I am thrilled to introduceyou all to the NottinghamEconomic Review, andwould like to thank you fortaking the time to read ourvery first issue. The Re-view is the brand newmagazine of the Universityof Nottingham’s School ofEconomics and is also as-sociated with EconSoc. Itsprimary focus is to act as aconduit by which Notting-ham students can express

their interests in economic areas beyond those covered inlecture material. These can include anything ranging fromdiscussions about your opinions on current economic issuesto the application of economic theory to everyday life à laFreakonomics - examples of which are contained in thisissue.

The project began in September and has beenrunning full steam ever since in order to create a reputableand distinctive magazine for our very own School, andthankfully that goal has now been realised. It has been anexciting experience for me and the Review team to initiateand launch this magazine for the University of Nottingham. Aquick browse through the magazine will show that we notonly have student articles but contributions also from leadingeconomic figures, as well as articles from the academic staffdiscussing their varied research interests.

The creation of the magazine would have been anigh impossible task had it not been for the support and con-tributions from key individuals, and for that reason, on behalfof the entire Review team, I would like to extend our grati-tude towards everyone who has had a hand in helping buildthe foundations of the magazine. In particular I would like tothank the School of Economics and EconSoc who bothwholeheartedly supported the project from the very begin-ning, as well as our sponsors who have made it possible forthe magazine to reach a wider audience than we could everhave hoped for. However, equal recognition must be givento the rest of the staff who have worked tirelessly in order tobring you all the first issue of the Nottingham Economic Re-view. I would like to particularly highlight the contributions ofSenior Editor Romanos Priftis whose constant exuberanceand dedication helped in the realization of this collectivedream of ours.

Finally, I would just like to once again emphasisethat this magazine is made by and for the students of Not-tingham university. I therefore urge all the students whohave anything to say concerning economics, whether theyare studying economics or not, to take advantage of the op-portunity presented by the magazine and please write! Welook forward to receiving your intellectual contributions.

Editor-In-Chief & FounderMalik Yusuf

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SPO LT

Inaugural Editorialby Malik YusufWelcome from the Head of Schoolof Schoolby Chris MilnerPresidential Addressby Mugwe Manga

Student ArticlesChina’s Foreign Exchange Worriesby Rushan Pandya

It’s all about love.. and economicsby Pan Tsang

Staff ArticlesBad Finance and High EconomicGrowth: Are They Compatible?by Alessandra Guariglia

Is Economics an Experimental Science?by Chris Starmer

Special Guest ArticlesThe Morality of Corruptionby Ananda Aisola

Reforms Essential for EconomicProgress and Prosperityby Dr. George Alogoskoufis

InterviewsInterview with Sir Clive Grangerby Daniel Guest

Interview with Evan Davisby Malik Yusuf

Special FeaturesDebt: Why the British Consumeris Heading for a Black Holesummary by Malik Yusuf

CareersThe Future is Bright for EconomicsGraduatesby Jan Perrett

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ContentsIINNAAUUGGUURRAALL EEDDIITTOORRIIAALL

China s Foreign Exchange Worries

Presidential Address

Welcome from the Head of School

China, a country known for maximizing the re-wards from international trade, has recentlyachieved a new milestone in its personal devel-opment when its total foreign exchange re-serves reached US$1 trillion at the end of 2006.

It was recently announced that China's foreignexchange reserves had reached $1.0663 trillionand that they are growing by approximately$18bn each month. Compare this figure to the$165bn foreign reserves that China reported in2000, and it is clear that China’s increase intrade has been escalating dramatically. Thehuge surplus is undoubtedly a product ofChina’s success as an exporter to the world.China’s trade surplus, the difference betweenthe amount it buys and sells from the world,topped $100bn, with the US being the majorcontributor to the imbalance. As a consequenceof exports being far greater than imports, Chinareceives a progressive amount of foreign cur-rency each year, which it puts in its reserves.But China's currency reserves are now so largethat some economists fear they will unbalancethe entire global economy.

Whilst a contrasting situation arose in Britain inthe 1970’s, where a lack of foreign currency re-sulted in problems with the pound, it is the factthat China’s surplus is much more than Chinaneeds to cover its exports or pay for its own in-vestments abroad that causes difficulties. Asecondary problem is that the fate of the US istied to that of China. China’s investment of$700bn in long-term US treasury bonds hasenough influence to lower US interest rates by1.5%; a situation which helped stimulate the re-cent housing boom. Subsequently, due to thismajor influence, if China decided to diversify itsholdings, it could cause a collapse in the valueof the dollar and higher inflation in the US. For

instance, if money was to be taken out ofTreasury bills and put into, perhaps, equities,that will inflate share prices. Similarly if Chinadecided to stop accumulating or slow downtheir rate of accumulation of the dollar, it couldcause a dollar crash.

Economic theory would suggest that this bigtrade surplus would cause the Chinese cur-rency to rise. However, due to China’s eco-nomic growth being heavily dependent onexports and investments, with little coming fromdomestic consumption, it is not unusual that theChinese government wants to keep the value ofits currency, the yuan, fixed at a rate tied to theUS dollar (with a 3% variation allowed). Thiswould help foreign investment, yet does notsuggest a change in its long term strategy toswitch its emphasis to domestic demand,something which will take time. In the short-term it may be beneficial for both the US andChina. The former obtains a cheap source offunding for its trade deficit (treasury bonds) withits inflation being kept in check as consumerscontinue to purchase cheap foreign goods;whilst the latter is able to maintain its export-ledgrowth, generating jobs for its growing urbanpopulation.

Yet, it is clear that any situation to loosen thesehuge imbalances could destabilise the worldeconomy; unless the yuan value is reassessed,China will face an ever increasing pressure onits domestic industry. Hence, it comes as nosurprise that many economists are claiming thatthese problems with adjustment and huge tradeimbalances will generate growing protectionistpressures in the US and Europe, undermining

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Spring 2007

Honorary EditorChris Milner

Editor-In-Chief & FounderMalik Yusuf

Senior EditorRomanos Priftis

DesignerAnna Pichugina

Editorial Sub-CommitteeMembersMario HinojosaPan TsangDaniel GuestShruti Taneja

ContributorsChris Milner; Mugwe Manga;Rushan Pandya; Pan Tsang;Alessandra Guariglia; ChrisStarmer; Ananda Aisola;Hon. George Alogoskoufis;Evan Davis; Sir CliveGranger; Jeff Randall; JanPerrett; Daniel Guest; MalikYusuf

AcknowledgementsNottingham School of Eco-nomics; EconSoc; Pricewa-terhouseCoopers; TheEconomist; The Daily Tele-graph; University of Notting-ham Students’ Union;Richard Disney; Hilary Dea-con; Tulha Patel; Sue Mac-Cormick; Mantas Skardzius;Adeline Hong Zheng An;Ashkan Azerkan; KasitRochanakorn; Guled Yusuf;Jeff Randall; MatthewGreaves; Vasileios Tokakis;Emma Sullivan; SpirosBoughers; Alec Linley; Caro-line Breakwell; Carrie Lev-enson-Wahl

Nottingham Economic Review © 2007 The Univer-sity of Nottingham School ofEconomics

Printed March 2007 byPolar Print Group Limited, Venturi House, 9-17 TuxfordRoad, Hamilton IndustrialPark, Leicester, LE4 9TZ

Welcome from the Head of School

I am delighted to be able to write in sup-port of this new publication, the Notting-ham Economic Review, to be run by andfor students of the Nottingham School ofEconomics. The School has excellent stu-dents who consistently produce work thatis praised by our external examiners for itshigh quality. The Review will provide anexcellent outlet for this work, and for stu-dents’ interests beyond the curriculum. Itwill also provide an excellent opportunityfor engaging with the wider student andprofessional community. I hope very much that our student bodywill support the initiative by contributing to and using the Review.The School’s academic staff will, I am sure, also support the Re-view. It will give them an opportunity to report on their research in-terests and about their policy and advisory work in a way that thenormal teaching activities do not allow. This can only help to in-crease interaction between students and staff, something I amkeen to promote.I wish the current editorial team my very best wishes for a success-ful launch, and strongly urge students and staff to back this excitingdevelopment.

Chris MilnerHead of School & Honorary Editor

Presidential Address

I am honoured to welcome you all to thefirst issue of the Nottingham Economic Re-view! As president of Econsoc, I take over-all responsibility for running the society andoverlooking everything from sports to socialevents. This academic year EconSoc guar-antees a fun-filled fresh experience packedwith new and exciting trips, events and ca-reer opportunities that we hope will enrichyour time here at our university and be-yond.

In Autumn 2006 EconSoc became associ-ated with and lent its support to the Review initiative in order to produce theSchool of Economics’ first ever magazine, which features articles written bythe students and staff of our very own School of Economics as well asthose written by featured guests and interviews with influential figures inthe world of economics. It has been an exciting process seeing the growthof our ideas, however, even more exhilarating was working with my peersand highly influential personalities in the world of economics. This is a proj-ect on which the committee and I have worked tirelessly on, in order to pro-duce a fruitful tailor-made magazine for those interested in economics. Ihope you all enjoy the magazine, economist or not!

Mugwe Manga Econsoc President

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China's currency reserves arenow so large that some econo-mists fear they will unbalancethe entire global economy.

“”

It is the fact that China’s surplusis much more than China needsto cover its exports or pay forits own investments abroad thatcauses difficulties.

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A healthy financial system is generally seen asa prerequisite for high economic growth. Finan-cial systems foster growth as they produce exante information about possible investment;monitor investment and exert corporate gover-nance after providing finance; facilitate the trad-ing, diversification, and management of risk;mobilize and pool savings; and ease the ex-change of goods and services (Levine, 2005).Recent articles, based on data for several coun-tries, have shown that those countries with bet-ter financial systems also benefit from highergrowth.

China is a counter-example to this finding. It hasin fact a poorly performing banking system, buthas experienced phenomenal growth rates inrecent years, of the order of 10 percent perannum. Until recently, despite the large size ofits banking sector, most bank credit was di-rected to inefficient state enterprises, leavinggood private enterprises without access to ex-ternal funding. The system was liberalized at theend of 1990s, when the Chinese constitution ac-knowledged the private sector to be an integralpart of the economy, and theoretically it is not inplace any more. In practice, however, banks stillconsider private enterprises to be riskier thantheir public peers either due to their short credithistory or lower chance of being bailed out bythe government. Moreover, lending by statebanks is still determined by policy reasons,rather than by commercial motives. Yet, Chinahas experienced unrivalled growth rates in re-cent years, and this growth has been drivenmainly by private firms, which are discriminatedagainst not only in terms of access to externalfunding, but also in terms of property rights pro-tection, taxation, and market opportunities. Allenet al. (2005) document that between 1996 and2002, the private sector grew at an annual rateof 14.3 percent, while the combined state andlisted sector only grew at 5.4 percent.

So where do private firms get the funding nec-essary to sustain their high growth? And howcan high growth take place in the presence of ahighly distorted financial system? Sandra Pon-cet and I have used data from 30 Chineseprovinces (over the period 1989-2003) to an-swer these questions. We have shown that indi-cators measuring the level of stateinterventionism in finance are generally nega-tively associated with growth. This suggests thatfinancial distortions represent an impediment togrowth in China. Considering that China isamong the top foreign direct investment (FDI)recipients in the world, we have then claimedthat FDI may explain how China achieved un-usually high growth rates, despite its malfunc-tioning financial system. Specifically, we haveargued that those private firms that are unableto obtain funds from local banks, may form joint-ventures with foreign firms, which allows themto obtain the capital they need to grow. In sup-port of this hypothesis, we have found that thenegative effects of financial distortions ongrowth tend to be weaker for high FDI recipi-ents.

Other explanations are also obviously possible.For instance, private firms can make use of al-ternative financial mechanisms such as internalfinance, non-bank financial intermediaries, andcoalitions of various forms among firms, in-vestors, and local governments to sustain theirhigh growth. Yet, whichever the explanation theChinese case demonstrates that poor financeand high growth are not incompatible after all.

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Bad finance and high economic growth: are they compatible? By Alessandra

Guariglia

Alessandra Guariglia is an As-sociate Professor and Readerin Economics. She joined theUniversity of Nottingham inJuly 2003. Her research inter-ests are in the areas of ap-plied econometrics and macroeconomics.Currently, the focus of her research is on firms' be-haviour under imperfect capital markets; the eco-nomics of transition in Eastern Europe (includingRussia) and China; and the determinants of house-hold saving and consumption decisions.

FDI may explain how China achieved

unusually high growth rates, despite its

malfunctioning financial system.“

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George Alogoskoufis is the Minis-ter of Economy and Finance ofGreece. He is a Member of theHellenic Parliament for the govern-ing New Democracy Party, andwas first elected in 1996. He wasOpposition Spokesperson on Eco-nomics from 1997 to 2004. Heserved as Chairman of the Councilof Economic Advisors at the Min-istry of National Economy in 1992,and was responsible for draftingthe First Convergence Program forthe Greek Economy. He has beenan advisor to the World Bank andthe European Commission, as wellas to other international economicorganisations.Mr. Alogoskoufis obtained an MScin Economics in 1978 and a PhDin Economics in 1981 from theLondon School of Economics. Heholds a Chair in Economics at theAthens University of Economicsand Business and was Lecturerand Reader at the University ofLondon from 1984 to 1992. He haswritten four books and has hadover 40 articles published in someof the most prestigious interna-tional academic journals. His book“The Drachma: From the Phoenixto the Euro” was awarded, in De-cember 2002, the annual Prize ofthe Academy of Athens

Bulgaria and Romania) have been coming out of a longperiod of central planning. These countries are nowstaging a remarkable recovery. They are enjoying highrates of growth, massive inflows of foreign direct invest-ment and improving social conditions. They are gradu-ally adjusting to the requirements of an open economy.The European Union has helped finance major infra-structure projects that aim to make economies in South-east Europe part of the wider international economy.

Among the measures that Greece has taken tohelp these countries are the following:

* In less than ten years, Greek direct investment inSoutheast Europe has exceeded !12 billion.* Greece is the leading foreign investor in Albania andFYROM and ranks among the top three foreign in-vestors in Bulgaria, Romania and Serbia.* Greek banks operate, directly or through their sub-sidiaries, a network of over 1000 branches across theregion, employing 16,000 people and accounting for ap-proximately 16% of the banking market share in South-east Europe.* Greece has received more than 2 million immigrantsfrom Balkan countries, relieving pressures during thetransition from a centrally planned to a market economy.* The Greek government is committed to speeding upthe implementation of the Hellenic Plan for the Recon-struction of the Balkans allocating !550mn and lookingforward to a completely new economic environment inthe economies of the region in the years to come.

Greece is not only the gateway for foreign in-vestors to Southeast Europe, but also the gateway forSoutheast Europe to the international capital markets.We help our neighbors gain access to international or-ganizations and we fully support their efforts to join theEuropean Union in the future. At the same time, wecommend our neighbors’ efforts to open their economiesfurther to the rest of the world and to introduce rapid re-forms. Although it may be too soon to talk about theSoutheast Europe economies joining the Euro, I believethis could be feasible sometime in the next decade.

I am convinced that the wider region will enjoyan even more impressive economic performance in thefuture, and that it could well become one of the most at-tractive places for business in the years to come. Andthis development will be the fruit of the methodic and de-cisive implementation of structural reforms.

In Greece, which joined the euro zone in 2000,the monetary stability and low interest rates as-sociated with the euro have boosted privateconsumption and investment and facilitatedservicing of the public debt. Unfortunately, how-ever, the failure of the previous administrationto push a reform agenda and rationalize publicspending has led to disproportionate budgetdeficits and to a decline in the competitivenessof the Greek economy, thereby reducing thepossible benefits from the euro. The presentgovernment has clear objectives: to containbudget deficits, to make the economy morecompetitive and to implement long-needed re-forms.

We have not wasted any time. Sincethe new government took office in March 2004,we have introduced multiple reforms in everyarea of the economy. We have reformed the taxregime by reducing corporate tax rates andmaking tax procedures simpler and morestraightforward. We have introduced a new In-vestment Incentives Law to promote regionalconvergence and encourage investment aimedat exploiting Greece’s comparative advantages.We have introduced a Law for Public-PrivatePartnerships, so that we can build the neces-sary infrastructure more cheaply, more quicklyand more efficiently. Our ambitious privatizationagenda is already ahead of plan. Privatizationsfrom March 2004 till the end of 2006 generateda total of !4.6bn, most of which came from for-eign direct investment.

At the same time, we have enacted apolicy of gradual fiscal adjustment to bring ourbudget deficit below the three percent ceilingimposed on euro zone members. In 2006 thegeneral government deficit is being reducedfrom 7.8% of GDP in 2004 to 2.6% of GDP. Thissignificant reduction is primarily achieved

through the reduction of public spending.We have also introduced reforms to

make the banking sector more efficient andcompetitive. We have pushed forward withlong-awaited reforms in the labor market andhave substantially reorganized the public sector

to fight red tape.It must be noted that Greece has

emerged from an era of heavy government reg-ulation, in which the State was practically om-nipresent. This made our task much moredifficult. Careful maneuvering was required toensure maximum possible consensus. Cur-rently, however, the Greek people are in favorof our reform agenda and have realized that in-creased State intervention would not necessar-ily lead to optimal economic performance. Theyhave realized that well-targeted reforms are es-sential to catch up with the productivity and in-come levels of the more prosperous areas ofthe European Union.

The Greek economy is respondingsatisfactorily to our reforms. Despite high en-ergy prices and slow overall growth in the eurozone, the Greek economy is expected to growby 3.8 percent in 2006, one of the zone’s high-est rates. The economy is profiting from strongprivate consumption, a 13.1 percent increase inexports in 2005 compared with 2004 and a dou-ble-digit increase in foreign visitors. Unemploy-ment fell from 11.3% in the 1st quarter of 2004to 8.8% in the 2nd quarter of 2006, despite theend of all the activity surrounding the OlympicGames, which many economists feared wouldcause a considerable slowdown.

Greece is also playing an importantrole in incorporating the surrounding region intothe world economy. With the exception ofTurkey, Greece’s neighbors in Southeast Eu-rope (Albania, the States of Former Yugoslavia,

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Reforms Essential For Economic Progress and Prosperity

by Dr George Alogoskoufis

The Greek people are in favorof our reform agenda and haverealized that increased Stateintervention would not neces-sarily lead to optimal economicperformance.

Greece is not only the gate-way for foreign investors toSoutheast Europe, but alsothe gateway for SoutheastEurope to the internationalcapital markets.

“”

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Sir Clive Grangerreceived the 2003Nobel Prize in Eco-nomic Sciences,sharing it withRobert Engle. Hereceived his B.A. inMathematics andPh.D. in Statisticsfrom the University

of Nottingham and eventually went on to teach atNottingham for 22 years before leaving for UCSDin 1974. In 2005, the former Economics and Geog-raphy Building was renamed the Sir Clive GrangerBuilding in his honour.

What led you to take an Undergraduate degree atNottingham? I went to school in West Bridgford and so Nottinghamwas not my first choice as the tendency was to go touniversity in another city but I also wanted to take acombination of Maths and Econ, and Nottingham wasthe only place offering. I was the only student in thecourse.

How were the university and the city like at thetime? When I started at Nottingham the city was similar butwith some substantial differences, the city square wasvery active as all the buses left from there and it wassurrounded by major shops. From just south of thesquare to Trent Bridge was a large area of very poorhousing and rather depressing. The big difference be-tween then and now are the fogs, which used to bethick and frequent , but after the law was changedand made the burning of coal illegal in houses the fogvanished, as it did in London.

In 2003 you received a Nobel Prize in EconomicSciences for "Methods of analyzing economictime series with common trends (cointegration).”How did your interest in time series emerge andin what ways do you think your discoveries havecontributed to econometrics? My interest in time series started once I started tolook for a topic for my thesis. I found just one book onthe topic concerning economics and realised that ithad great potential. Apart from a few wrong turns,such as spectral analysis, I have helped develop newforms of model and approaches that have greatlychanged the way econometrics is done. You onlyhave to compare the contents of econometric textsthirty years ago, where time series methods got abrief mention at the back of the book to now wherethey take up most of the space. Time series methodsare greatly used in macroeconomics and in finance.My development of ideas such as 'causality' and coin-tegration' have played central roles.

What impact has the Nobel Prize had on your life? Since getting the Nobel Prize I have received manyexciting invitations, so that in 2006 I visited 12 coun-tries. I also interact with some well-known people.

Do you feel your education and teaching experi-ence at Nottingham gave you the tools for yoursuccess in the field? My education at Nottingham provided me with a scep-tical viewpoint about economic theory and a solidbasis in Maths and Statistics, which has proved use-ful.

According to your autobiography, you were sur-prised at the age of 23 to be appointed the posi-tion of Junior Lecturer in statistics at Nottingham.This must have been an interesting experience foryou. Could you tell our readers a bit about this? At the age of 23 I was in the second year of my Ph.D.and knew a certain amount of theory, but little thatwas practical. At this time universities around thecountry were expanding rapidly. The Maths Dept. atNottingham obtained a position for a Junior statisti-cian but only got one applicant, which they found em-barrassing and so asked me to apply. I was reluctantto do so but did it to please them once I was assuredthat there was no chance that I would get the job. Ientered the interview with no nerves and later foundthat the other candidate, who was very well qualified,annoyed the committee so I was offered the position.

In your eyes how has the study of economics andeconometrics changed over your career? The biggest changes over my years has been thegrowth of Finance as a field, the speeding up of com-puting and the increase in the amount of data avail-able. Although I am not a particularly good observer,economic theory seems to progressing more in a cir-cular pattern than in a straight line. The battles be-tween theorists and empirical economists are exactlysame now as they were a hundred years ago.

How has life been treating you now that you areretired?Retiring is the best thing that I ever did, no more lec-tures or committees, I don’t referee papers for jour-nals, I do not need to publish and I can travelwhenever I want to. My wife, Lady Patricia and I go tothe South Island of New Zealand for two months eachyear, in their spring, which is magnificent.

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Interviewed by Daniel Guest

Interview with Sir Clive Granger

even if there were already adequate places --just as long as a new provider thought he couldprovide better places that parents would wantto send their children to. In the short term, thatmakes little difference. In the long term, it canmake a very big difference.

Of course, there are costs to having a marke-tised schools system -- you probably end uphaving more school places than you need. Andthere might be other social issues too. But it isworth at least thinking about the long term ef-fects of letting the market allocate capital,rather than the administrators.

As to your question, I don't have a strong publicview about what we privatise or marketise - it'sjust a matter of people being aware of the dif-ferent ways of running a section of the econ-omy, and the benefits and costs of each.

Do you believe that your show, Dragons’Den, has affected entrepreneurial spirit inthe UK for better or for worse?

Undoubtedly for the better. That's not just be-cause it has promoted the idea of entrepreneur-ship in a populist format, but also becauseDragons’ Den shows the viewers that businessis something on which we are all entitled andqualified to hold some opinions. Unlike thecomplicated, technical stuff you might read inthe business section of a newspaper, aboutrights issues and mergers, Dragons’ Den bringsbusiness home to people by inviting them toform their own view of products pitched to theDragons. As a viewer, you cannot but help askyourself "will that sell?" when an entrepreneurpitches, and by getting people to make thatjudgement, the programme makes business ac-cessible. Business suddenly feels closer to theviewer than they might have realised it was.

You were once quoted, referring to yourpredecessor Peter Jay, saying “his insightwas that economics journalism is not aboutreporting the facts, there are too manyfacts.” What, in your opinion is economicsjournalism about?

It is about drawing the big story from the multi-plicity of data out there. It's like watching thewaves lap on to the shore of a beach. You re-ally don't want to be too obsessed with any onewave; you want to look at the pattern in thewaves to determine whether the tide is comingin or going out. Many city economists are a bitfocussed on the short term data flow, and thuslose sight of the medium term story that is whatreally matters.

How do you use economics in your daily life(other than at work)?

Well, I think very clearly about non-economic is-sues in my life, because economics is great forgiving you analytical tools to organise yourthoughts on issues. But I don't use my econom-ics brain to play the markets or anything, so Istruggle as a wage slave like most other peo-ple.

Do you have any suggestions for our maga-zine?

Produce a couple of issues and then get feed-back as to what the readers like or don't like.I'm afraid I don't know, and nor do you. So yourjob is to acquire information about the tastes ofthe buyers, and the skills of the writers -- andthen to edit them into neatly matching combina-tion. But business is really about acquiring in-formation, and then using it cleverly. And thebest information in this context, incidentally, isnot gained by asking people questions, butwatching what they buy or read.

Interviewed by Malik Yusuf

What, in your view, are the global economicissues that currently require priority atten-tion from the international community?

I think there are what one might call the biglong term issues, and the more short term,macro issues.

Under the big long term issues, I'd mention theobvious ones: climate change, global povertyand the rules of world trade. Of course, thesego beyond economics, but economists shouldget stuck right in to them. We have a lot tocontribute. It's good that the profession hasbeen given some prominence on climatechange with the Stern Review. Who else candesign efficient incentives and promote the ap-propriate use of price signals to alter behav-iour? Who better understands the "prisoners'dilemma" which characterises the problem ofreaching agreement on these issues?

Perhaps more immediate though, in direct eco-nomic impact, are the macro economic prob-lems facing us at the moment. To use a cornymetaphor, it is as though the world economy isresiding comfortably in San Francisco -- weare in a pleasant situation, the climate is fairlybenign, but there is an enormous great faultline underneath us that threatens at somestage an unpleasant earthquake.

In the case of the world economy, that fault linerelates to the dependence of the world on aprobably unsustainable imbalance betweenlow savings in the west and high savings inAsia. Asian savings have (partly) led to lowreal interest rates that have encouraged theAnglo-Saxon economies to borrow and spend,and to drive up asset prices (from houses andshares to vintage wine and renaissance art). Ifreal interest rates rise at some point, we mayfind the debt we have taken on to be uncom

fortably high, houses to be overvalued andconsumer spending to be curtailed. That couldcreate a nasty bump.

Which of these do you believe most affectsthe UK?

The story of global imbalances looks pretty sig-nificant to the UK. We are one of theeconomies that has really responded to lowreal interest rates by borrowing and spending,so we are one of the countries that may turnout to have overdone it, if conditions nowchange.

In your book ‘Public Spending’ you arguethat public services could be more efficientand productive by hiring competitive pri-vate service firms to supply them. Whichpublic service do you believe requires thissort of change most urgently?

The purpose of the book was to highlight someof the differences between traditional publicsector provision, and market provision. Myview is that there is nothing magically betterabout one type of service over the other. I'msceptical of the view that public sector workersare nicer or more caring than private sectorones, or that private sector workers are in-nately more industrious and hard working thanpublic sector ones. What is the case though isthat there is more fluidity in the market sector.It is easier for a new, superior provider to takebusiness from an incumbent.

For example, take the case of public sectorschools in this country. We have traditionallytended to only open new schools if there aremore children than there are school places inan area. But imagine a market driven schoolssystem, you would probably get new schools

18 19

Evan Davis has been the BBC’s economics editor since2001 and has been working for the BBC since 1993. Hehas won several awards including the Work Foundation'sBroadcast Journalist of the Year award in 1998, 2001 and2003, and the Harold Wincott Business Broadcaster of theYear award in 2002. He is also the host of BBC Two’sDragon’s Den, in which entrepreneurs pitch their ideas tobusiness experts (known as the ‘Dragons’) in order to acquire funding.

Interview with Evan Davis

Dragons’ Den shows theviewers that business issomething on which we areall entitled and qualified tohold some opinions.

“”