The Wonderful World of Potternomics

'Welcome' said Hagrid, 'to Diagon Alley.'

Economic systems are fascinating. They come in all shapes and sizes, from classic liberal democracy to more notorious historical ne'er-do-wells such as communism, empire (mercantilism) and autarky. The world of fiction is also replete with them; think Star Wars, The Lord of the Rings, Prachett's Discworld or even simpler constructs such as The Borrowers. In numerous ways, depending on the preferences of the author, they can offer up a whole range of similarities or differences to our own economic experiences. In turn, these fictional 'case studies' offer a unique opportunity for us to explore the world of economics in new and interesting ways.

And what better place to compare and contrast fictional economic concepts than the wizarding world depicted in J.K Rowling’s Harry Potter series? Not only is it a modern childhood classic, but part of its charm as a story is that many aspects of both the protagonists’ personal lives and the realm they inhabit are directly comparable to our own, with enough unique differences to complete the fantasy effect in our imaginations.

Potternomics - The Basics 

I’m assuming anyone reading up to this point probably has a passing interest in the Harry Potter franchise, and a grasp of the at times convoluted but essentially simple plot. From this point on, then, we’ll start looking at the various different actors and institutions that populate the ‘Potterverse’ (a bit of fan-vocab, but useful), and hopefully uncover some interesting economics that we can compare to our own societies.

So what sort of things in the wizarding world could interest economists? Well, from pretty much the moment Harry walks through the wall (a magic wall, naturally) at the Leaky Cauldron, we are presented with a wonderful array of economic participants in Diagon Alley and beyond.

At the firm level, we have commercial enterprises (Ollivander’s wand shop, Flourish and Blotts’ bookshop), financial institutions (Gringotts), a central government (the Ministry of Magic) and an established education system (no need to reference here!). At the individual level, we have wizards, goblins and elves as the three main economic participants. The latter two are distinctly subordinate in status to wizards, with goblins fulfilling the ‘negative’ role of moneylenders at Gringotts, and elves as a type of servant underclass. Whilst it is clear that Rowling uses these social strata to discuss moral and ethical dimensions, and to encourage her readers to contemplate these subjects, the economic aspects of such stratification are also of interest. Why, for example, do the wizards feel the need to maintain such an economically discriminatory system?

In addition to economic participants and institutions, we also have a fascinating collection of economic items; commodity money in the form of gold Galleons (and their sub-units, the Sickle and Knut); magic itself as a productivity-enhancer akin to technology; a developed legal structure that has frightening inconsistencies, and much more. This is an intellectual dream for economists of all stripes, encompassing microeconomic theories of individual preferences to macro level institutional policies.

Diagon Alley and beyond...

Over the next four posts, I’ll be looking at a number of areas in the Potterverse that I think are of particular interest to economists in the real world today. We’ll assess the role of Gringotts as a financial institution, and the wizarding preference for commodity money over a paper equivalent. We’ll look at social stratification in the wizarding world, and assess why wealth differences still persist despite the universal provision of standardized education. Then we’ll turn to the role of institutions, and ponder their effectiveness in serving the wizarding population. Finally, we’ll conclude with a magical case study; ‘Voldemort – from orphanage to oligarch’. How did he make it, how did he gain support, how did he game the system and what lessons might there be in this tale for economic management in the real world today.

Who knows, if we learn a thing or two about our own societies in the process…well that may be what JK intended all along! So get your broomstick, and see you outside Gringotts!

The Reason Why Apple Can't Open A Store In India

It may be one of the world's largest and most iconic brands, but Apple has yet been unable to persuade the Indian government to allow the building of a single Apple Retail Store.

Photo: @tim_cook

Recently, Apple CEO Tim Cook made a much-publicised visit to India, mingling with Bollywood stars, visiting a Hindu temple and generally experiencing what the second most populated country in the world has to offer. But this wasn't a holiday- following Apple's success in China, Cook has turned his sights to India, a country whose economy has boomed in a similar fashion over recent decades. No doubt, business was firmly in the Apple CEO's mind throughout the trip, as he met with key players in India's technology market as well as the nation's Prime Minister.

One of the issues believed widely to be at the forefront of discussions is that of Apple Stores in India. Looking at the massive boom in consumerism in India over recent decades, it seems unbelievable, but there remains no official Apple Store built in the country. Yes, there are 'premium resellers' located across India, local franchise-style businesses authorised to sell Apple products, but these lack typical features of Apple Stores, such as a Genius bar for technical support. There is no official, Jony Ive-designed Apple Store anywhere in India.

The situation is all due to the interesting government policies regarding the activities of foreign businesses in India. The headline policy preventing Apple here is the one requiring at least 30% of all products sold in foreign retail stores in India to be sourced locally. This is part of the 'Make in India' initiative designed to encourage foreign investment in Indian manufacturing, on top of input in the local goods market.

Currently, the large majority of Apple's products are made in China, the USA and Brazil, and even if Apple* does begin to manufacture products in India as recent talks were also rumoured to be about, it is highly unlikely that it could produce 30% of the ware it sells in its stores locally by 2017 as it hopes.

So Apple must either play the long game and ramp up production in India over the next 5-10 years to conform to the rule, or it must seek an exception. This will prove an interesting test of Modi's government's commitment to his 'Make in India' policy. Apple being such a massively influencial global company, the country could see a substantial, immediate economic boost if it lets Apple bypass the policy.

However, of course this is a sign that there is room for compromise, and it may provoke other multinational corporations to seek exceptions too. Furthermore, the government could make use of Apple's desperation to open stores in India to its advantage, if they demand that jobs and other sustainable sources of growth (such as factories) can be contributed by Apple in return.

From Apple's perspective, it is time to grab the Lurpak and begin to butter up the Indian government. Modi is highly unlikely to allow stores to be opened without any contributions made elsewhere at all, but if any company is to receive a little leeway in this matter, Apple is highly likely to be it.

* Apple does not technically manufacture its products, this is outsourced to dedicated manufacturing firms such as Foxconn.

Want To Save Britain's Economy? Vote To Stay In Europe.

As each day passes the EU referendum draws ever closer, a referendum whose outcome will undoubtedly have huge impacts on both the economic and political landscape of the whole country for years to come. A huge part of the debate that’s raging is over the political repercussions of either outcome, much of which focusses on our political sovereignty and by extension the central issue of ‘regaining control’ of our borders. I’m not going to address the potential political outcomes (the endless rhetoric clouding politicians’ true intentions makes this nigh-on impossible anyway) but instead I will focus on the economic aspect of this debate. In doing this I will seek to answer one key question: which option should the people of the United Kingdom take to ensure economic prosperity going forward?

There is no precedent to the situation the UK finds itself in, therefore nobody can state empirically exactly what the outcomes of each choice are. The complexity of prediction is further hampered by the range of trade deals the UK has if it does choose to leave, but that’s not to say we can’t build models to predict at the very least the net effect of the outcomes – whether they are positive or negative. Economically, we can split the potential impacts of a ‘Brexit’ into the short and medium-to-long term, with different potential issues presenting themselves in different time frames.

Author’s Own Calculations using data sourced from ONS

Short term issues are already presenting themselves. The referendum is still a month off but the mere possibility that the UK could leave the EU is already having tangible economic repercussions. We saw a negative trend in GDP growth in the first quarter of this year, with growth falling 0.2% compared to final quarter of 2015, and UK industry has fallen into recession after two successive periods of negative growth in Q4 (the fourth quarter) of 2015 and the Q1 in 2016. Though it would be both naïve and plain wrong of me to attribute this growth slowdown completely to uncertainty, it is at least partly responsible. If seen in the results for the second quarter of the year, it does pose a question – if we’re seeing this kind of trend in an economy which is merely discussing the possibility of abandoning the status-quo, then what results will we see if the UK does actually vote to leave? Further slowdowns in growth, coupled with a very real possibility of contraction of the economy are the most obvious guesses.

The uncertainty goes further. We’re already starting to see markets pricing the risk to the economy, the most obvious of which is in the CDS spreads (Credit Default Swaps – essentially the cost of insuring UK debt against a default). The spread allows the cost to be compared to other economies and the Eurozone to see how the market is pricing the individual risk of default). In the 6 months to April 2014, costs have nearly trebled, nearly reaching the Eurozone level as a whole and overtaking both the US and Japanese cost. What does this mean? The markets see the country as a risky prospect, the problem with that is that businesses don’t invest in a risky economy.

Kierzenjowski et. Al (OECD)

The long term effects are perhaps more of a significant worry, however. One such effect is the predicted impact on Foreign Direct Investment (FDI) – investment by foreign investors in UK businesses or other entities. The scale of FDI in this country is huge, with FDI stock estimated to be over £1 trillion and roughly half coming from within the EU. Part of the appeal for non-EU investors is the UK’s access to the single market – access which we may or may not have if we choose to leave. EU membership has had a huge effect on the level of FDI – the Centre for Economic Performance estimates that membership has increased FDI by around 28%. 

But why does it matter? What impact will this have on our everyday lives? For a start, studies have found that (for varying reasons) FDI has (among others) the benefit of enhancing productivity . This would suggest a positive correlation between GDP and FDI levels and empirically we find that to be the case, especially in an economy with such a large service sector.

Based on a conservative model, if the UK were to leave the EU, we would expect to see a 3.4% reduction in real incomes, a loss even greater than the anticipated drop in trade and a figure which translates to £2200 per household – not small change.

Another issue I want to just briefly address is the supposed reduction in the contribution to the EU budget. The net contribution to the EU budget, once total public sector receipts have been applied, was £8.5billion in 2015- but it is a fallacy to think we will no longer have to contribute to any organisation should we leave the EU. There are thought to be four options for trade agreements – the Norwegian Model (joining the European Economic Area), the Swiss Model in which they negotiate individual treaties to take part in any initiatives, re-joining the Free Trade Association (FTA) or trading through the World Trade Organisation.

I don’t have time to describe exactly what each one entails- it’s safe to say each comes with its own disadvantages- but I’m going to briefly describe how their contributions compare to ours. Norway are part of the European Economic Area; essentially this is just jargon for saying they are part of the single market but not full paid-up EU members. Compared to the UK, the net contributions are only 17% lower and come with disadvantages in the form of having no influence over EU decision making and potentially facing higher costs in trade.

The Swiss Model is significantly ‘cheaper’ than the Norwegian model- it’s estimated that the contribution to the EU budget is 60% lower than the UK’s contribution per capita. However there’s no guarantee of market access that the EU provides, and again, the UK is shut out of influencing key EU decisions.

Rejoining the European Free Trade (FTA) agreement is the third option and, though there is no obligation to contribute to the EU budget, increased non-tariff barriers between the UK and the EU are likely to arise, as well as greater restrictions on the free movement of people (it’s worth remembering that migration has been found to have a positive net effect on the economy).

The final option is to be governed by the World Trade Organisation. This would increase the cost of exporting for UK firms relative to the EU, there would be no right of access to EU markets and the same issue with free movement of people that was present in the FTA would also apply here.

The conclusion of all this? There are trade alternatives that the UK could choose to pursue but each one has its flaws. For some, this is the insignificant reduction of contributions to the EU budget, for others it’s the increased difficulty and cost of trading within Europe. There’s no straightforward alternative.

I said that I wasn’t going to talk about the political side of this argument but I feel I must say something brief in conclusion. Economically speaking, this decision appears to be a no-brainer – the net effect of being in the EU on the UK economy is positive. However, this debate is a wider discussion than just the economic consequences and I understand that the political landscape and ‘ever-closer union’ that the EU appears to be striving for is a potential cause for concern and there are countless other issues that will influence the way people vote. All this means that I think the decision over whether to leave the EU will come down to one key battle – nigh-on ensured Economic prosperity, or political sovereignty. Which will you choose?