our
current situation.

Figure 1: From Davies (2013)

Since secular stagnation is a long-run phenomenon, there must be evidence for it from before the crisis.
Many agree that the early 2000s was characterised by an enormous asset bubble (Bernanke 2010); this
should have increased aggregate demand greatly, by creating a wealth effect that enabled higher
consumption and borrowing, while having no impact on aggregate supply. The impact should have been
first to push the economy to its capacity, and then to lead to overheating as the economy exceeded its
capacity. There are key signs of an overheating economy that we would expect to see in the years before
2008: high inflation, unemployment below the estimated non-inflation-accelerating rate, very high capacity
utilisation, and growth above the estimated trend for the economy. Yet none of these things were actually
observed in the early 2000s. This is highly puzzling, and what the secular stagnation hypothesis seeks to
explain. If there had been a long-run decline in aggregate demand over the period, excluding the effects
of the bubble, the increase in aggregate demand from that bubble would not produce an overheated
economy, but might only have sufficed to bring the economy near capacity. The bubble was necessary to
prevent an output gap from being sustained.
This idea is often discussed in terms of interest rates. The natural rate of interest is defined as the rate
of interest at which desired savings equal planned investment at full employment. An interest rate set
below this natural rate will lead to excess investment demand, while a rate set above the natural rate will
depress aggregate demand. If the secular stagnation hypothesis is correct, aggregate demand was not
sufficient to produce full employment before the crisis, indicating that the interest rate set by central
banks and in financial markets was above the natural rate. But since interest rates were not significantly
higher than they had been in the past, the logical conclusion is that the natural rate of interest has fallen
significantly. This conclusion is supported by the long term reduction in various interest rates over the past
30 years reported in the World Economic Outlook 2014, as well as in Laubach and Williams (2003), the
updated conclusions of which are illustrated in Figure 2. There are two major problems caused by this
decline in the natural rate. The first is that such low rates of return will push investors to look for more
risky assets with higher yields, creating bubbles and financial instability. The second is that if the real
natural rate becomes so negative that nominal rates also have to be negative, then it is impossible for the
central bank to loosen monetary policy enough, and advanced economies will be left with permanent
output gaps as well as the instability created by low rates. Summers et al argue that this was the case
from the mid 2000s, but Figure 2 suggests that this argument does not have universal support.

Estimated natural rate of interest (%)

0
1961

1965

1969

1973

1977

1981

1985

-1

1989

1993

1997

2001

2005

2009

2013

Year

Figure 2: The estimated natural rate of interest in the US, from Laubach and Williams (2003)
Nevertheless, if the natural rate of interest is declining, it is a worrying trend. It suggests that
advanced economies are doomed either to consistently have large asset bubbles, and a correspondingly
high level of economic volatility, or to have an economy that consistently under- invests, leading both to
output gaps and to lower potential growth; if nominal rates have to be negative to produce equilibrium,
they will have both. Relatively high growth rates, such as the 3.0% growth between Q1 2013 and 2014
in the UK, are consistent with the secular stagnation hypothesis firstly because the economy is still well
below its trend level of output, and secondly because the possible development of new asset bubbles may
offset the impacts of secular stagnation.
The secular stagnation hypothesis is relatively new in the modern context, and little formal research has
been conducted on secular stagnation after the post-war boom discredited the original theorists.
However, Eggertsson and Mehrotra (2014) recently created a model that explains some ways for the
natural rate of interest to become negative. They find that under some unconventional but justifiable
assumptions1, various factors can lead to the equilibrium natural rate of interest being negative;
significantly, many of the factors that they identify as theoretical causes of secular stagnation are observed
in advanced economies.

Their model includes three heterogeneous generations, rather than one representative agent, as is usually
used in similar models.
1

The first of these is demographic. Aging and slower-growing populations will reduce future demand for
products, both because the middle aged and old have a lower marginal propensity to consume than the young,
and because the fall in population growth will mean fewer people needs have to be fulfilled. This means that
less investment is required to increase capacity to meet demand, so planned investment falls and the
natural rate of interest decreases. Almost every developed country has seen their population age in recent
years, as life expectancy increases and fertility rates decline. Japan, which has been in stagnation for over 20
years (Economist 2009), is one of the countries with the most aged populations; in 2010, more than half of its
population was over 45 (UN 2013). This provides some real-world evidence that an aging population could
lead to stagnation, and suggests that the other developed economies may follow suit.
Another possible cause of stagnation is income inequality. Briefly, inequality redistributes income from
the poor to the rich, and as the rich tend to have a higher marginal propensity to save, this will increase
desired saving in the economy, causing the natural rate of interest to fall. Income inequality has been rising in
almost all developed economies; the OECD (2011) reports that the average Gini coefficient across its
members increased by 10% between the 1980s and the late 2000s, while Piketty (2014) has documented
similar trends in wealth inequality. So inequality is another theoretical cause of secular stagnation that is
observed in the advanced economies.
A third possible cause is a deleveraging shock. This occurs following a so-called Minsky moment
which is the moment when a financial bubble collapses, and borrowers start to reduce their debt levels, or
deleverage. This forces them to reduce their consumption or borrowing and increase their savings,
contributing further to the fall in the natural rate of interest. In combination with the other factors
contributing to secular stagnation, it may take a long time for the deleveraging process to be completed, as
increased saving will reduce incomes and therefore make it harder to reduce their debt levels the classic
paradox of thrift. Japans period of stagnation was triggered by a financial crisis in the early 1990s,
which is likely to have been accompanied by deleveraging, and the other advanced economies all suffered
similar shocks in 2008. Debt levels have fallen in these countries after their financial crises, but remain fairly
high in some sectors (IMF 2014a). However, while deleveraging contributes to secular stagnation, high
levels of leverage contribute to economic instability. So deleveraging is associated with the same growthstability trade-off that is characteristic of secular stagnation more generally.
The final cause suggested by the model is a reduction in the relative price of investment goods. If
investment goods become cheaper, the total spending on investment across the economy will decrease, as
investment will only take place to the extent that it fulfills a demand for a product; demand for investment
is a derived demand. This decline in desired investment spending will cause the natural rate of interest to
fall further. We observe such a long-term reduction in relative prices in data from the US, illustrated in
Figure 3.

Figure 3: The price of investment goods relative to consumption goods, as an index where the value in 2005 is
1. From FRED (2013)
The model does not take account of international capital flows, and there is reason to believe that these
also contributed to the fall in interest rates. Rising incomes in developing countries, particularly China,
greatly increased the global supply of savings, reducing interest rates globally. The greatly increased financial
flows between countries in the past decades mean that this decline will be passed on to the national interest
rates in developed countries.
So most of the theoretical causes for secular stagnation are, in fact, occurring in at least some
advanced economies at present. This would seem to suggest that it is at the very least a strong possibility.
But if it is true, do we have to accept lower real growth rates? Three main possibilities have been
suggested for escaping secular stagnation.
The first, and least desirable option, is the business as usual scenario: more asset bubbles. Bubbles in
the 1990s and 2000s managed to maintain growth at trend levels, despite the fact that secular stagnation
had already begun to take hold. This worked, as described above, by the asset bubbles producing a wealth
effect that enabled higher consumption and borrowing, thereby pushing up interest rates and maintaining
aggregate demand. If similar bubbles are allowed to form again, we should see the same effect. This should
be good enough to raise our growth rates back to the trend level. Of course, there are some downsides to
such a policy. Pre-2008 growth rates based on pre-2008-style asset bubbles will inevitably result in 2008-style
financial crises. Bubbles increase growth at the cost of macroeconomic stability, and that is not a trade-off
that people are likely to accept, given the very high social cost of recessions. Unfortunately, it is

perhaps the most likely path for the advanced economies, given that it requires government inaction
rather than action, although the trend towards giving central banks macroprudential powers suggests that
various governments are trying to avoid new bubbles forming. However, some markets seem to be reentering bubble territory, such as in the London housing market, where house prices rose by 4.5% in Q1
2014 and are expected to continue rising (Bank of England 2014). This could be an explanation for the
unexpectedly high growth rates recorded in the UK in recent months.
The second option is to increase inflation. The secular stagnation problem centres around the fact that the
central bank cannot reduce rates low enough to produce full employment, as the natural rate is negative.
However, the natural rate is expressed in real terms, while the central bank rate is a nominal rate. The zero
lower bound is, in real terms, a lower bound of 0% minus the inflation rate. If the real natural rate of
interest is, say, -3%, then given inflation of 4% the central bank could set this rate by setting the nominal
rate to 1%. If inflation is 2%, however, they are unable to reach this interest rate and it will therefore
not be possible to reach full employment. So if we are in conditions of secular stagnation and real interest
rates are negative, raising inflation could help to close the output gap by allowing the real interest rate to
fall to its natural rate. However, there are also significant problems with this course of action. The
inherent disadvantages of inflation will intensify if the inflation target is increased. It is possible that a
moderate increase for example, from 2% to 4% will not increase these costs so much that they override
the benefits of lower output gaps. However, an additional consideration is that a central bank raising its
inflation target may cause it to lose credibility. So this policy could only be successful if central banks
could show that the raising of the inflation target does not constitute a more lax attitude towards inflation
generally.
The third option is the one proposed by Summers as the best solution, but also the least probable
one. If the governments in advanced economies finance high levels of public investment, they will be able to
close the output gaps and achieve full employment; this will consume the excess saving that are
characteristic of stagnation without allowing them to be driven into damaging asset bubbles. As the key
problem is that interest rates are too low and not enough investment is taking place, crowding out of
productive private sector investment is unlikely to be a major problem. Investment in infrastructure and
major projects will have three positive effects: increasing aggregate demand and closing short-term
output gaps, reducing the long- term impact of these output gaps on growth through hysteresis, and
increasing the economys productive capacity. Politically, however, the trend in recent years has been
away from fiscal intervention, and it seems unlikely that any government will consider permanent fiscal
stimulus until another crisis develops.
On balance, there appears to be evidence that investment in the advanced economies is low and
declining, due to forces that are predicted by the model of secular stagnation. As a result, relative
economic stagnation seems to be a likely outcome over the next few decades; even if growth rates are
fairly high at times, this is likely to be offset by increased economic volatility, so that trend growth rates
over the business cycle decrease significantly. However, there are solutions to this; none of them are
perfect, but increased government investment appears to be the most effective solution. If governments
carry this out, it should be possible to mitigate at least some of the effects of stagnation. The advanced
economies are not doomed to stagnation, but they need to take action if they want to avoid it.
word count: 2480 words

References
Bank of England. 2014. Financial Stability
publications/Pages/fsr/2014/fsr35.aspx.

Report.

June.

http://www.bankofengland.co.uk/

Bernanke, Ben S. 2010. Monetary Policy and the Housing Bubble. http://www.federalreserve.
gov/newsevents/speech/bernanke20100103a.htm.
Davies, Gavyn. 2013. The implications of secular stagnation. Financial Times. http://blogs.
ft.com/gavyndavies/2013/11/17/the-implications-of-secular-stagnation/.
Eggertsson, Gauti B., and Neil R. Mehrotra. 2014. A Model of Secular Stagnation. http :
//www.econ.brown.edu/fac/gauti_eggertsson/papers/Eggertsson_Mehrotra.pdf.
Federal Reserve Economic Data, Federal Reserve Bank of St. Louis. 2013. Relative Price of Investment
Goods [PIRIC]. http://research.stlouisfed.org/fred2/series/PIRIC.
International Monetary Fund. 2014a. Global Financial Stability Report: Moving from Liquidity- to Growth-Driven
Markets. April. http://www.imf.org/external/pubs/ft/gfsr/2014/01/ index.htm.
. 2014b. World Economic Outlook: Recovery Strengthens, Remains Uneven. April. http:
//www.imf.org/external/Pubs/ft/weo/2014/01/.
Laubach, Thomas, and John C. Williams. 2003. Measuring the Natural Rate of Interest. The Review of
Economics and Statistics. http:// www. frbsf. org/ economic- research/ economists/johnwilliams/Laubach_Williams_updated_estimates.xlsx.
Organisation for Economic Co-operation and Development. 2011. An Overview of Growing Income
Inequalities in OECD Countries. In Divided We Stand: Why Inequality Keeps Rising.
http://www.oecd.org/els/soc/49499779.pdf.
Piketty, Thomas. 2014. Capital in the Twenty-First Century. Translated by Arthur Goldham- mer.
Summers, Lawrence H. 2013. http://larrysummers.com/imf- fourteenth- annual- research-conference-inhonor-of-stanley-fischer/.
The Economist. 2009. The incredible shrinking economy. http://www.economist.com/node/
13415153.
United Nations, Department of Economic and Social Affairs, Population Division. 2013. World Population
Ageing.
http://www.un.org/en/development/desa/population/publications/
pdf/ageing/WorldPopulationAgeing2013.pdf.

Jessica Zeng

RES Young Economist of the Year 2014

Page 1

Does immigrant labour benefit or impoverish the United Kingdom?


Imagine a newlywed young couple from China, or perhaps Romania, Poland or Pakistan. Though
they have only just started their married life, they want something bigger, something better than their
country can offer them. The UK seems as good a place as any: better employment prospects, high
job creation rates, an impressive average standard of living, free healthcare and secondary school
education. So, they decide to emigrate. With the appropriate skills, their job options are many,
ranging from professorship to construction work to managerial positions. Together, they can support
themselves and their family back home. But they are constantly accused of taking our jobs, jobs
that should go to British workers. This forms one of the main arguments used to support legislation
that limits and reduces immigration. Therefore, how does immigrant labour benefit the United
Kingdom if there are fewer jobs for the British?
Lets think about our happy couple. With 50.2% of the working age population of the UK having
finished education at age 16 or under, and 53.6% of new immigrants obtaining university level
education (equating to 41.1% of all immigrants), it is evident that a larger proportion of immigrants
have obtained a level of education higher than that of UK born citizens. Thus, it is likely that our
happy couple are well-educated and skilled - a significant factor in the consideration of the benefits
of immigrant labour, as it takes years to educate and train people. With 532,000 citizens migrating to
the UK during the year ending September 2013, an increase from the previous year, the UK is able to
benefit from the labour of these educated and skilled workers instantly, without waiting for current
UK citizens to be trained and educated. Therefore, through filling any gaps in the labour supply
market, the market can expand and shortages can be prevented in professions such as lectureship
(which requires an obviously extensive knowledge of the subject) in the UK. Consequently, the
presence of immigrants in the workforce means that there are more workers with the appropriate
expertise and experience, leading to a greater human capital stock. The UK economy can benefit
from this as it is less likely to be restricted by bottlenecks and thus, the economy can become more
competitive and efficient. This effect is mostly seen for skilled jobs as 23% of immigrants have a
professional occupation but as 16.2% fill elementary occupations, labours shortages for lower-skilled
jobs can also be filled through immigrant labour (though shortages here are less likely to occur).
In addition to increasing the supply of educated and skilled workers, the presence of immigrants in
the workforce increases productivity, most commonly measured as output per person. A report from
the National Institute of Economic and Social Research (NIESR) shows that between 1997 and 2007
a 1% increase in the number of immigrants employed correlated with a rise in labour productivity of
0.06-0.07%. This increase in productivity occurs for many reasons: skilled immigrants are more
willing to take on lower-skilled jobs, employing their expertise; the diversity of teams with
immigrant workers is conducive to productivity; immigrants knowledge of their home countries; the
more prevalent promotion of specialisation with immigrant workers present, but mainly, because of
the hard-working nature of immigrants. For example, our skilled young couple immigrate to the UK
in search of a better life; therefore, they are willing to work hard to make one for themselves, even if
this requires taking on more undesirable jobs, such as those with unsociable hours. An increase in
productivity enhances the UK economy through the increased international competitiveness, which

Jessica Zeng

RES Young Economist of the Year 2014

Page 2

derives from an increased output decreasing the prices of goods and services. Furthermore, the
NIESR have found evidence of the skill of immigrants acting as a complement to that of native
workers. Because of this, immigrant labour can be said to benefit the UK by incentivising UK born
workers to try and obtain the same level of education/ same skills as immigrants. The resultant
competition could help the economy to expand through increasing the productive capacity of the UK.
As productivity of labour is intrinsically linked with a countrys standard of living, one of the most
important ways of increasing economic growth in a country is through encouraging productivity in
order to boost the potential capacity of the economy. As wages earned by migrants in the UK are
often seen as more than could have been earned in their country of origin, national consumption
would increase, as more of the population would be purchasing native goods. Further contributing to
the economy would be the lower prices resulting from increased productivity, improving exports.
This provides a means of economic growth as aggregate demand increases, which the economy can
greatly benefit from. Therefore, when our happy couple immigrates to the UK, not only can they aid
the economy through contributing their skills and education but also through consuming the UKs
products and adding demand to the economy.
Despite contributing to the economy in the aforementioned ways, the 31st NatCen Social Research
British Social Attitudes survey shows that almost 25% of Britons believe the main reason workers
immigrate to the UK is to claim benefits and over 75% of the population have the view that
immigration should be reduced. It is surprising therefore, that a study at UCL discovered recent
immigrants were 45% less likely to receive money from the government through benefits between
2001 and 2011 than UK born workers. Immigrants from the European Economic Area have, in total,
added 22.1 billion to the economy through taxes and the like equating to 34% more than has been
taken out through benefits or such. Contrarily, UK born citizens have contributed only 89% of the
money they have taken out - this is a loss of 624.1 billion to the UK financial system. Therefore, the
labour of immigrants benefits the UK as they support the economy by making a positive financial
contribution. As shown in figure 1, UK born citizens, compared to recent immigrants from both the
EEA and non-EEA, have had lower
revenue to expenditure ratio over recent
years. Therefore, immigrant labour (during
the 10-year period discussed) has
contributed significantly more to the
economy than received from the
government - this is especially important,
as this has helped lessen the UKs
considerable budget deficit since the end of
Figure 1
2001.
Whilst contributing a financial surplus to the UK, remittances - the money that is sent home by
migrants - are significant cash flows out of the country. In 2012, around 236 billion worth of
remittances were recorded (likely to be a vast underestimate, considering how much is not recorded).
It is understandable for our happy couple to want to support their family back home and though
remittances do significantly help the country they are being sent to, they could be seen to impoverish
the UK through creating an outflow of money that should have been spent in the UK. It is difficult,

Jessica Zeng

RES Young Economist of the Year 2014

Page 3

however, to say whether this really impoverishes the country as, even with money being sent back to
the immigrants native countries, the migrants are still able to positively contribute to the economy
(in contrast to native workers).
Despite the positive effect that immigrant labour has had through adding to the economy, immigrant
labour could be said to impoverish the UK through affecting wage distribution. Though a 1%
increase in the number of immigrants in the workplace in 1997-2005 led to a 0.1-0.3% increase in
wage, and during 2000-2007, a 1% increase of immigrants in the workplace caused a 0.3% fall in
wage, the average wage varies only slightly with the percentage of immigrant labour employed and it
is difficult to predict how- whether this change will be positive or negative. In contrast, during 19922006, with a 1% increase in the number of immigrants in the workplace of unskilled or semi-skilled
workers, the average wage was reduced by 0.5%, thus impoverishing the UK through lower wages
for the least wealthy. Similarly, the same is true for the 5% lowest paid workers who faced a slightly
larger fall of 0.6% in average wage whilst skilled workers had higher wages with the presence of
immigrant labour. Thus increasing income inequality, which is significant: an IMF study has shown
that as inequality increases, growth decreases and will continue to do so in the future the
correlation of which can be seen in figure 2 below. Therefore, immigrant labour could be said to
impoverish the UK through making the rich richer and the poor poorer, contributing to higher levels
of income inequality.
The effect of immigrant labour on the wages of
workers depends heavily on the nature of the
labour - if immigrant labour is complementary to
the labour and skills of native workers, it is
likely to have a positive effect on wages; in this
case, it is probable that immigrant labour was in
fact a substitute for the skill of workers. The
extent to which immigrant labour is
complementary or substitutable can also
influence the long-run and short-run effects of
immigrant labour. Substitutive immigrant labour
Figure 2
provides competition for the native citizens, thus
decreasing the average wage, whilst conversely,
complementary immigrant labour is likely to increase the average wage. However, in the long term,
because a larger proportion of working immigrants can lead to an increase in productivity and
consumption, investment will also rise as firms will have more profit. Therefore, the presence of
immigrants in the workplace helps the productive potential of the economy. Likewise, labour for
both immigrants and natives could increase in demand as wages decrease, therefore, increasing
employment. Both of these factors could benefit the UK such that it outweighs the loss made initially
when immigrant labour is substitutive and lowers the average wage through increasing employment/
job creation.
One of the determining factors to whether immigrant labour benefits or impoverishes the UK lies in
the country of origin of the immigrants. For example, the effect of EEA immigrant labour and nonEEA immigrant labour is vastly different. During 1995 and 2011, immigrants from the EEA

Jessica Zeng

RES Young Economist of the Year 2014

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contributed 4% more to the UK economy than they received, whereas non-EEA immigrants caused a
negative fiscal impact as, in general, they had more children than natives thus received more in
benefits - obviously impoverishing the UK. As discussed before, EEA immigrants during the years
2001 to 2011 contributed 34% to the economy but non-EEA immigrants contributed only 2%
comparatively (adding 2.9 billion to the economy) and are around 7% more likely than EEA
immigrants to claim benefits - showing a noticeable difference. The origin of immigrants has also
correlated with changes in employment rates. In 1995-2010, EU immigrants did not seem to affect
employment rates but non-EU immigrants seemed to increase unemployment of natives. Therefore,
if this were to continue, the labour of non-EU immigrants could be seen to impoverish the UK
through increasing unemployment levels for those born in the UK.
Arguably the most significant determinant of the benefit of immigrant labour is the current skills and
characteristics of the immigrants. Currently, when comparing the likelihood of recent immigrants
claiming benefits to native workers, recent immigrants are 45% less likely but when compared to UK
born workers of the same age/ education level/ gender, this statistic falls to 21%. Therefore, this is
indicative of the effect that characteristics of immigrants have on the extent to which immigrant
labour benefits/ impoverishes the UK. However, the age of the immigrants can be of an advantage to
the UK. For example, though our happy couple may enjoy the life they make in the UK, there is a
high chance that they decide to migrate back to where they grew up and were born originally,
whether to be with family or for familiarity. This means that during the least productive and probably
least economically active portion of their life, they are not draining the UKs resources through
pensions and increased healthcare costs. Rather, they are returning home after having contributed
positively to the economy, especially when considering that many immigrants reach their
productivity peak/ the peak of their economic activity during their time as an immigrant in their host
country. On the other hand, this could be seen as a negative factor - after working in the UK, they are
taking the money they earned and spending it elsewhere. Like remittances, this may be a negative
withdrawal from the economy - not something that they originally would have had without the
immigrant labour, but something the UK should have received afterwards. Therefore, this lack of
consumption caused could be said to impoverish the UK but, most likely, the return home of the
immigrants would be beneficial to the UK when balanced alongside the cost of healthcare and
pensions that would no longer be incurred on the government.
Ultimately, immigrant labour has benefitted the UK over the years, especially more recently. The
reason for this is quite clear: the UK attracts educated and skilled immigrants, thus the benefits
received from these immigrants are most often
positive. This perhaps, is one of the strongest
characteristics of the UK economy and lasts
even through economics downturns, such as the
2008 recession. It is difficult however, to predict
how long this trend will continue for and it is
this trend which will have the biggest effect on
whether the UK benefits from or is
impoverished by immigrant labour. After the

Figure 3

Jessica Zeng

RES Young Economist of the Year 2014

Page 5

laws restricting Romanians and Bulgarians from working in the UK were lessened, there was a
decrease of 4000 Romanians and Bulgarians working in the UK in the first quarter of 2014 as seen in
figure 3, invalidating predictions that forecasted a dramatic increase in the number of Romanians and
Bulgarians immigrating/ working in the UK. Therefore, predictions of immigration are sometimes
inaccurate and difficult to make. Thus, predictions about the types of immigrants (as in skilled or
unskilled, educated or uneducated) the UK attracts may also be difficult to make. Moreover, with
anti-immigration parties such as UKIP increasing in power and popularity, the economy could be
harmed if laws limiting immigration were passed - the effect could be positive and encourage only
the most educated and skilled workers to immigrate (and so continuing the trend), or it could
persuade immigrants of all levels of skill to decide to live elsewhere.
So, our happy and well-educated couple chose to immigrate to the UK. Whether in the future, similar
people will decide to immigrate is difficult to predict. But overall, the labour of immigrants has
benefitted the UK thus far and, hopefully, will continue to do so in the coming years.

Word count (excluding bibliography): 2430

Jessica Zeng

RES Young Economist of the Year 2014

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References and Bibliography


Cribb, J. (2013). Income inequality in the UK. Available:
http://www.ifs.org.uk/docs/ER_JC_2013.pdf
Dustmann, C and Frattini, T. (November 2013). The Fiscal Effects of Immigration to the
UK. CReAM Discussion Paper. No. 22/13. Available: http://www.creammigration.org/publ_uploads/CDP_22_13.pdf
Easton, M. (May 2014). Romanian and Bulgarian migration: Dip in workers coming to UK.
Available: http://www.bbc.co.uk/news/uk-27407126
Ford. R and Heath, A. (2014). Attitudes to Imigration. British Social Atttitudes. No. 31.
Kay, J. (2004). The Economics of Immigration. Everlasting Light Bulbs: How economics illuminates
the world. The Erasmus Press. P64-67.
Ostry, J., Berg, A. and Tsangarides, C. (February 2014). Redistribution, Inequality, and Growth. IMF
Staff Discussion Note. No. 14/2. Available:
http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf
Rolfe, H., Rienzo, C., Lalani, M. and Portes, J. (November 2013). Migration and productivity:
employers practices, public attitudes and statistical evidence. NIESR. Available:
http://niesr.ac.uk/sites/default/files/publications/Migration%20productivity%20final.pdf
Ruhs, M. and Vargas-Silva, C. (March 2014). The Labour Market Effects of Immigration. Migration
Observatory briefing, COMPAS. No. 2.
Wadsworth, J. (June 2012). Immigration and the UK Labour market: The latest evidence from
economic research. CEP Policy Analysis.

Are the advanced economies in for a long period of


economic stagnation?

Viva Avasthi

The future: a murky blur of possibilities, problems, and potential shifts in paradigms. Attempting to make
sense of our collective experiences in the past and present to make informed predictions about the future is
one of the difficult tasks faced by economists across the world. At present the key question haunting
economists and leaders of the advanced economies is the one which this essay attempts to answer.
Setting the stage for analysis
Since we are constrained by the word limit, lets consider the advanced economies to be the US, UK and
European economies. Most notably, Japan has been omitted. Several key reasons for this must be condensed
into the following: Japan is structurally quite different from the other economies since it has a far stronger
manufacturing sector, far better standards of education, and a greater social cohesion. Its prospects seem
much brighter than the rest of the advanced economies for these reasons. Thus (perhaps rather
controversially!) it was felt that there was no need for it to be included in this analysis.
Traditionally, economic stagnation is considered a prolonged period of little or no growth in the economy,
often with annual GDP growth of less than 2-3%. High unemployment is generally perceived to accompany this
low growth. However, perhaps such GDP growth benchmarks become redundant when one considers that
normal growth might not actually be normal at all. Pre-crisis levels of GDP growth can be described as being
not normal for the entire period between today and the 1980s because of the existence of various bubbles
providing artificial boosts and drags on GDP. Even before then, we were living in a world boosted by the
massive demand created in the aftermath of the world wars, and so it would be irrelevant to compare the
growth levels of today to those of that time. So perhaps measuring economic stagnation by looking at GDP
growth alone doesnt make much sense.
To measure economic stagnation we must consider what we value as important for an economy: growth levels
in themselves, or standards of living, equality and sustainability of growth? A better measure of economic
stagnation than GDP growth may be real median income levels. With 95% of the increase in American income
since 2009 having gone to the top 1% (Saez and Piketty, 2012), it is clear that just looking at GDP growth can
cause issues, since the sort of growth occurring does not benefit the economy as a whole. More suitable
measures, perhaps, are unemployment levels (accounting for those who have given up actively seeking work),
investment levels and productivity levels.
The secular stagnation argument
As economists we might try to look back at history to provide us with some idea of what to expect for the
future. Lawrence Summers (2013) recently looked back to the ideas of Alvin Hansen (1939) who argued that
the end of the Great Depression would mark the start of a future of secular stagnation. Hansen wrote: This is
the essence of secular stagnation sick recoveries which die in their infancy and depressions which feed on
themselves and leave a hard and seemingly immovable core of unemployment. He feared that future
investment levels would be poor because he thought that: the USs invention engine had run out of steam; the
population would decrease as fertility reduced; and the US was highly unlikely to discover new territories or
new resources. Hansen turned out to be spectacularly wrong. The baby-boom years followed the War,
technological development was phenomenal during the 30s, and in 1941 the US economy produced almost
40% more output than it had in 1929.

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Are the advanced economies in for a long period of


economic stagnation?
Figure 1: Natural Rate of Interest

Source: Summers (2014)

Viva Avasthi

Summers looks at things slightly differently.


According to him the advanced economies are in a
secular stagnation situation where the natural real
rate of interest (i.e. the rate at which desired
savings and desired investment would be equal at
full employment) is pretty much permanently
negative, and has declined over time (see Fig. 1),
but central banks have been and still are
constrained by the zero lower bound. He argues
that its only through the creation of bubbles that
the natural real rate of interest is raised from
negative levels. This explains why the advanced
economies have had trouble in maintaining full
employment, strong growth and financial stability

simultaneously since the 1980s.


But whats the link between Hansen and Summers ideas? The ageing population argument. When the US
economy was last able to sustain full employment without bubbles, during the period from 1960-85, the US
labour force grew 2.1% annually, on average. Looking forward, the working population is expected to grow at
an annual rate of just 0.2% between 2015 and 2025. Thus, linking to Hansens point, sustaining investment will
be difficult in the future, considering the accelerator effect. In support of Summers natural real rate of interest
theory is the Samuelson consumption-loan model (1958) which suggests that the natural rate of interest
equals the rate of population growth. Although the model seems a tad over-simplified, the general connection
seems to make sense, in which case Hansens factor of decline in population growth will affect the natural rate
of interest in the way Summers expects.
This idea of a declining natural rate of interest is a fascinating one, but one which others seem to have
accepted far too readily. One wonders whether the actions of central banks could have led to this trend
emerging artificially. Digging into research reveals that low
Figure 2: Low interest rates in a time of debt
interest rates may be self-reinforcing and therefore not
natural (Borio and Disyatat, 2014). Figure 2 indicates how
policies which do not tighten against booms, but ease
aggressively during busts force a downwards bias in interest
rates over time and an upwards bias in debt. This might be
considered a sort of debt trap which could have serious
implications for financial stability in the long term.
Taking this alternative approach into consideration, Summers
ideas of how secular stagnation may have arisen might be
flawed. Regardless, the underlying solution to the issues raised
is the same: monetary policy should be used very little and the
focus needs to be on fiscal and structural policies to improve
growth potential in the long term and strengthen demand in
the short term. While politicians remain hostile to increasing
budget deficits in the short term, however, the risks for the
long term seem very real indeed.
Source: Borio and
Disyatat (2014)

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Are the advanced economies in for a long period of


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Risks from unwinding QE


What Andrew Haldane of the Bank of England calls the single biggest risk to global financial stability is
something too many people ignore when considering the future of the advanced economies. Quantitative
easing, that is. Whatever the BofE and Fed might say, QE has no real precedent at all. But Japan, people
often cry, used QE measures in the 2000s! The difference, though, is that whereas the US and UK engaged in
QE using long-term bonds, Japan largely used short-term ones, so the complications which may arise for
Britain and America when they begin to unwind QE are some which never existed for Japan.
The trouble is that the UK and US central banks are now the largest buyers of their own government bonds.
This means that it is impossible for them to sell back into the market since, their being the biggest players in
the market, if they sold, everybody else would start selling and interest rates would surge. This potentially
massive rise in interest rates could make government borrowing more expensive for years to come, impacting
long term growth. The alternative, writing these debts off, doesnt seem feasible either, since that might
damage the UK and US credibility with international debt markets and so potentially raise borrowing costs for
a long time.
Figure 3: US and UK economies may fall into QE 'trap'

Figure 3 indicates how Koo (2013) thinks the


tapering of QE will lead to instability in the
long term. Initially, long term interest rates
fall much further than they would in a
country without a QE policy, leading to a
faster economic recovery. However, as the
economy picks up, local bond markets
anticipate the central bank will unload its
holdings of long-term bonds, so long-term
rates rise sharply. Demand then falls in
sectors sensitive to interest rates, such as
housing, leading to an economic slowdown
and forcing the central bank to relax its policy
stance. Again, the market heads towards
Source: Richard Koo, Nomura (2013)
recovery but again, the market fears that the
central bank will absorb excess reserves, and so the long-term rates surge in
a cycle Koo calls the QE trap. Unfortunately, Koos analysis seems to make an awful lot of sense, and, despite
much pondering, not a single solution springs to mind, at least, not at the moment
Therefore, QE (which will have to be wound down at some point to prevent the risk of massive inflation once
liquidity eventually enters the economy) clearly provides a significant threat to the long-term recovery of the
advanced economies. But by exacerbating the already existing issues of inequality, it provides further risks
Inequality bites economies where it hurts
Stan Druckenmiller (2013) called QE the biggest redistribution of wealth from the middle class and poor to
the rich ever. But how much of a problem is inequality for an economy in the long-term? A recent (2014)
paper by some IMF economists draws some fascinating conclusions. It appears that inequality functions as a
significant determinant not only of the pace of medium-term growth, but also of its duration. More
surprisingly (or not, depending on your previous knowledge!), redistribution measures, which many on the
right of the political spectrum argue are harmful to growth, apparently only have direct negative impacts on
growth in extreme cases.

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Are the advanced economies in for a long period of


economic stagnation?
Figure 4: The evolution of the shares of the top 1% in different
countries

Viva Avasthi

What should we take from this? Consider


Figure 4. It shows that inequality has been
on the rise for some of the key advanced
economies and that even after the
financial crisis, it looks set to grow.
Tying this in with the conclusions drawn
by the IMF report, inequality seems to
be a considerable threat to long-term
economic prospects. It is one which
governments should seriously aim to
tackle to ensure the welfare of their
people and economies. One slightly
radical long-term approach might be for
governments to equip badly performing

schools with the tools to incentivise students to pay better attention during
lessons. This might be through liasing with theme parks and offering well-behaving
or high-achieving students free tickets to such places. The idea behind this would
be that by paying closer attention in lessons, students might come to realise how fascinating the topics taught
at school actually are, and educational attainment levels might increase. Perhaps using ideas from behavioural
economics more commonly could allow governmnets to find better, smarter solutions to the issues they face.
Source: Alvaredo, Atkinson,
Piketty and Saez (2013)

The spectre of hysteresis


Figure 5: Counting the costs of the financial crisis

What about the long-term

effects of the financial crisis?


As Figure 5.1 indicates,
potential output for most
countries is far below precrisis trends: 11% below for
Britain and 4.7% below in
America. The chart seems to
suggest serious structural
Source: The
issues at play, particularly in
Economist
(2014)
the Eurozone, which might
be fixed through massive
increases in investment and immense structural reform. One reform of the Maastricht Treaty which ought to
be pushed is allowing European countries deficit to GDP ratio to be increased from the current 3% limit when
they are in serious recessions. This would potentially allow individual countries to stabilise their economies
without having to turn to the ECB for help.
Looking at Figure 5B, the biggest problem going forward for the US seems to be labour-force participation, and
a third of this drag is due to ageing (Hall, 2014). In addition, the US and the other advanced economies face the
issue of providing the long term unemployed (who have now given up searching for jobs, thereby lowering the
unemployment figures) with the incentives and skills to try to get back into the labour-force. The severity of
the situation is illustrated by the following: if the US unemployment rate were adjusted to include people no
longer actively seeking work, it would be over 9%. If it were adjusted to include those working part time
involuntarily, it would be over 12% (Stiglitz 2014).

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Are the advanced economies in for a long period of


economic stagnation?

Viva Avasthi

Worse, senior Fed economists argue in a working paper (2013) that fewer businesses are being created and
existing ones are spending less on R&D, so productivity could suffer in the long term. Real R&D has grown only
1.6% per year since 2007, compared to 3.6% on average from 1990 to 2007. The fact that R&D investment has
reduced at a time when many argue that we arent advancing technologically at the pace that we should
anyway does not bode well for the future. But to what extent can it really be argued that the advanced
economies arent doing well in terms of technological developments?
Technology engine running out of steam?
Some economists (Gordon 2012) and others (Kasparov, Thiel 2012) have argued that technological progress is
far more limited today than it was during the industrial period until 1970. While our inventions today might be
cool, they are incomparable in their usefulness and potential to generate employment to the ones of the
past. Gordon wrote: The rapid progress made over the past 250 years could well turn out to be a unique
episode in human history. This approach seems to be too pessimistic. It takes time before a new discovery is
found which revolutionises technological development, but when that happens, development is very rapid
indeed. It could be that robotics, which has really lifted off as an industry recently, with the number of
industrial robots sold globally hitting a record high of 179,000 in 2013, will lead the next tech revolution. Frey
(2013) predicts that 47% of existing US jobs are at high risk from work automation over the next two
decades, but agrees that automation will improve peoples livelihoods as companies extra revenues will feed
back to shareholders and employees, increasing consumer spending and creating more jobs. Rather than
worrying about the perceived lack of technological progress, governments might do better to invest in R&D
and STEM education to prepare the labour-force for the future.
Heading into the mire of stagnation
Where does our analysis bring us? Almost all the factors weve considered seem to suggest a bleak outlook for
the advanced economies. Yet sound policy-making has the potential to move us in the right direction. That
governments need to step in and stimulate demand in the short-term and make structural improvements for
the long term is a given. They also need to consider the importance of microeconomic-level policies in ensuring
stable economic environments in which businesses and consumers feel safe to spend. Could the British
government, for example, consider imposing a larger tax (maybe of 90-100%) on second homes which arent
being rented out, but have only been bought to accumulate wealth because people are speculating that
property prices will rise? Though it is probably politically unfeasible, it could do a great deal to stabilise the
housing market and the economy as a whole. With serious economic reform not on the horizon, though, the
advanced economies seem to be headed towards a not-too-bright future.

Word count: 2,496

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Viva Avasthi

Bibliography and references:


Alvaredo, Atkinson, Piketty, and Saez. Summer, 2013. The Top 1% in International and Historical
Perspective, Journal of Economic Perspectives, 27(3): 3-20 http://pubs.aeaweb.org/doi/pdfplus/10.1257/jep.27.3.3
Appelbaum, Binyamin. June 11, 2014. U.S. Economic Recovery Looks Distant as Growth Stalls, The New York
Times http://www.nytimes.com/2014/06/12/business/economy/us-economic-recovery-looks-distant-as-growth-lingers.html?hp&_r=1
Boesler, Matthew. October 23, 2013. RICHARD KOO: I Can't Find Anyone To Refute My Argument That
America Is In A 'QE Trap', Business Insider http://www.businessinsider.com/koo-says-no-one-can-refute-the-qe-trap-2013-10
Borio, Claudio and Disyatat, Piti. June 25, 2014. Low interest rates and secular stagnation: Is debt a missing
link? Vox http://www.voxeu.org/article/low-interest-rates-secular-stagnation-and-debt
Crossley, Rob. June 30, 2014. Will workplace robots cost more jobs than they create? BBC News
http://www.bbc.co.uk/news/technology-27995372

Frey, Carl and Osborne, Michael. September 17, 2013. The Future of Employment: How Susceptible Are Jobs
To Computerisation? Oxford Martin School
http://www.oxfordmartin.ox.ac.uk/downloads/academic/The_Future_of_Employment.pdf

Gordon, Robert. August, 2012. Is U.S. Economic Growth Over? Faltering Innovation Confronts the Six
Headwinds, NBER Working Paper No. 18315 http://facultyweb.at.northwestern.edu/economics/gordon/Is%20US%20Economic%20Growth%20Over.pdf

Halligan, Liam. October 21, 2013. Quantitative Easing: Miracle Cure or Dangerous Addiction? BBC Radio 4
Hansen, Alvin. March, 1939. Economic Progress and Declining Population Growth, The American Economic
Review, 29(1): 1-15
Kasparov, Garry and Thiel, Peter. November 8, 2012. Our dangerous illusion of tech progress, Financial
Times http://www.ft.com/cms/s/0/8adeca00-2996-11e2-a5ca-00144feabdc0.html#axzz2m8I4M2uL
Krugman, Paul. November 16, 2013. Secular Stagnation, Coalmines, Bubbles, and Larry Summers. The New
York Times http://krugman.blogs.nytimes.com/2013/11/16/secular-stagnation-coalmines-bubbles-and-larry-summers/
Leonhardt, David. April 12, 2011. When Hard Times Led to a Boom, The New York Times (interview of
Alexander Field) http://economix.blogs.nytimes.com/2011/04/12/when-hard-times-led-to-a-boom/?_php=true&_type=blogs&_r=1
Ostry, Berg, and Tsangarides. April 2014. Redistribution, Inequality and Growth, IMF
http://www.imf.org/external/pubs/ft/sdn/2014/sdn1402.pdf

R.A., J.S. and L.P. September 12, 2013. The rich get richer, The Economist
http://www.economist.com/blogs/graphicdetail/2013/09/daily-chart-8?fsrc=scn%2Ftw%2Fte%2Fdc%2Frichgetricher

Reifschneider, Wascher, and Wilcox. 2013. Aggregate Supply in the United States: Recent Developments and
Implications for the Conduct of Monetary Policy, Working paper, Finance and Economics Discussion Series,
Federal Reserve Board. http://www.federalreserve.gov/pubs/feds/2013/201377/201377pap.pdf
Stiglitz, Joseph. May 22, 2014. The North Atlantic Malaise: Failures in Economic Policy, Oxford Martin School
talk http://www.oxfordmartin.ox.ac.uk/videos/view/388
Summers, Lawrence. 2014. U.S. Economic Prospects: Secular Stagnation, Hysteresis, and the

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Zero Lower Bound, Business Economics, 49(2): 65-73 http://larrysummers.com/wp-content/uploads/2014/06/NABEspeech-Lawrence-H.-Summers1.pdf

June 14, 2014. Wasted potential, The Economist, http://www.economist.com/news/finance-and-economics/21604188counting-long-term-costs-financial-crisis-wasted-potential

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HS2 will blight the countryside and just lead even more businesses to
locate in London. Discuss.
Hello, and welcome to BBC Radio 4. Tonights debate is on the controversial proposed high-speed
railway line between London, Leeds and Manchester, High-Speed 2. Construction of the line is due to
commence in 2017 and is expected to be finished by 2032. It will allow trains to travel at speeds up to
225mph which will significantly cut journey times. Joining us tonight is Sarah Kelly, a keen
environmentalist who lives in Stoneleigh, a village in Warwickshire which would be greatly affected
by HS2. We are also joined by Ashok Brahma, owner of Woking Ltd, which has branches in both
London and Birmingham. They are here to discuss whether HS2 will blight the countryside and just
lead more businesses to locate in London or whether it will have a more positive effect.
We will start with Sarah, who has serious concerns over the environmental impact of HS2.
Sarah: For me HS2 will undoubtedly blight the countryside and there is a great deal of evidence
supporting this. Personally, my biggest concern is the massive amount of precious habitats that the
new train line will destroy. This is called Habitat Fragmentation which endangers specific animals
such as Turtle Doves. To some people this may not seem important but that is an ignorant view to
have. According to the website StopHS2, the building of the train line will threaten 350 unique
habitats, 67 irreplaceable ancient woods, 30 river corridors, 24 Sites of Special Scientific Interest plus
hundreds of other sensitive areas. These are enormous numbers which show that HS2 would have a
catastrophic effect on certain important parts of the environment in England.
Ashok: Surely that would be the case for any new train line? Are you suggesting that, because of
the environment, we cant build any new train lines?
Sarah: Not at all. The problem is HS2 plans to be ultra high-speed, meaning that the design is
affected. The tracks need to be straight meaning that they cannot curve around certain crucial areas
of land. This design issue has meant that the Kent Principles have been ignored for the planning of
HS2. Planning HS1 used the Kent Principles and this promoted environmental concerns. HS2 in
contrast does not care at all about the disastrous environmental effect it is having.
Ashok: Now I dont think thats completely true is it? Firstly HS2 Ltd says it has already altered
plans for the line in order to reduce the amount of people affected. The main alteration has been
to add more tunnels to the plan so that around 22 miles of the phase 1 route will now be
completely enclosed in tunnels. That is 18% of the 140 miles of rail from London to
Birmingham. Also, Peter Miller, Head of Environment and Planning for HS2, said that he plans to
recreate habitats that the building of the train line will destroy in other places so that there is
no net loss of bio diversity. So here, in fact, is concrete evidence that HS2 does care.
Sarah: There are however several issues with Habitat Recreation. First of all, is that it will be
expensive. And this cost will be added on to the supposed cost of 43 billion. Although we all know
that, in reality, this will end being much greater. Secondly Im unsure as to how successful it will be.
It is impossible to completely replicate a habitat, so the question for me is how accurate and
effective the recreations will be. After all, saying that youre going to do it is one thing. Doing it
David Bullen
Manchester Grammar School

RES competition 2014

successfully is another. My final issue is loss of farmland. Not only will the train line destroy 6,916
acres of farmland between London and Birmingham according to the Community Transport
Association, but the habitat recreation plans mean that even more farmland (4,940 acres) will be
lost and this will inevitably affect certain farming businesses monumentally. This has encouraged
numerous complaints from the National Farmers Union. Overall the environmental impact of HS2 is
hugely negative and will ruin the lives of countless people.
Ashok: Ruin is quite an extreme word. Every single person directly affected will be
compensated by the government including house owners near the line. The official HS2 website
says that they will get the unblighted market value of their property, plus 10% (up to 47,000)
and if necessary moving costs will also be paid.
Sarah: Do you think that money is just everything? Peoples lives will be affected in a way that
money will not be able to repair. Obviously it is good that people are being compensated, myself
included. But I can tell you personally that money will not solve everything. There will be visual and
noise pollution; negative externalities that will affect the lives of many. This will undoubtedly blight
the countryside.
Ashok: What about the fact that HS2 will reduce car use and hence will reduce CO2 emissions
from cars. Overall HS2 is quite green in that sense.
Sarah: Im not so sure about it being green. The Environmental Audit Committee has said that it is
concerned that green benefits would be limited until the electricity that HS2 uses becomes Carbon
neutral. To further this, StopHS2 says that in order to achieve the speeds proposed for HS2, at least
three times as much energy will be needed as on conventional inter-city trains. This means that
Phase 1 will require 350 Mega Watts of power.
Ashok: Surely you must agree though, that the economic benefits of HS2 outweigh some of those
environmental problems. It will boost the U.K economy. As Transport Minister, Baroness
Kramer says HS2 will generate thousands of jobs across the UK and provide opportunities to
boost skills. To be specific, according to the BBC, it will generate 22,000 construction jobs in the
next five years and once the entire line is running 100,000 jobs will have been created with the
government estimating that 70% of them will be outside of London. In terms of the economy,
KPMG have estimated that within five years of the line opening, UK productivity will rise by
15bn a year which is an increase of 0.8% in GDP.
Sarah: That may appear positive but there has been much controversy over those KPMG figures. The
HS2 Action Alliance, which campaigns against the project, says that there is no independent, peerreviewed research backing up KPMG's 15bn figure. In fact, BBC business editor Robert Peston has
called them spuriously precise. The problem, according to Peston, is that KPMG's forecasts assume
that the biggest impediment to narrowing the economic divide between north and south is poor
transport. It ignores the impact of other hard-to-calculate factors such as skill shortages and lack of
developable land. Therefore Im not convinced.
Ashok: Im not sure about that, KPMG seem very reliable and respectable to me. Either way, I
have more statistics to support my argument. On the official HS2 website, it states that HS2 will
generate 59.8 billion in user benefits when the entire network is completed, as well as 13.3
billion in wider economic benefits. The Department for Transport estimates a benefit-cost ratio
David Bullen
Manchester Grammar School

RES competition 2014

for the new railway at 2.3 to 1, showing that it is definitely beneficial. And this estimate could be
even higher if the benefits and costs werent capped over a 60-year period because Im sure that
it will be in use for longer than that.
Sarah: Again Im not convinced. Larry Elliot, the Economics editor of the Guardian says that the
economics of HS2 suck. Elliot also states that the cost is high and the benefits, in many cases, are
spurious. We all know that the UK economy is dominated by London and this needs to be dealt
with. However HS2 wont do this. The way its looking at the moment, it just appears to be an
expensive way of making regional imbalances worse not better.
Ashok: It will make regional imbalances worse? Are you joking? Nick Clegg says that the
government is healing the north-south divide by investing in the Y-shaped train line. While
Chancellor George Osborne predicts High-speed 2 will be the engine for growth in the north
and the Midlands. How can you say that HS2 is worsening regional imbalances?
Sarah: It still seems to be too London dominated for me. HS2s own forecasts state 80% of journeys
on the new line will begin or end in London. Given that most of the trips on HS2 are forecast to be
for leisure purposes (70%), more people and more money will go to London and so will the jobs to
support this. Tim Harford, author of The Undercover Economist Strikes Back, says history does not
support HS2's regeneration claims. He believes that a better idea would be to improve transport
between just the northern cities instead of including London. He would begin with the V-shaped line
linking Manchester and Leeds with Birmingham. Then there would always be the possibility of
adding London later. This would give the north an advantage and counter claims that the line would
suck investment to London. Temporary upgrades on London commuter lines would then be a shortterm solution to overcrowding. This would stop HS2 being too London orientated.
Ashok: Surely involving London is the whole point of HS2. London being involved would bring
about positives for the North. An article that I read recently in the Telegraph states, if cities up
north become more accessible to London, then more companies will decide to locate there,
making use of cheaper office space and property, safe in the knowledge that the capital remains
in easy reach. My own company Woking Ltd plan to expand our Birmingham offices as well as
potentially investing in offices in Manchester in the future because of HS2 increasing the
mobility of labour and products. I believe this will become a trend as many companies are
looking at the possibility of expanding and moving. This will help these other cities such as
Manchester to grow. Alison Munro, Chief Executive of HS2 Ltd backs this up by saying that HS2
will be truly beneficial to Manchester and the wider region because of the greater connectivity
that HS2 will deliver to Greater Manchester, not only to London, but to other places in the
north.
Munro also says that HS2 will cause cities such as Leeds, Manchester and Birmingham to be
more connected to suppliers, to bigger markets, which they can serve, and to have access to
bigger labour markets.Overall I am certain that the substantial price of HS2 is worth paying for
revitalizing Britains great northern cities.
Sarah: The real question is will these economic benefits actually occur? Will these cities be
revitalized? The perfect comparison can be made by looking at the TGV in France, because of its
similarities to HS2. The TGV became operational in 1980 and had the aim of reducing Paris
dominance. According to Allister Heath in the Telegraph, France with the TGV ought to have been
David Bullen
Manchester Grammar School

RES competition 2014

the perfect example of rail infrastructure leading to job creation in recent decades. Conversely
France is quite the opposite with its youth demoralised by immorally high unemployment, its best
and brightest leaving at a rate not seen since the Huguenot exodus, while its economy is barely
growing with Goldman Sachs predicting growth of a mere 0.7% this year. The evidence shows that
the TGV has done very little for the development of the cities it has connected or to reduce
unemployment.
The TGV also had a very limited effect on Paris dominance in France. The perfect example to
demonstrate this is the CAC 40 in France, where 33 of the 40 firms are still based in Paris. While 4 of
the remaining 7 firms are located abroad. So if you expect HS2 to create a movement of FTSE 100
Headquarters away from London to the north then you will be bitterly disappointed because there is
no evidence to believe that HS2 will be any different.
Ashok: UCL professors Peter Hall and Chia-Lin Chen say that when the TGV brought Lille within
one hour of Paris, it morphed into a knowledge-economy city. The example of Lille in Northern
France is extremely positive. According to the Centre for Cities report, the arrival of high-speed
rail played a significant role in facilitating a structural transformation in a declining industrial
city and its hinterland. This is what I believe will happen to Leeds, Birmingham and
Manchester.
Sarah: Lille's revival was not purely caused by high-speed rail though. As Larry Elliot said, it was
combined with "extensive regeneration investment and improvements to local networks, which
were supposed to spread the benefits of high-speed rail across the region." Overall, Elliots view is
that the likely upshot of HS2 is that London will benefit most, the big regional hubs such as
Birmingham and Leeds will get some benefit, but cities bypassed by the line will lose out. The
Economist magazine also agrees with this view when it talks about existing long-distance routes
seeing fewer trains as a result of HS2, which would affect the cities not on HS2s route. So
Birminghams gain could be Coventrys loss . And the north is much larger than London-based
ministers seem to think. Although Leeds and Manchester may benefit, the north of England
stretches well beyond them to cities such as Newcastle which HS2 does not benefit at all.
Furthermore, Professor John Tomaney at UCLs Bartlett School of Planning has suggested, using
evidence from Spain, France and South Korea that capital cities benefit as more wealth is sucked to
the centre. He believes that the main effect of HS2 is that Birmingham will become part of the South
East labour market.
Were running out of time. Please could both of you briefly conclude?
Ashok: HS2 will inevitably cause some environmental problems for the countryside but
programmes are being introduced to reduce this. Overall I believe that economically and
socially, HS2 will benefit other hubs in England and will certainly reduce Londons dominance
with many businesses such as my own, now looking at new offices away from London.
Sarah: For me HS2 is quite simply disastrous. It will completely blight certain areas of the
countryside, majorly affecting people who live there such as myself. There is no evidence from
overseas that HS2 will reduce Londons major influence because for me HS2 is too London
orientated. I completely agree with Tim Harfords idea of cutting out London and turning the Yshaped train line into a V-shaped line.
David Bullen
Manchester Grammar School

RES competition 2014

I would like to thank both of you for giving such strong arguments on what is a highly controversial
and complex topic. Today we have gone into depth on the effects of HS2 on the countryside and on
businesses as well as scratching the surface on the costs involved and the full economic effects. The
bill for Phase 1 of HS2 will not pass through parliament before the 2015 general election. Until then,
this incredibly divisive debate on HS2 will not cease. Thank you for listening.

Word Count: 2,487

David Bullen
Manchester Grammar School

RES competition 2014

References and Bibliography

The Economist. (2013). High Speed Rail: Accounting Trips. November 2013.
BBC1 Countryfile: HS2 and the Environment. June 2014.
BBC News. 22 January 2014. HS2 legal bid rejected by Supreme Court.
Stop HS2. (2014). Stop HS2 facts and problems. Available: http://stophs2.org/news/10028-hs2facts-and-problems. Last accessed 12th June 2014.
Tom de Castella. 24 September 2013. BBC News. HS2: 12 arguments for and against.
The Economist. 2 November 2013. High-Speed Railways: Still off-track
Larry Elliot. Nov 2013. HS2 will be more London gravy train than locomotive of regional
growth. Available: http://www.theguardian.com/business/economics-blog/2013/nov/24/hs2locomotive-growth-london-gravy-train
Allister Heath. 3 June 2014. Telegraph. HS2 is not the answer to Londons economic domination.
Available: http://www.telegraph.co.uk/finance/economics/10872729/HS2-is-not-the-answer-toLondons-economic-domination.html
hs2.org.uk. Official website of HS2
http://www.hs2actionalliance.org/
Shelina Begum. 17 March 2014. HS2 will benefit North-West Firms. Manchester Evening News.
http://www.manchestereveningnews.co.uk/business/business-news/hs2-benefit-north-west-firms6838697
The Undercover Economist Strikes Back. Tim Harford.
Jonathan Riley. 28 April 2014. Hs2 land grab excessive, say Landowners. Farmers Weekly.
http://www.fwi.co.uk/articles/28/04/2014/144318/hs2-land-grab-excessive-say-landowners.htm

David Bullen
Manchester Grammar School

RES competition 2014

Hannah Dudley Toot Hill College

[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

Is Independence Consistent
With Scotland Keeping The
Pound?

Hannah Dudley
Toot Hill College
2014

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Hannah Dudley Toot Hill College

[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

Soon, there could be a divorce bigger than the Chris Martin and Gwyneth Paltrow
self-titled conscious uncoupling (Perkins, Guardian, 24th March 2014) which graced
the pages of UK gossip magazines. However this break up is unlikely to reach the
front pages of Hello! and may be far less amicable. Scotland may leave the UK and
file to take joint custody of the pound. The question is, can Scotland broker monetary
union after fiscal divorce whilst retaining independence?
First reactions to this question would undoubtedly be no. Surely retention of the
pound would mean the creation of a formal currency union, resulting in delegation of
power to the UK government, in terms of monetary policy? If Scotland were to retain
the pound a formal currency union is likely on the basis that the rest of the UK would
bail out Scotland if economic crisis arose, effectively becoming the Lender of Last
Resort (Spence, CityA.M 13th February 2014)
An optimum currency area could be created as part of a formal union given the level
of integration between Scotland and the UK. In 2011 Scotland exported 36 Billion to
the rest of the UK and imported 49 Billion (HM Government, Scotland Analysis,
September 2013). The provision of this optimum currency area, outlined by Mundell
(1961), results in loss of independent monetary policy, to influence inflation rates to
control demand and mitigate asymmetric shocks.
This theory applies to the Eurozone where interest rates are set by the European
Central Bank (ECB) to maintain the euro's purchasing power and thus price stability
in the euro area ( European Central Bank online 6th June 2014). The loss of
economic sovereignty has gone further in recent times as member states have
ceded fiscal control through the Fiscal Compact 2012 , which requires that all
signatories adhere to a balance budget rule(European Council Europa Treaty on
Stability, Coordination And Governance 2012) . Monitoring of member states fiscal
policy has now become part of the ECBS remit in management of the optimal
currency area. Applying this to Scotland, control of monetary policy will be ceded
and interest rates most likely set by the Bank of England which may go even further,
introducing fiscal coordination to maintain the stability of Sterling. Furthermore if the
Scottish economy were to experience sluggish demand and needed to lower interest
rates to incentivise consumption, the Scots would be unable to exercise loose
monetary policy, due to the binding nature of the currency union enforcing a blanket

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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

monetary programme. The blanket approach to monetary policy does not take into
account asymmetry in members economic cycles. Therefore Scotlands long term
economic prosperity may be jeopardised if a formal currency union and subsequent
optimum currency area was formed.
The maintenance of this optimal currency area may require Scotland to surrender
monetary control conflicting with the ideals of independence, essentially selfdetermination. Furthermore Alistair Darling architect of the Better Together
opposition movement described the effects of such a relationship on Scotland as a
legal straightjacket (Shedden, The Wee G March 2014) suggesting Scotland will
not be securing independence through monetary union. The formation of a formal
currency union and potential optimum currency area may further undermine
independence as Scotland may be forced to sacrifice fiscal autonomy for ideological
independence. Perhaps the most significant comment made on the retention of the
pound leading to loss of monetary sovereignty is the assertion from Danny
Alexander Scotland would have no control over mortgage rates and would be
binding its hands on tax and funding for vital public services ( Taylor BBC News
online 29th March 2014).
However, if Scotland retains the pound, the loss of independence may not be as
severe as first assumed. The Scottish National Party (SNP) may be able to negotiate
and gain official representation on the Monetary Policy Committee (MPC). The SNP
stated that they would regard themselves as a shareholder in the Bank of England
once independence had been attained and would expect consideration accordingly
(Stewart, Guardian 26th November 2013). Laurence H White writing for the Institute
of Economic Affairs suggests this may be achieved through a change in the Bank of
Englands governing statutes allowing for official representation on the MPC. He
likened this to the US Federal Reserve System on which the Federal Reserve Bank
of New York sits. This suggests complete sovereignty in monetary policy does not
have to be ceded, instead collaboration can be sought. Although it is worth noting,
Parliament may be unlikely to make major constitutional change accommodating the
economic wants of a newly divorced party. White continues to put forward a
convincing argument in terms of the issuing of banknotes ensuring independence as
he asserts the Bank of England dos not need to have any other form of relationship
with the Scottish banking system private Scottish banks can continue to issue
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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

banknotes. The Lender of Last Resort principle will not apply, in which case the loss
of monetary policy may be less extensive. However this is subject to the cooperation
of the rest of the UK in allowing an informal currency union to operate. The SNPs
Fiscal Working Group have outlined proposals for monetary policy including the
retention of Sterling with the day to day monetary policy discharged independently
by the Bank of England suggesting an informal currency union may be sought
(Fiscal Commission Working Group Macroeconomic Framework 2013).
The feasibility of an informal currency union is indicated by Joan McAlpine who
backs the Panama option referring to the informal currency union existing between
Panama and the US (Torrance, Herald Scotland, and 31st March 2014). The
International Monetary fund commented the union has effectively engineered a
system which lacks a traditional Lender of Last resort, monetary control has not
been delegated to the US and thus remains sovereign. The existence of an informal
currency union between Scotland and the rest of the UK may yield similar results.
Fiscal divorce may not entail monetary union entirely stripping Scotland of monetary
independence.
George Osborne commented on Scotland potentially adopting the pound with a
similar arrangement declaring the pound is not an asset to be divided up between
two countries after a breakup like a CD collection (BBC News online 13th February
2014) implying the formation of an informal currency union may be unlikely. The
retention of monetary policy and therefore independence is subject to the
cooperation of the rest of the UK in terms of agreeing to an informal currency union.
Perhaps the most poignant comment made by the Fiscal Commission Working
Group is the absolute support they extend to the retention of the pound we believe
that retention of the sterling is the best option suggesting that the advocates for
independence believe that independence is consistent with keeping the pound.
A major alternative to retaining the pound may be the adoption of an independent
Scottish currency fulfilling, the ideological ambition of Alex Salmond, creating
complete fiscal and monetary autonomy. The success of a Scottish fledgling
currency depends on the transition/transaction costs associated with its
implementation and the credibility of the currency in the long term.

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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

The dawn of independent Scottish currency would in theory see a new Scottish
central bank created to issue the fiat currency. In order to ensure stability and
confidence the new central bank would need to garner credibility. This may be
achieved through a constitutional commitment to keep to inflation targets, to
convince international markets the currency and central bank are plausible.
The ability of the central bank to do this may be hampered by the effects of Dutch
Disease outlined by W. Max Cordon (1982). Scotland relies on North seas oil for
12% of its fiscal revenue ( Ashcroft Scottish Economy Watch, 20th January, 2012) ,
suggesting a newly independent Scottish state may be susceptible to an overly
strong exchange rate, backed by finite resources ,in the long term prompting a
decline in the manufacturing sector. This would be disastrous for the fledgling state
whose long term economic plans focus on broadening the base of the economy and
reindustrialising (John Swinney, SNP.ORG). Long term decline in manufacturing
may cause the prices of domestic goods to rise, creating inflationary pressure
thwarting the central banks attempt to gain credibility through controlling inflation.
The threat of Dutch Disease may also hinder the new sovereign state by creating
unnecessary trade barriers. The appreciation of the exchange rate may make
Scottish currency relatively more expensive in international markets, resulting in
domestic goods being less attractive to perspective overseas consumers. In effect
the disease artificially raises the value of the currency, hindering trade. Consequently
in the long term, the creation of an independent currency may adversely affect
economic prosperity. The economic viability and credibility of an independent
Scottish currency may be questionable if the effects of Dutch Disease are felt.
The transition costs associated with the introduction of a fledgling currency are also
a cause for concern. Costs would be incurred by business and households during
the transition. The estimated costs to the rest of the UK alone is reported to be
approximately 500m per year (Scotland.gov.uk). Even more significant are the
capital controls necessary during transition, to stop investment volatility in response
to the potential appreciation/ depreciation of the currency against sterling. This
control may be actualized in a Tobin tax (Tobin 1974); a charge on financial
transactions between one currency and another. This may deter extreme changes in
capital outflows/inflows, remedying uncertainty and potential domestic market

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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

distortions. The case for capital controls during transition has been raised by
Government, referring to the analysis of Scottish currency and monetary policy (HM
Government Scotland Analysis, April 2013). Although issues with transition could be
mitigated by utilising capital controls, is it worth it? A currency union using a stable
and credible currency (e.g. Sterling) could be pursued. The implementation of
capital controls and transition costs incurred during transition to an independent
currency may not be necessary. Furthermore the implementation of capital controls
is not guaranteed to remedy investment volatility. The Walls and Gates theory
outlined by M.W.Klien details that episodic capital controls (gates) are unlikely to be
as effective as long-term controls (walls). The success of an independent Scottish
currency, ensuring long-term independence, depends on the willingness of the
Scottish Government to commit to long term capital controls to ensure a successful
transition. The introduction of an independent Scottish currency may create
ideological independence but long term, Scotland may be bound by the interaction of
international markets through the necessity of maintaining capital controls instead of
catering to domestic needs.
In terms of transaction costs, the launching of an independent currency may fail to
ensure independence. The HM Government report on Scotlands currency and
monetary policy asserts the introduction of an independent Scottish currency would
increase transaction costs for all Scottish business that operate outside Scotland and
for all businesses located in the rest of the UK that currently trade with
Scotland(Scotland Analysis: Currency and Monetary Policy April 2013). Monetary
independence may be achieved at the expense of economic viability.
Furthermore, a commitment is necessary to an exchange rate regime. Scotland may
choose to implement a floating exchange rate or opt to fix the currency. The
question is, will floating or fixing better serve the ideals of independence? The
contention between these two regimes is perhaps best described in the Theory of
the Impossible Trinity developed by Mundell and Fleming (1960). The theory states
that market forces restrict the ability of a country to achieve three policy objectives
simultaneously (Aizenman the Impossible Trinity, May 2010) namely, free capital
flow, independent monetary policy and stable exchange rate. In Scotlands case the
main goal of launching an independent currency is to retain control of monetary
policy. This objective may be compromised if Scotland subscribes to a fixed
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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

exchange rate regime as only free capital flow and a stable exchange rate can be
achieved .Monetary policy will be committed to maintaining parity of the pegged
currency. This may mitigate volatile capital flows in which case free capital flow
exists. However the use of monetary policy as a domestic tool has been lost. The
independence of monetary policy has been compromised.
Therefore, the only way in which Scotland could retain monetary policy for domestic
purposes, is to subscribe to a floating exchange rate regime. However the retention
of flexible monetary policy may be at the expense of increased transaction costs.
Government analysis on Scotlands currency and monetary policy supports this view,
asserting an independent currency subscribing to a floating exchange rate regime
would come at the microeconomic cost of increasing transaction costs with the UK
(HM Government Scotland Analysis April 2013). It has already been established the
rest of the UK and Scotland could constitute an optimal currency area; the perceived
advantages of flexible monetary policy may not offset the increased transaction costs
associated with a floating exchange rate regime when an optimal currency area
could be achieved. The World Bank reports smaller countries are better off pegging
their currency to a larger neighbour or adopt a neighbours currency as their own
(World Bank, April, 2001) suggesting that in terms of economic viability, an
independent Scottish currency may not be worth the sacrifice.
The creating of an independent currency may at first, seem to fulfil the ideals of
independence ensuring self-determined monetary policy; however the case becomes
muddied when applied to the practicalities of launching and sustaining an
independent currency. What use is independence in monetary policy if it is not
economically viable or sustainable in the long term?
In conclusion an independent currency and monetary policy is often associated with
an autonomous state. This has been proven by sovereign countries created by the
dissolution of the old Soviet Bloc. Countries such as Latvia and Estonia founded
their own independent currency the Lats and the Kroon replacing the soviet Ruble
(Oanda Forex Trading) creating complete monetary control. In this sense Scottish
independence is not consistent with the retention of the pound. However, soon after
launch of their independent currencies, states began to experience unstable inflation
and fluctuating exchange rates (Fidler December 2010) eventually adopting the

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[IS INDEPENDENCE CONSISTENT WITH SCOTLAND KEEPING THE POUND?]

Euro. The new independent currency was not sustainable long-term. A new Scottish
currency would encounter credibility issues, transaction and transition costs proving
unviable. Scotland may have to sacrifice true independence for economic longevity
as an independent state. This sacrifice may see an informal currency union created
which allows for some retention of monetary policy and negotiations culminating in
Scottish input on the MPC. Independence is consistent with Scotland Keeping the
pound. The implementation of an informal currency union is the only feasible
alternative, in which Scotland can retain elements of monetary policy without
jeopardising economic prosperity. If Scotland decides to consciously uncouple from
the UK, hopefully a union will be brokered to co-parent the pound.
2469
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Taylor, Brian. Scottish independence: Chancellor George Osborne denies currency


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