The Analyst, Michaelmas Term 2013

FOREWORD

CREDITS

While the world is showing signs of recovery after a deep recession since 2008, many countries are still struggling with fundamental problems in their econo-mies. In the Markets section, Madeline delves into a pertinent problem Europe is facing - youth unemployment. Terence, on the other hand, seeks to analyse the Trans-Pacific Partnership - an opportunity for Japan to revive its economy.

In the Fundamentals section, Siyuan discusses about how the Ba-sel III regulations may be hampering EU’s path to economic recovery.

Finally, we invited two LSE finalists who completed their IBD Summer Intern-ships to reveal some tips regarding applications and working in IBD. Those with a keen interest in IBD will not want to miss out on such invaluable advice!

Editor-in-ChiefChor Hiang Tan

Production DirectorShu Hang Low

ContributorsJosias Goh

Madeline LimSherman LimSiyuan WangTerence Goh

Thorsten Kern

CONTENTSMARKETS

The Trans-Pacific Partnership – Japan’s Long-awaited Revitalisation?By Terence Goh

Youth Unemployment in SpainBy Madeline Lim

An introduction to Tech CompaniesBy Josias Goh

Growth potential of European football clubsBy Sherman Lim

India - a depreciating rupee and skyrocketing onion pricesBy Thorsten Kern

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FUNDAMENTALSBasel 3: slowing the EU recovery?By Siyuan Wang

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INSIDE ANALYSISDubai: Islamic Finance as FocusBy Oxford Business Group

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CAREERSThe Analyst Interviews: IBD InternshipsBy Shu Hang Low

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MARKETS

Japan has recently joined the Trans-Pacific Partnership (TPP) this July together with 11 other countries - Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States (US) and Viet-nam. Multilateral negotiations regarding issues of trade liberalisation, investment, intellectual property, government procure-ment, legal services, patents, among others, are ongoing under closed doors. However, much media coverage has been focused on the bilateral free trade talks between the two largest economies involved – Ja-pan and the US – dealing most prominently with the reduction of tariffs in Japan’s five important agricultural commodities, insur-ance products and automobiles, as well as stronger protection of intellectual property.

The Japanese entry into the TPP deal can hardly be timelier as political power has just returned back into the hands of the Lib-eral Democratic Party (LDP) after a period of political turmoil seeing the transition of seven Prime Ministers in five years. The cur-rent Prime Minister of Japan, Shinzo Abe, has seemingly turned the tide for Japan’s economy with his ‘three arrows’ strategy as part of his ambitious Abenomics plan. The strategy consists of firstly, looser monetary policy to devalue the yen to increase ex-

ports; secondly, fiscal stimulus; and lastly, structural reforms that increase competi-tiveness in which TPP fits the bill perfectly.

Loosening the grip on the local economyOf the 9,081 products Japan trades, 586 products grouped into categories of rice, wheat, beef and pork, dairy products and sweetening crops are considered ‘sacred ground’ that the Japanese government has protected dearly ever since the end of World War 2. Currently, the tariff on rice is a whopping 778% and that on butter being 360%, while sugar attracts a 328% levy1. The highest tariff concession in any previous trade agreement was 88.4%2.

TPP has shown Japan’s commitment to cre-ate competition domestically, much to the consternation of some Japanese farmers. Mr Abe aims to eliminate 95% of all import tar-iffs on goods, which is over the 93.5% if tariffs are maintained on all 586 products. Moreo-ver, a total of 248 goods outside the five cat-egories have never been tariff-free in Japan3. Considerations are being made as to wheth-er these goods are in need of protection.

Two examples of such goods are pineapples which play a big role in the local economies of

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1 Field work. (2013, April 13). The Economist, Retrieved from http://www.economist.com/news/asia/21576154-fewer-bigger-plots-and-fewer-part-time-farmers-agriculture-could-compete-field-work2 Two challenges lie ahead as U.S., Japan move forward TPP talks: U.S. official. (2013, November 07). Xinhua News. Retrieved from http://news.xinhuanet.com/english/world/2013-11/07/c_132867176.htm3 Yokobori, Y., & Ikeda, S. (2013, October 16). Japan negotiations in TPP talks may tread on ‘sacred ground’. The China Post. Retrieved from http://www.china-post.com.tw/asia/japan/2013/10/16/391380/Japan-negotiations.htm

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THE TRANS-PACIFIC PARTNERSHIP – JAPAN’S LONG-AWAITED REVITALISATION?

BY TERENCE GOH

Okinawa and Kagoshima prefectures, as well as beans which are viewed to be essential to maintaining the country’s crop rotation system. The inclusion of such goods would mean picking out even more items from the five categories to accomplish the 95% goal4.

According to Japan’s Ministry of Agricul-ture, Forestry and Fisheries, the TPP is likely to cause a 3 trillion yen decline in the agri-culture-forestry-fisheries sector with 74% of the loss attributed to the five key com-modities. Losses in imports are predicted to be 2.9 trillion yen as Japan opens up to cheaper foreign goods and local industries lose out on pricing. On the other hand, this is counteracted by rises in domestic con-sumption, exports and investments from increasing purchase power and lowering protectionist policies in the other mem-ber countries. A net increase in real GDP of 0.66% will occur, albeit over a 10 year pe-riod of easing away tariffs. Nevertheless, it is a result Mr Abe is anticipating as he leads the country out of two ‘lost decades’.

Failing paddy fieldsThe yield for rice, as well as many other agricultural commodities, has dwindled ever since the rice consumption started to fall in the late 1960s as consumers switch to eating more meat. Since 1960, average cattle and pig numbers have grown 35-fold and 690-fold respectively, dwarfing the 90% increase in average rice acreage6.

In a bid to maintain farmers’ income, Ja-pan enacted the ‘Gentan’ policy to sustain the price of rice by curbing supply through limiting acreage. Consequently, as many as 72% Japanese farms now are one hectare or less. These farms are miniscule and inef-ficient compared to the average rice farm in the US at 180 hectares with 50% more yield per hectare7. To make matters worse, Japan pays out 1 trillion yen’s worth of rice subsi-dy per year while the annual output of the rice industry is 1.8 trillion yen – and falling8.

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4 Japan mulls expanding scope of TPP tariff removal exceptions. (2013, October 17). Kyodo News International. Retrieved from http://www.globalpost.com/dispatch/news/kyodo-news-international/131017/japan-mulls-expanding-scope-tpp-tariff-removal-excepti5 Japan. Ministry of Agriculture, Forestry and Fisheries, (2013). FY2012 annual report on food, agriculture, and rural areas in Japan. Retrieved from website: http://www.maff.go.jp/j/wpaper/w_maff/h24/pdf/e_all.pdf6 Major reforms, not cosmetic changes, needed for Japan’s rice farming. (2013, November 04). The Asahi Shimbun. Retrieved from http://ajw.asahi.com/article/views/editorial/AJ2013110400477 Takada, A., & Mogi, C. (2013, November 15). Rice plan signals end of era as new world farmers beat old Japan. Bloomberg. Retrieved from http://www.bloomberg.com/news/2013-11-15/rice-plan-signals-end-of-era-as-new-world-farmers-beat-old-japan.html8 Abe touches Japan’s third rail. (2013, October 31). The Wall Street Journal. Retrieved from http://online.wsj.com/news/articles/SB10001424052702304527504579168961244747846

Figure 1. (Source: Japan, MAFF, 2013) 5

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TPP’s contribution to agricultural re-formsThe TPP will spur a reduction in price of rice that will deter the small, inefficient farmers that now dominate the industry from con-tinuing to farm. At the same time, larger farming operations will have more room to develop and improve productivity by reaping economies of scale; and as an add-ed incentive, the Japanese government also plans to set a minimum rice acreage requirement for subsidies at 10 hectares in Hokkaido and 4 hectares elsewhere9.

Subsequently, TPP reforms will eliminate the complacency within the agricultural industry that Japanese tariffs and subsi-dies have been extensively cultivating. Japan’s growth is greatly burdened by the immense inefficiency brought about by hard-line protectionist policies. It may be a fact that Japan’s agricultural indus-try is an aging one, with more than 60% of farmers being 65 or older. Yet only 10% of domestically-consumed rice is grown by them10. Most of the produce is grown and harvested by full-time farmers that approve of the TPP. Of Japan’s 1.5 million farmers, only 420,000 of them work full-time. One of such people is Mr Mutsuo Banba of Ishikawa prefecture northwest of Tokyo. He is distressed that part-time farmers “stay inside with their air-con-ditioning, while their rice dries out and cracks”. The part-timers’ lack of dedication to their fields dissuades full-time farm-ers from putting in their best effort since their harvests are mixed together when the local co-op picks them up. Part-timers also tend not to invest and farm badly11.


Furthermore, high tariff rates that double or triple the price of basic commodities have been driving away Japanese food and manu-facturing firms alike to greener pastures. The firms that do remain within Japan are unable to export at competitive prices since they start with much higher input costs. Improving com-petitiveness within the agricultural sector may just be the right medicine for a country whose agricultural output has waned steadily over the past few decades from 11.7 trillion yen in 1984 to 8.2 trillion yen in 2011 – a 30% reduction.

Made in JapanYet the Japanese should not feel so perturbed by the increase in foreign competition. Japan is known for her quality products and Mr Abe sees the potential for an increase in luxury food exports, especially Japan’s world-class rice, beef and fruits. Kobe beef, sake, and to a lesser extent, the infamous oddly shaped watermel-ons, are all well-known – as is their spectacular prices. Japan should not be afraid of importing lower quality food items as this will free up pre-mium quality domestic produce for export, in turn, benefiting the Japanese economy. After all, painstaking work has been put into produc-ing these quality products: Orchards are hand-pollinated by tiny wands, and animals are pam-pered and are raised by the thousands within the whole of Japan. In addition, the Japanese government has pledged around USD300 mil-lion, with banks matching that figure, to invest into the production of luxury food items13.

As Japan secures the position of its high-quality products, agribusinesses can bank on modern agriculture to leverage on Japan’s ag-ricultural technology capabilities on vegeta-bles, fruit trees and other horticultural crops.

9 Japan plans to limit rice subsidy recipients to large-scale farmers. (2013, October 25). The Mainichi. Retrieved from http://mainichi.jp/english/english/newsselect/news/20131025p2g00m0bu070000c.html10 Asakawa, Y. (2013, November 14). What Japan’s farmers really need is freedom. Retrieved from http://www.nippon.com/en/in-depth/a02502/11 Field work. (2013, April 13). The Economist, Retrieved from http://www.economist.com/news/asia/21576154-fewer-bigger-plots-and-fewer-part-time-farmers-agriculture-could-compete-field-work12 Harner, S. (2013, August 19). Tpp or no tpp japanese agriculture must be reformed. Forbes. Retrieved from http://www.forbes.com/sites/ste-phenharner/2013/08/19/tpp-or-no-tpp-japanese-agriculture-must-be-reformed/13 Quigley, J. T. (2013, October 16). Can $150 melons boost Japan’s post-tpp agriculture exports?. The Diplomat. Retrieved from http://thediplo-mat.com/2013/10/can-150-melons-boost-japans-post-tpp-agriculture-exports/

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Forming food and farming clusters through tripartite collaboration between busi-nesses, research institutions and govern-ment would be a good way of boosting international competitiveness. The suc-cess of the Netherlands’ “Food Valley” in Wageningen municipality attests to this method of large-scale cooperation14.

Traction in the insurance marketApart from agriculture, inefficiency contin-ues to brew in Japan’s insurance industry as well. Of the 43 insurance companies func-tioning in Japan, half of which are foreign-owned companies. Yet they only hold a 20% market share. In contrast, Japan Post Insur-ance holds the largest slice of the market share at 20% leaving its Japanese counter-parts a substantial portion of the market15.

Since its privatisation in 2007, Japan Post Insurance Co. has lost over 10 million poli-cies in force and reported it had failed to make insurance payments on past claims, hurting both its earnings and reputation16. The sale of some of Japan Post’s insurance products have been put on hold as Japan tries to ascertain a level playing field for its private sector counterparts as well as ensuring the integrity of its business man-agement system. It is expected that this will take at least a few years to achieve.

Plans are also being made to offer insur-ance policies from foreign-owned compa-nies, such as Aflac or American Family Life Assurance Co., at all the 20,000 or so post offices throughout Japan. On the contrary, the US is not content with the plans Ja-

pan has made so far. The US is playing de-fensive over insurance within the medical-field which US insurance companies now hold a dominant market share in – they in-tend to keep Japan Post out of their turf17.

Automobiles – US’s end of the bargainOn the other side of the economic spec-trum, Japan’s automobile industry has al-ways been going strong both locally and internationally. The TPP would help ad-vance its market position worldwide and yet still maintain its dominance at home. The Japanese remain adverse to buying imported automobiles despite the lack of any tariffs on automotive imports. Global import penetration remains below 6%.

Nonetheless, the Abe administration has agreed to open up Japan’s market to more imports coming in from the US under the preferential Handling Procedure (PHP), a certification method used by US auto man-ufacturers to ease the process of exporting into Japan. A quota of 5,000 vehicles for each vehicle type would be specified, up from the current ceiling of 2,000 per vehi-cle type. However, present statistics show that for every American car sold in Japan, 117 Japanese cars make their way into the US market18. Japan’s Toyota Motor Co. and Honda Motor Co. have been achieving a greater foothold of the US auto market at the expense of local automakers – General Motors Co., Ford Motor Co. and Chrysler Group LLC. The shift to Japanese automo-biles has also been enhanced by the de-preciating yen which fell 23% against the dollar from the time Mr Abe took charge19.


14 Honma, M. (2013, October 18). The TPP and the internationalization of Japanese agriculture. Retrieved from http://www2.jiia.or.jp/en_commen-tary/201310/18-1.html15 An overview of the Japanese life insurance market. (2013, April 10). Retrieved from http://www.trefis.com/stock/mfc/articles/178123/an-overview-of-the-japanese-life-insurance-market/2013-04-1016 Japan post to expand private insurance sales. (2013, September 28). The Nikkei. Retrieved from http://e.nikkei.com/e/fr/tnks/Nni-20130928D2709A07.htm17 The Toa Reinsurance Company, Limited. (2012). Japan’s insurance market 2012. Retrieved from http://www.toare.co.jp/english/html/pdf/2012_insur-ance.pdf18 Japanese-brand vehicles are integral to U.S. economy. (2013, November 18). Business Wire. Retrieved from http://www.businesswire.com/news/home/20131118006046/en/Japanese-Brand-Vehicles-Integral-U.S.-Economy19 Szczesny, J. (2013, June 07). U.S. labor, environmental groups join auto makers in opposing TPP. Retrieved from http://wardsauto.com/politics/us-labor-environmental-groups-join-auto-makers-opposing-tpp

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While recent trends worry the large auto-mobile companies in the US, it will not af-fect the US employment or the economic situation of the automobile industry since Japanese automakers purchase USD51 bil-lion’s worth of US auto parts and contrib-ute around 1.36 million jobs in the US. As an added bonus, Japanese automobiles are light on gas emissions and make up 85% of eco-friendly vehicles in the US20.

US push for more intellectual property rightsThe US has been trying to garner favour of other countries to strengthen the pow-er of intellectual property rights holders through the TPP. Currently, the US is re-questing for stronger copyright and pat-ent protection as well as data exclusivity.

Should the TPP pass in its current state, the health of countless people around the world would be in dire straits. The US wishes to extend chemical drug patents by 5 years and biologics patents – which includes numerous lifesaving drugs that treat cancer, diabetes and hepatitis C – by 12 years; as well as establish data exclusiv-ity that restricts clinical trial data usage when approving generic drugs. While this provides more incentive for research, it would lead to expensive drugs for a longer period of time since cheap gener-ic drugs cannot make it onto the shelves soon enough. Many of these could turn the lives of billions of people around, yet remain unaffordable and unreachable to the people that need them the most.

Moreover, the TPP seeks to put in place Investor-State Dispute settle-


ment (ISDS) clauses that permit foreign inves-tors sue governments directly under interna-tional law if they are not contented with the verdict of domestic court decisions. Should the investors be successful, the government would have to change the offending law, or pay dam-ages, or both. 70% of the corporate claims made against governments like the US and Canada challenged the governments’ natural resource and environmental policies, and not tradition expropriations. The cumulative effect of these claims takes a toll on governments’ budget that could be better put to use elsewhere.

Japan in favour of US’s stanceThe recently leaked Intellectual Property Rights Chapter through WikiLeaks clearly re-veals Japan’s support of the US’s stance on intellectual property, in spite of opposition from all the other TPP member countries. Article QQ.A.2 mentions that the objectives of the chapter are to “enhance the role of in-tellectual property in promoting economic and social development”, particularly in an advancing technological age; and calls to pro-mote “effective and adequate creation, utili-sation, protection and enforcement of intel-lectual property rights”. It is notable that this section was proposed by the US and Japan and opposed by all other member countries.

Article QQ.A.9 prevents “the abuse of intellec-tual property rights by right holders” and “anti-competitive practices”. Not surprisingly, this ar-ticle was opposed by the US and Japan against the proposition of the rest of the TPP countries24.

It is understandable that Japan would like stronger intellectual property rights. Japan has consistently maintained technological advan-

20 Japanese-brand vehicles are integral to U.S. economy. (2013, November 18). Business Wire. Retrieved from http://www.businesswire.com/news/home/20131118006046/en/Japanese-Brand-Vehicles-Integral-U.S.-Economy21 Godoy, E. (2013, October 08). Pacific pact – a minefield for health care. Inter Press Service. Retrieved from http://www.ipsnews.net/2013/10/pacific-pact-a-minefield-for-health-care/22 Johnston, E. (2013, July 22). Farmers stealing TPP spotlight from other key issues. The Japan Times. Retrieved from http://www.japantimes.co.jp/news/2013/07/22/business/farmers-stealing-tpp-spotlight-from-other-key-issues/23 Secret Trans-Pacific Partnership Agreement (TPP). (2013, November 13). Retrieved from https://wikileaks.org/tpp/24 Ibid.

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tage and produced commendable research-work over the past decades that has been driving innovation and, to some extent, their economy. However, Japan has to tackle the problem of ISDS has led to policy chang-es on environmental issues in the countries that have adopted it and would inevitably soil Japan’s reputation as one of the most environmentally friendly countries in the world; and Mr Abe has to face the resent-ment of his people and the world at large in allowing businesses more pricing power and rights that compromise the quality of life.

Geopolitical pressures in the Far East The TPP is a major cornerstone for estab-lish-ing US geopolitical control over Asia andaway from China. It counterbalances the Regional

Comprehensive Economics Partnership (RCEP) that is much like the TPP and consists of the ASEAN +6 countries which China is part of. China is also negotiating a trilateral FTA with Japan and South Korea but territo-rial disputes have been holding them back.

Japan is aware of its pivotal role in the various multilateral trade agreements which would ideally allow more concessions to be made by the US and China in the respective part-nerships. Additionally, Japan is committed to reach a conclusion with the European Union.

More importantly, Japan’s entry into the TPP has aroused South Korean and Tai-wanese interest as well. For South Korea, its participation might boost the country’s


25 Sato, Y. (2013, March 27). TPP declaration fuels other talks / European nations grow more eager to reach trade deals with Japan. Daily Yomiuri. Re-trieved from http://www.bilaterals.org/spip.php?article22925

Figure 2. (Adapted source: Daily Yomiuri, 2013) 25

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economic growth by 2.6%, though it has reservations with increased competition of its beef and dairy farming sectors. It would also be able to acquire more bargaining power with China and Japan in tackling non-tariff barriers. As for Taiwan, the TPP is an opportunity to seek global recognition as an economic entity separate from Chi-na through the TPP. Taiwan’s former Vice President Vincent Siew states that Taiwan wants to “take care of economic matters first before […] political ones”. The ASEAN nations not already in TPP negotiations have also expressed interest in taking part.

The Chinese administration is still ambiva-lent with the apprehension of engaging in diplomatic relations with the US, and the temptation of hopping onto the band-wagon to reap potential benefits from lowered trade barriers. Nevertheless, new-ly elected Chinese President Xi Jinping,


who is strong on policy reform, is consider-ing the TPP as a way to forward China’s inter-ests. It is possible that the TPP could include the complete Asia-Pacific ring of countries.

The rising sun of JapanThe TPP promises good opportunities for Ja-pan’s economy to grow. It also fits well with Mr Abe’s plans to further the interests of his coun-try in terms of structural reform in the agricul-tural and insurance sector in return for deeper market penetration in the automobile industry, and promotion of intellectual property rights.However, considering Japan’s vital role in the power dynamics of the Asia-Pacific, one should not be too hasty in wrapping up negotiations lest they make unnecessary concessions. The Abe administration also has to be mindful of whether or not the citizens and local businesses are prepared for the repercussions stemming from the liberalisation of Japan’s economy.

26 S. Korea’s TPP entry to boost GDP by 2.6 pct: data. (2013, November 14). Yonhap News. Retrieved from http://www.globalpost.com/dispatch/news/yonhap-news-agency/131114/s-koreas-tpp-entry-boost-gdp-26-pct-data27 Ex-Vice President Siew calls for Washington to support Taiwan on TPP. (2013, November 22). The China Post. Retrieved from http://www.chinapost.com.tw/taiwan/national/national-news/2013/11/22/394230/Ex-Vice-President.htm

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Five years after the financial crisis of 2008 which devastated economies all over the world, youth unemployment remains a problem for many European countries.

According to the World Economic Fo-rum, when a country suffers economically, younger workers are usually the last in and first out, since it is more costly to lay off old-er workers. Youth unemployment in Europe currently stands at 22.6%, as compared to 16% in the United States and 11.6% in Hong

Kong. German chancellor Angela Merkel recently declared youth unemployment to be Europe’s most pressing problem, and warned of the emergence of a “lost genera-tion” should the problem be left unattended.

One of the EU nations worst hit by the problem of youth unemployment is Spain. Although the country has just emerged from two years of recession with a third quarter growth rate of 0.1%, the youth unemployment rate stands at an alarm-ing 56.1%, equivalent to about 1.8 million


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YOUTH UNEMPLOYMENT IN SPAINBY MADELINE LIM

Spaniards under 30 who are unable to find a job.

This article will examine the rea-sons behind Spain’s high youth un-employment rate, before outlining the implications of this phenomenon.

How Did it Happen?Like many other European economies, Spain suffered from a string of austerity measures and the poor economic outlook through-out Europe. Nevertheless, other underly-ing structural problems inherent before the financial crisis struck have exacerbated the situation, contributing to a high rate of youth unemployment within the nation.

Fixed Term Temporary ContractsBefore the financial crisis, Spain was one of the Organisation for Economic Co-oper-ation and Development (OECD) countries with the most stringent employment pro-tection for permanent contracts. In contrast, fixed-term temporary contracts could be terminated at virtually no cost, with mini

mal control on the fraudulent use of such contracts. As such, Spanish employers cre-ate large numbers of temporary contracts and are reluctant to convert them into per-manent jobs. Hence, when the crisis struck, rapid job shedding was evident among workers with temporary contracts, who were less costly for companies to offload.

Almost 40% of less-educated and 20% of high-educated workers still hold temporary contracts at the age of 39, significantly high-er than that of other EU countries. While fixed-term contracts often act as stepping-stones toward more stable employment, they often become dead-end jobs in Spain.

Mismatch of Skills and JobsAnother problem contributing to high youth unemployment rates is the mismatch between the supply and demand of work-ers. Before the financial crisis, the boom in the construction sector generated a strong demand for low-educated workers. Given these excellent employment opportunities and the relatively high wage in the construc-tion sector, many young males dropped out


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of education at an early age. However, when the real estate bubble burst many lost their jobs, and remain jobless with-out clear future employment prospects. The number of early school leavers has fallen from 32% to 25% during the crisis, but these figures are more than twice as high as in many other European coun-tries. Unless changes are made, struc-tural problems will persist in the labour market as demand for such type of work-ers will not return to its pre-crisis level.

In addition, among students who com-pleted their upper-secondary education, the majority opted for general education instead of vocational education. This re-sulted in a supply distribution of skills in the shape of an hourglass – there are many university students at the top, a high num-ber of dropouts at the bottom, and rela-tively fewer students in the middle with vocational degrees. The polarisation of Spain’s educational attainment has given rise to an imbalance between the supply and demand for qualified work, resulting in high levels of graduate unemployment as compared to other European countries.

The oversupply of university graduates has resulted in over-qualification, where the percentage of graduates in jobs that require a lower a qualification has sur-passed 30% since the beginning of the 1990s. The incidence of over-qualification is even higher among the younger co-horts of the population, where the per-centage of overqualified employees in the 25-29 age group exceeds 40% in Spain. As a result, many over-qualified individu-als with tertiary education end up in jobs that are more suitable for workers with upper-secondary education, forcing the latter to accept other less demanding jobs.


Why Youth Unemployment Deserves Our Attention:

Youth unemployment has detri-mental effects not only on the Span-ish youth, but also on the country.

Effects on the YouthThe period of youth unemployment is said to have scarring effects on future employ-ment paths for individuals. For many, the ‘wage scar’ can persist into middle age, as the longer the period of unemployment, the bigger the effect, and the earnings penalty can be as high as 20 percent compared with their peers who find employment early. For example, those who entered the job market during Japan’s ‘lost decade’ in the 1990s ex-perienced such scarring effects. Long-term youth unemployment more than doubled and persisted well after recovery began, because Japanese employers preferred to hire recent graduates rather than those trapped in long-term unemployment or persistent inactivity.

In addition, unemployed youths are more likely to dependent on welfare later in life, with the average young unemployed person spending an additional 2 months per year out of work by their late twenties. On a national level, this would translate to massive costs for the government in terms of future unem-ployment benefit payments, lost potential tax revenue, and a loss in economic output.

Unemployment also affects the youth so-cially. In particular, young adults affected by unemployment take longer to get mar-ried, buy homes and begin families. Some even turn to illegal or violent activities to lash out against their own country as they feel like they were not being taken care of.

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Effects on the Country

High youth unemployment causes sig-nificant economic damage to a country. In the longer term, countries face slower economic growth and lower tax revenues, resulting in decreased funding for social se-curity programmes prevalent in EU nations.

In addition, this economic tragedy results in brain drain. Benjamin Serra Bosch, a 25-year-old Spanish man living in London, has be-come a symbol of his home country’s dismal youth unemployment situation after reveal-ing in a Facebook post that despite having three degrees, he was forced to leave Spain and move to London, where he cleans toilets for a living. Like him, many other young Span-iards, frustrated by the lack of opportunities at home, are leaving the country in search of jobs. An estimated 100,000 university grad-uates have left Spain for jobs in Germany, Britain, and the Nordic states, leaving the country to tackle the problem of brain drain.

The Way ForwardJobs and skills matching are crucial in reduc-ing youth unemployment levels. In Germa-ny, instead of pushing high school students into higher education, many are steered into apprenticeships that lead to stable full-time jobs. As a result, Germany has the low-est youth unemployment rates in Europe, at 7.5%. Recently, Germany has agreed to give jobs or apprenticeships to about 5,000 young Spaniards every year, under a deal signed by labour ministers from both countries.

Furthermore, the government of has pushed through a labour market reform that lowered the cost of firing workers and made it easier for companies to de-part from collective wage agreements. It remains to be seen whether such reforms will come to fruition in the coming future, as Spain slowly emerges from the recession.

ConclusionIn addition to boosting the country’s eco-nomic growth, structural reforms need to be made to Spain’s education system and job market. Spain will continue to face sig-nificant losses if little or no action is taken to address the root issues of youth unemploy-ment. Meanwhile, other countries should learn from Spain’s mistakes and reform their labour and education system to avoid a suffering from a similar fate in the future.


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Technology has been constantly evolving. The devices we have now may be obsolete in ten years time. For instance, we have moved from snail mail to electronic mail. We have progressed from landlines to mo-bile phones. We are even using the Internet for conferencing and communications now. We have been the recipients of innovation.

New tech start-ups have been heav-ily courted recently. In 2012, Facebook bought Instagram, a photo and video sharing social networking app for US$1b. In 2013, Yahoo bought Tumblr, a micro-blogging and social networking site for US$1.1b. That is considerably a huge amount of money for relatively new firms.

Also, with the recent highly popular in-tial public offerings (IPOs) of technology companies like Facebook and Twitter, tech companies are certainly in the limelight. Let us now examine some of the success-ful tech giants that managed to stay in business through innovation and amaz-ing business models and also why others did not manage to survive in this industry.

Apple1

Steve Jobs, Steve Wozniak and Ronald Wayne founded Apple in April 1, 1976. In the beginning, Apple wanted to make a personal computer for the general pub

lic. They have done extremely well in the first few years, with strong growth coming from the Apple II. However, in 1985, there were many disagreements in the board-room, leading to Steve Job’s resignation.

Then, Apple went downhill as their prod-ucts were too expensive as compared to their competitors. They could not find a so-lution to the cheaper personal computers which were run by Windows2 . Their fortunes began to change when Apple acquired NeXT in 1996, bringing Steve Jobs back on board the ailing company. This turned out to the best decision Apple has ever made.

The comebackIn 1998, Apple started to sell their all-in-one iMac which featured Apple’s unique design and just within a few months, they managed to achieve a high level of sales. Then, in 2001, Apple came up with the iPod and both iTunes and the App Store in the next few years. Due to the integration of these three products, Apple managed to achieve a business model that retained its consumers. With this synergy, Apple’s rev-enues were increasing rapidly (Figure 1). Furthermore, with the launch of both the iPhone and the iPad, both very innovative products in their own right, Apple stamped their mark on the industry. As seen in Fig-ure 1, Apple’s revenue grew tremendously as a result of their integrated products. Ap-

1 Isaacson, W. (2013). Steve Jobs.2 Krimly, N. Mac vs. Pc: Myth-busting guide for consumers. Retrieved from http://www.hongkiat.com/blog/mac-vs-pc-myth-busting-consumer-guide/

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AN INTRODUCTION TO TECH COMPANIESBY JOSIAS GOH

ple also introduced the iCloud recently to further integrate all its different products.

As of 2013, Apple has close to 68% mar-ket share of the entire tablet industry and around 15% of the phone industry’s market share. This is a commendable amount and has led them to obtain such high growth and revenues over the past few years.

Why Apple?Apple have always focused on simplicity and design. The products are very stylish and easy to operate. Furthermore, all its products are made with high quality ma-terials and have a very professional and yet classy finishing touch. This is certainly a fac-tor that allowed Apple to retain many of its loyal customers over the past few years.

The next few yearsHowever, Apple’s dominance in the industry may be threatened with the evolving land-scape. What made Apple so successful was their strong branding and most importantly, innovation. Apple came up with products like the iPod and the iPhone which revolution-ised the entire industry. However, the newer editions of products tend to feature minor upgrades only. Besides, Apple is also losing market share to Samsung 3. With that, Apple may lose its competitiveness in the next few years and may become obsolete unless they come up with something groundbreaking.


Figure 1: Apple’s Quarterly Revenue by Product Category

3 Donavon, F. (2013, August 17). Apple continues to lose market share to Samsung, other competitors. Retrieved from http://www.fiercemobileit.com/story/apple-continues-lose-market-share-samsung-other-competitors/2013-08-17

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Google (Vise, 2008)

How it beganLarry Page and Sergey Brin are the two founders of Google. They met while at Stan-ford and suspended their PhD studies to fo-cus on this project. Like many entrepreneurs, they searched for solutions to problems and one of their solutions for having better in-ternet search was the Google search engine.

On 1998, they launched their search engine named Google. Some other search engines at that point of time were Yahoo, AskJeeves and Altavista. What made Google different was the way they ranked searches. Google used a patented algorithm named PageR-ank which ranked searches based on rel-evance and importance, not by how much companies paid them. This meant that the search would produce results that are more accurate and more likely to meet the require-ment of users. This led to the rise of Google’s search and right now, they have over 71% of the entire search engines’ market share5.

With this rise in prominence, they then used advertisements as their main revenue stream. Then, Google decided that they should leverage on really popular websites in order to further their advertisement rev-enue margins. This led to them acquiring YouTube for 1.65 billion in 2006. YouTube is the third most visited site in the world and this has been proven to be a really good de-cision. That allowed billions of Google ad-vertisements to be shown and with that, a whooping 95% of the 50 billion dollar rev-enue was contributed from advertisements.

What next?Having only one type of revenue stream exposes Google to plen-ty of market and industrial risks. In 2005, Google bought over Android Inc., a company they helped to finance in its initial stages. This has reaped dividends. Through the years, Android has allowed Google to gain a foothold in the smartphone operating sys-tem arena. Heavyweights such as Samsung uses the Android operating system, an open source software that allows a wide range of functionality and also has a huge collec-tion of applications, and this contributed heavily to the growth of Android. As shown in Q3 2013, Android devices accounted for 81% of the total smartphone shipments6.Google has been developing the Nexus phone and tablet series with other man-ufacturers. However, it’s believed that Google will be looking to making its own smartphone in the near future since it has developed such a strong and popular op-erating system. This would be a great av-enue for growth in another industry sector.

In the pipelineGoogle has also started to invest heavily in the highly anticipated Google Glass. It is worn like eyeglasses but it displays infor-mation in a hands-free format. It can also be used to communicate with the Internet via your own voice commands. Google is constantly innovating and looking for new opportunities in the market, this will cer-tainly help Google as they strive to grow and gain more followers in the future.

4 Vise, D. (2008). The Google Story.5 Desktop search engine market share. (n.d.). Retrieved from http://www.netmarketshare.com/search-engine-market-share.aspx?qprid=4&qpcustomd=06 With record market share of 81%, Android leaves iOS in the dust. (2013, November 13). Retrieved from http://www.firstpost.com/tech/with-record-market-share-of-81-percent-android-leaves-ios-in-the-dust-1227679.html

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Privacy Concerns 7

However, there are many privacy concerns with regard to some of Google’s products. They have been accused of using the con-tent of emails to develop targeted adver-tisements. With the advent of new products such as Google Glass, privacy issues will certainly be a contentious topic for Google.

Amazon8

Jeff Bezos founded Amazon.com in 1994, and it went live in 1995. Amazon started off as an online bookstore. It was an idea spurred by limitless inventory and hence the competitive edge against brick and mortar bookstores. They even started sell-ing music and were the most successful on-line retailer for music at that point of time.

Not long after, they launched the Amazon market. It has evolved tremendously over the years, but has retained certain key fea-tures. For instance, the website is very easy to navigate. Furthermore, Amazon makes it

easy for people to buy their products. There is the One-Click Ordering function which was introduced in 1997 to allow for smooth-er and quicker checkouts. Besides con-venience, they also offer fantastic prices in their online marketplace. Amazon provides the platform for retailers to sell their prod-ucts and they are sold at attractive prices.

Strong Management TeamDespite revenues rising to record highs, coupled with high investor optimism which shot the share price to an all time high, Amazon is not making any prof-it. They have reinvested all their profits into the company which allows the com-pany to grow at the phenomenal rate.

A key reason is Jeff Bezos, Amazon’s founder and CEO. He has allowed the sale of Kin-dles, Amazon’s EBook device, at a loss in order to push his competitors out of the market. They have been successful, acquir-ing close to 60% market share as seen by the statistics. Amazon focused on the sales


7 Hall, G. (2013, November 27). On your side alert: Gmail privacy concerns. Retrieved from http://www.nbc12.com/story/24084532/on-your-side-alert-gmail-privacy8 Wasserman, S. (2012, May 29). The Amazon Effect. Retrieved from http://www.thenation.com/article/168125/amazon-effect & Amazon.com, the hid-den empire. (n.d.). Retrieved from http://www.slideshare.net/faberNovel/amazoncom-the-hidden-empire>

Figure 2: Market Share of the E-Book Industry

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of books in order to cover the loss and they have been doing really well. Bezos has also invested heavily in Amazon Web Services.

Amazon Web Services9

Cloud computing is the next big thing for Amazon. Amazon Web Services delivers a set of services to form a huge platform in the cloud. Due to economics of scale ex-perienced by Amazon, they are able to of-fer start-ups attractive prices to host their servers on Amaozn. Hundreds of major internet firms like Dropbox, Netflix and In-stagram are customers of Amazon Web Services. It is growing at a really stable rate and it may be one of the larger revenue streams for Amazon in the next few years.

ConclusionThe Technology scene is indeed evolving very quickly. In order to keep up with current in-dustry trends and consumer preferences, com-panies have to constantly innovate to stay ahead of the curve. Led by some of the smart-est minds of this age, these companies have grown at the expense of their competitors. However, with companies like Twitter and Snap-chat warming up to the scene, the entire indus-try may look very different in a few years time.

9 Om Malik, New startup economics: Why Amazon (Web Services) and Dropbox need each other <http://gigaom.com/2013/11/16/new-startup-eco-nomics-why-amazon-web-services-and-dropbox-need-each-other/#!>

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Keen football fans would have noticed that this summer’s transfer window (the period during the year in which a football club can transfer players from other countries into their playing staff) was unusually frantic, in spite of all the economic woes faced in Europe. In fact, even non-football fans may have had an inkling of the bustling transfer activity that took place, with eye popping transfer fees (like the record 100 million euros (£85 million) Real Madrid reportedly paid for Tottenham’s Gareth Bale) making its way to the headlines of newspapers.

When Uruguayan striker Edinson Ca-vani completed his move from Napoli to PSG for 64 million euros, the PSG presi-dent afterwards admitted that the price was “absurd”, noting that it was more than the prize money awarded to Bay-ern Munich for winning the Champions League, Europe’s premier club competition.

Indeed, the football industry seems to be in a world of its own, seemingly unaffected by the economic crisis. With expenditures rapidly rising, questions have been raised regarding the sustainability of the finan-cial behaviors of European football clubs. In this article, we shall examine the current financial situation of football clubs, before contemplating what the future might bring.

RevenuesStarting off on a positive note, it must be noted that European football has al-ways been an expanding industry. In general, revenues have been rising, with the increases being exponential for the most successful football clubs.

Football clubs generally have three main sources of revenue, namely broadcast rev-enue, matchday revenue, and commer-cial revenue. They refer to licensing fees paid by broadcasting companies, ticket sales from fans at football matches, and commercial income (sponsorships, adver-tising, and merchandising) respectively.

Broadcast revenueIn terms of broadcast revenue, the appetite for football seems almost insatiable, with top football leagues being able to negoti-ate for higher and higher licensing fees. For instance, new broadcast deals were re-cently announced for the German Bundes-liga as well as the English Premier League. German Bundesliga and Bundesliga 2 clubs have agreed a deal that will net them 2.5 billion euros for their domestic broadcast-ing rights over the next four seasons begin-ning 2013-14. Together with revenue from overseas broadcasting rights (around 70 million euros a year), they will earn around


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GROWTH POTENTIAL OF EUROPEAN FOOTBALL CLUBSBY SHERMAN LIM

700 million euros (£585 million) a season, an increase of over 50% from the previous deal. The English Premier League has also negotiated a new deal that sells their do-mestic broadcasting rights for 3.4 billion eu-ros (£2.84 billion) over the next three years, a 60% increase from the previous deal. In addition, the English Premier League has been able to leverage on its global popular-ity to negotiate lucrative broadcasting deals overseas, and is set to make over five billion euros (£4.18 billion) in terms of total broad-casting revenue over the next three years.

Commercial revenueFor commercial revenues, the top football clubs in the world has reported remarkable growth in recent years. This growth is most apparent in sponsorship deals, such as Gen-eral Motors’ groundbreaking shirt sponsor-ship deal with Manchester United, worth $559 million (£345 million) over the next sev-en seasons beginning 2014/15. This annual income is almost two and a half times their previous deal, worth around £20 million a season. However, such growth is likely to be only possible for world famous clubs like Manchester United and Real Madrid. Clubs at the lower end of their domestic tables earn only a tiny fraction of what the biggest clubs make from their commercial deals, and their figures also grow at a much smaller rate.

Matchday revenueEssentially, matchday income can be roughly assessed as the prod-uct of the following four components:

-Percentage of Tickets Sold-Stadium Capacity -Ticket Price -Number of Games

Each of these values vary from season to season, as well as from club to club. While

some clubs have been able to increase at-tendance rates or ticket prices, it can be argued that there is a limit in terms of how much their matchday income can grow. Without increasing stadium ca-pacity through expansion or redevelop-ment, matchday revenues is unlikely to be a significant source of revenue growth.

To sum up, European football clubs have been experiencing growing income, though the bulk of these gains are con-centrated among the biggest clubs. There seems to be an insatiable appetite for football, and the seemingly price-inelas-tic demand for televised matches and stadium tickets indicate the potential for the growth in revenues to continue.

ExpendituresWhile income is growing, the expenditures of top European football clubs is also on the rise.

While football clubs spend sizable amounts on areas such as business operations and capital expenditure, the main cost still comes from the wages paid, most of which go to the playing staff. In the case of certain clubs, interest payments and transfer spending also account for significant portion of the expenditure.

Transfer spendingGiven the media’s obsession with trans-fer activity, transfer spending has become a highly visible area of expenditure. In the previous transfer window, the five largest European leagues by revenue spent a total amount of £1.95 billion, while netting an income of £1.43 billion. However, the net transfer expenditure of a club largely de-pends on the club itself. Factors such as age-ing players, underachievement, and injuries may necessitate transfers, though in most


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cases player signings are influenced by am-bition, finances, and club philosophy. Upon closer inspection, vast disparities can be no-ticed between different clubs. This disparity is especially evident in the Spanish La Liga. The top two teams, Real Madrid and Barce-lona, spent a combined net amount of £80 million, while the rest of the league posted a net transfer income of around £170 million.

Indeed, some of the transfer fees paid have been described as disrespectful to the cur-rent economic climate. However, it is im-portant to note that player investments allow for future gains, such as increased merchandising sales if the player is popular, or future sale value if the player is resold.

WagesWhile the one-time payments involved in player trading command the most media attention, wage costs remain the greater concern for football. Since 2006/07, wage costs have consumed 83% of the revenue growth for English Premier League clubs. The wage to revenue ratio for these clubs have also reached 70%. In total, player wag-es have cost Premier League clubs around £1.8 billion for the 2012/13 season. This is an important reason why operating margins have been thin at less than 4%. Despite criti-cism over the seemingly excessive wages paid, player salaries are expected to con-tinue to grow, especially as the rewards for better competition performance increase.

What does this mean?From the evaluation of the finances of the clubs in Europe’s top football leagues, we can see that both revenue and expenditures are rising at a similarly fast pace. This is not unexpected, since football clubs are gener-ally not organisations that explicitly seek to maximise profit. There is also a motivation


to spend more than current rev-enues, given the potential for sub-stantially greater earnings should competition performances improve.

However, we have mainly explored league-wide trends, which may not paint the best picture. Ultimately, some clubs do bet-ter than others. As stated earlier, large and successful teams post much higher rev-enues, and have much greater potential to grow their income. That said, the finan-cial success of each club very much de-pends on their business models and vision. As a result, there exists a disparity between the financial performances of different foot-ball clubs. For example, Inter Milan posted a loss of $89 million (£55 million) last season, amounting to 38% of their revenue, whereas Napoli reported operating profits of $76 mil-lion (£47 million), or 40% of their revenue.

On the other hand, certain clubs, such as Chelsea, Manchester City, and Paris Saint-Germain rely heavily on owner benefaction to support their spendings. At such clubs, rich billionaire club owners use their personal fi-nances for the club, allowing for spectacular transfer and wage expenditures. Neverthe-less, the generosity of these owners cannot be taken for granted. When Sheikh Abdul-lah Al Thani took over the Malaga CF club in 2010, he launched an ambitious sporting project which involved the big name sign-ings of numerous star players. Under his ownership, Malaga attained their highest ever league position of 4th in the 2011/12 season, qualifying for the highly prestigious and lucrative UEFA Champions League tour-nament. However, soon after that achieve-ment, Al Thani abruptly stopped funding the club. This resulted in an inability to meet financial liabilities, leading to unpaid wages and club sanctions. Malaga also then had to quickly offload their star players, and their dream ended almost as soon as it begun.

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Without rich owner bankrolling opera-tions, many smaller clubs around Europe are also struggling financially. For instance, Portsmouth FC, who competed in the Premier League as recently as 2010, suf-fered a well-publicised and long running financial struggle. Arguably the largest club to have suffered liquidation would be Scottish giants Rangers FC, due to se-vere mismanagement of club finances.

Financial Fair PlayIn an effort to preventing clubs from spend-ing irresponsibly, UEFA, the football as-sociation governing European clubs, has begun implementing new regulations, collectively referred to as Financial Fair Play (FFP). When introducing these regula-tions, UEFA President Michel Platini not-ed that around half of European football clubs are losing money and that it was a trend that is increasing. As such, the rules are put in place to punish clubs who do not follow a certain budgetary framework.

While the main purpose was to protect clubs from threatening their long run survival, these regulations also hope to lead to a more “level playing field” by disallowing excessive spending to improve football performances. In effect, it is targeted to reduce the cash gifts wealthy owners make to their clubs, giving such football teams an unfair advantage.

As of now, FFP remains the single and most ambitious attempt to improve the financial sustainability of European club football. It has already had an im-pact, with many clubs taking more care in ensuring they avoid severe sanctions.

ConclusionTo conclude, many football clubs remain profitable and well-run. With such rapidly increasing revenues, the industry could be-come more lucrative in the coming years. Given the global appeal of football, it is also realistic to foresee further commercial growth in new markets. However, as football clubs tend to reinvest earnings, costs are also expected to continue rising at a similar pace.

That said, there is also an increasing danger of financial mismanagement at football clubs. We may begin to see a rising influence of football executives, as clubs see the greater need for professional input. The FFP remains the greatest hope for the financial world of football, and its successful implementation would go a long way in ensuring football is sustainable, and that well-supported clubs continue to exist without severe crises.


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Over the past three years, the Indian econ-omy’s growth rate has been constantly de-creasing. Due to such changes in the funda-mentals, the Indian Rupee depreciated by almost 28% in the period between May and August 20131. Additionally, there are various less obvious factors which led to the rapid devaluation of the rupee. The onion price is one of the important consumer goods which is heavily affected by the rupee ex-change rate change. The price of the onion has had a great influence on past elections and it is likely to become a major issue in the Indian General Elections in May 2014. There-fore, the Indian Prime Minister, Manmohan

Singh, has made it one of his priorities to reduce the onion price, suggesting a solu-tion similar to 2010’s during the Onion Crisis. Changes in the fundamentals were one of the key factors driving the rupee’s de-preciation. Interest rates, ranging from 4.5% to 10.5% over the past three years, were one of the catalysts2. The persistent inflation of the past few years, which has been on an upwards trend since mid-May 2013, increased the pressure on the cur-rency for a value adjustment. Furthermore, the high current account deficit (CAD) of about $85 billion or 4.5 per cent of GDP


Figure 1. (Source: Bloomberg, 2013)[1]

1 Bloomberg (2013). USD-INR Exchange Rate. Retrieved from http://www.bloomberg.com/quote/USDINR:CUR2 Trading Economics (2013). India’s Interest Rate. Retrieved from http://www.tradingeconomics.com/india/interest-rate

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INDIA - A DEPRECIATING RUPEE AND SKYROCKETING ONION PRICESBY THORSTEN KERN

contributed to the value depreciation of the rupee3. This CAD needs to be funded through uncertain capital inflows every year, and a slowing economy as well as a with-drawal of foreign direct investments (FDI) can increase the CAD quickly. Thus, the in-flation and the high current account deficit changed the fundamentals which pushed the rupee to the lowest value it has ever been at, 68.845INR (USD/INR) on 28 August, 20131.

Singh assessed the importance of the change in the underlying economic factors affecting India’s CAD and the rupee value and sug-gested a solution during a statement in the parliament on the 30th of August, 2013. He argues that large imports of gold as well as higher costs for crude oil and coal imports have led to the high CAD.4 The weak demand in major Indian markets has kept exports from growing in line with imports. These are, according to Singh, the specific issues which have led to an unsustainably large CAD.

Furthermore, he sees the rupee depreciation partially as a needed correction, because the inflation rate has been much higher in India than in advanced economies. At the same time, he blames the fear of tapering the US central bank’s quantitative easing for the speed at which the rupee depreci-ated. In order to limit the rupee’s fall, Indian policymakers implemented various capital controls to limited the amount of money leaving the country as foreign exchange re-serves are constantly decreasing. The over-all goal for the government’s CAD reduc-tion plan is to reduce the appetite for gold, economise in the use of petroleum products and take steps to increase India’s exports.

The changes in the fundamentals of the Indian economy and decreasing growth in India’s urban centres led to a slow reori-entation of India’s manufacturing and sales focus over the past 10 years. The slowing de-mand in urban centres makes less accessible rural markets more attractive6. Rural markets


Figure 2. (Source: South Asia Investor Review, 2012)5

3 Venu, M. K. (2013, August 29). The India of 2013 is not the India of 1991. Retrieved from http://www.thehindu.com/opinion/lead/the-india-of-2013-is-not-the-india-of-1991/article5068745.ece4 Indo-Asian News Service (2013, August 30). Text of PM’s statement on the current economic situation. Retrieved from http://timesofindia.indiatimes.com/business/india-business/Text-of-PMs-statement-on-the-current-economic-situation/articleshow/22159715.cms5 South Asia Investor Review (2012, January 30). India’s Debt Up, Forex Reserves Down. Retrieved from http://southasiainvestor.blogspot.co.uk/2012_01_01_archive.html6 Jadhav, R., Singh, R. K. (2013, November 28). Rural India shows signs of economic revival but wider outlook glum. Retrieved from http://in.reuters.com/article/2013/11/27/india-ruraleconomy-consumption-agricultu-idINDEE9AQ0DZ20131127

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have a large customer base and employ-ment has been increasing rapidly, espe-cially in suburban villages. The main ad-vantage of these markets is that their potential is nearly untapped7. For example, while enough automobiles are being sup-plied in the urban centres, newly enriched villagers have currently none or almost no access to automobiles and machines which could make them more productive and increase their output, thus, strength-ening India’s economy. Therefore, India’s economy is slightly changing its domestic focus on expanding into untapped, rural markets to increase its GDP growth again.

The slowing growth, rupee devaluation


and inflation serve as a price catalyst, lead-ing to exponential prices hikes. As prices increased, Indians’ started resenting their government9. India imports vast amounts of oil, worth $141 billion in 201210. The rapid rupee devaluation and inflation in-creased the effect of the constantly increas-ing global oil prices on domestic prices. While the India government cannot con-trol the global oil prices, Indians observe the government’s helplessness and “real-ize that their government is not able to do much to solve their problems.”11 Therefore, Indians have slowly grown unhappy with their government, especially because of rapid increases in the overall price levels.

7 Philip, S. (2013, October 21). Onion Bonanza Makes India’s Farmers New Target for Tata: Cars. Retrieved from http://www.businessweek.com/news/2013-10-20/monsoon-bonanza-makes-india-s-farmers-new-target-for-tata-cars8 World Bank (2006). Employment Growth. Retrieved from http://www.worldbank.org/content/dam/Worldbank/Feature%20Story/SDN/Urban/in-urbani-zation-chart-growth-by-sector-location-650x475.jpg9 Chandavarkar, R. (2013, November 9). More people frustrated with their governments now: Bruce Stokes. Retrieved from http://economictimes.india-times.com/news/economy/indicators/more-people-frustrated-with-their-governments-now-bruce-stokes/articleshow/25485213.cms10 Sharma, R., Choudhury, S. (2012, April 30) India Oil Imports Cloud Economic Picture. Retrieved from http://online.wsj.com/news/articles/SB1000142405270230405030457737568257526052611 Press Trust of India (2012, June 13). India’s import bill jumps 40% to $140 billion. Retrieved from http://www.thehindu.com/business/markets/indias-import-bill-jumps-40-to-140-billion/article3523906.ece

Figure 3. (Source: World Bank, 2006) 8

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Similar to the rapid oil price increase, the price surge of the onion has been a major issue for Indian governments in the past. The importance of the onion for Indians can be seen in the 14.5 million tonnes of con-sumption, or 12kg per person, alone in 2012 and the fact that India is the second larg-est producer in the world12. The high onion prices in 1980 were one of the key factors which brought down the central govern-ment13. In 1998, the public identified the surging onion price during the state elec-tions in Delhi and Rajasthan as the major political issue14. During the Indian Onion Crisis of 2010 India had to import onions from Pakistan to reduce the price quickly, because the government was fearing an-other debacle. This brief history of the onion price’s peaks shows the important connec-tion between the onion and Indian politics.

According to farmers, politicians and trad-ers, the recent increase in onion prices was caused by a large difference in the supply and demand. These groups tend to cite low-er amounts of planting and damaged crops due to rain as the main reasons for the de-crease in supply which in return increased the price as demand remained constant16. Additionally, the rupee depreciation led to more attractive export prices and many farmers decided to export their onions rather than selling them in the domestic markets. Therefore, the sharp decrease in the supply for onions, due to fewer plants, damaged crops and more exports, was a factor which increased the onion price.


12 Small Farmer’s Agri-Business Consortium (2012, April). Market Intelligence System – Baseline Data for Potato & Onion. Retrieved from: http://sfacindia.com/Docs/Onion%20&%20Potato%20Baseline%20Report.pdf 13 Magnier, M. (2010, December 27). Indians in tears over skyrocketing onion prices. Retrieved from http://articles.latimes.com/2010/dec/27/world/la-fg-1227-india-onions-2010122714 Shaikh, Z. (2013, August 17). As onion prices rise, BARC unit to increase shelf life lies unused. Retrieved from http://www.indianexpress.com/news/as-onion-prices-rise-barc-unit-to-increase-shelf-life-lies-unused/1156552/15 Shenoy, D. (2011, January 17). FII, Onion Prices and more…. Retrieved from http://capitalmind.in/2011/01/marketvision-chronicle-2-is-out-fii/16 Inamdar, N. (2013, October 25). Decoding onion inflation – a multi-layered tragedy. Retrieved from http://www.business-standard.com/article/econo-my-policy/decoding-onion-inflation-a-multi-layered-tragedy-113102500132_1.html

Figure 3. (Source: Capital Mind, 2011) 15

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However, these factors only explain the price increase partially. They fail to explain how an overall marginal decrease in sup-ply resulted in drastically increased prices. Further, these theories cannot explain the volatility and the consistent onion price inflation at the retail level since 2009, de-spite better yields and increased farming land. In reality, massive, continuous retail mark ups, inelastic demand and wholesale manipulation through hoarding and collu-sion between the most influential traders drove up the price16. Together, these under-lying issues explain the volatility and rapid increase in onion prices which have to be tackled by the government in the long term.

As in the past, the high onion prices are likely to affect the General Elections in May 2014. Therefore, the current government has made it one of its priorities to address this issue and, according to Madan Sab-navis, imports are the only short term solu-tion17. Overall, voters are again very unsatis-fied with the situation and the government is currently working on a solution which will probably be similar to their 2010’s im-ports solution of the Onion Crisis18. Onion imports could help reduce the domestic price, because the current global price is currently between $500 and $550 per ton as opposed to the domestic price of around $850 per ton. This would result in reduced domestic prices and it would change the government’s image for lots of Indians, be-cause the government would be able to demonstrate its influence and willingness to deal with this important domestic issue.


Overall, the reducing growth, draining of FDI, high CAD level and increased costs of intermediate goods have led to the rapid depreciation of the rupee. The Indian gov-ernment is trying to control the exchange rate mainly through capital controls to keep money inside India and offer investment opportunities to stimulate growth. The low value of the rupee has had important im-plications for India’s citizens as the onion price increased to a high level mainly due to retail mark ups, inelastic demand and wholesale manipulation. High onion prices have been politicised in the past and it is likely that they will become a major issue in the General Elections which is why the government is trying to reduce the onion price with short term solutions. However, the policymakers are currently not tack-ling the long term issues of the onion price and no matter what the outcome of next year’s election will be, the next administra-tion will have to solve the underlying issues.

17 Bloomberg (2013, August 24). India to import onions for first time since 2011. Retrieved from http://www.business-standard.com/article/economy-policy/india-to-import-onions-for-first-time-since-2011-113082500006_1.html18 Express News Service (2013, May 22). On UPA Anniversary, Manmohan’s job approval rating plunges. Retrieved from http://newindianexpress.com/nation/On-UPA-anniversary-Manmohan%E2%80%99s-job-approval-rating-plunges/2013/05/22/article1600446.ece

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Martin MinvielleBroker, London

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In the wake of the 2008 financial crisis, ques-tions were raised about the soundness of our financial systems and capital markets. In particular, concerns about “too big to fail” institutions (now termed as SIFIs, or sys-temically important financial system) and overleveraged balance sheets were raised.

The knee-jerk reaction of banks worldwide was thus a comprehensive re-evaluation of leverage ratios and current bank liquidi-ties. Furthermore, Basel III, the interna-tional regulatory standard on banks was introduced by regulators under strong public pressure for more scrutiny on the institutions many blame for the crisis.

However, the incoming regulation has come under attack for slowing down the econom-ic recovery from the financial crisis. The re-vision of the standard in January 2013 was no coincidence: the term ‘Basel Cliff’ had spooked markets worldwide in late 2012; there was even a rare solidarity amongst the American partisan divide against the regu-lation. Ultimately, when the rules were writ-ten down in 2010, the consensus amongst economists was that the global economy would be well on the way to recovery by now.

This article shall examine arguments that Basel III has slowed down the European Recovery.

Basel III: brief breakdownThe Basel accords are a set of banking super-vision accords issued by the Basel Commit-tee on Banking Supervision (BCBS). The com-mittee comprises of representatives from the central banks of major economies, in-cluding the G20 countries and banking pow-erhouses such as Hong Kong and Singapore.

Basel III is the third recommenda-tion published by the committee. The regulatory boards of most countries, including the Federal Reserve and the European Banking Authority, have man-dated that their banks keep to the stand-ard. In light, however, of the nascent economic growth in both the US and Eu-rope, the date of implementation of sev-eral standards were pushed back in Janu-ary 2013, in addition to being relaxed.

Nevertheless, the numerous regu-latory reforms are well underway:

1) Increased overall capital requirement2) Narrower definition of qualifying regula-tory capital3) Increased capital charges for both trad-ing and banking book exposures4) New leverage ratio5) Two new liquidity ratios

33| the analystFundamentals

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BASEL 3: SLOWING THE EU RECOVERY?BY SIYUAN WANG

Implications and Impacts on EurozoneAs one would expect, the greatest impli-cations of Basel III on the real economy would be through the money supply avail-able to corporates and individuals. These implications on money supply would mainly arise from regulatory changes in three areas: Leverage, liquidity and Capital.

Capital Requirements:Basel III uses the same equation for capital requirements as its predeces-sor, Basel II: the solvency ratio, where

Eligible capital here refers to the capital of the bank, and is further sorted into different tiers: Core Tier 1 (common stock and retained earnings), Tier 1 (preferred stock) and Tier 2.

Weighted exposures, commonly know as risk-weighted assets (RWA), refers to the total assets held by the banks weighted by credit risk. Intuitively, we know that as-sets like cash and currency should be risk-less, thereby having RWA values of 0, while certain loans, such as subprime mortgage loans, have a RWA of 100% of their face value.

Basel III has introduced changes to both the numerator and denominator of the equa-tion. While solvency ratio has been main-tained at 8%, the components of the 8% has been changed, as illustrated below:

Additionally, by 2019, banks would have to include 2 more capital buffers on top of the 8%: a ‘capital conservation buff-er’ of 2.5% and a ‘counter cyclical buffer’ (only during periods of excessive credit growth) of up to 2.5%, both of which are

34 | the analystFundamentals

Eligible capitalSolvency Ratio = Weighted Exposures (RWA)

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to be made up of common equity. The definitions of Tier 1 and Core Tier 1 were also changed, with certain sourc-es of equity no longer considered for the calculation of solvency ratio.

Lastly, regulators have also looked into the calculation of risk in the RWA; there has been a sharp increase in risk weights for counterparty credit risk of trading assets, toxic assets and securitisation.

The overall effect of increasing the solven-cy ratio while increasing the RWA of banks has led to a massive shortfall of capital of banks: estimates by the European Bank-ing Authority in September 2013 indicate that banks in Europe would need another 70.4 Billion Euros of capital. That is a mas-sive amount: to put things into perspec-tive, Deutsche Bank, Europe’s largest bank, has 39.9 Billion Euros of common equity.

To reach the required solvency ratio, banks have to either issue more shares or retain more profits/reduce dividends to boost their capital base, in addi-tion to reducing the proportion of Risk Weighted Assets on their portfolios.

In issuing shares and retaining profits, less money is being circulated into the real economy. Similarly, to reduce the risk weighted asset value, banks would have to hold onto less risky assets such as cash, resulting in less money in circulation.

A smaller money supply would mean lower price levels and transactions, which would be less than ideal considering the already dismal European GDP figures. Addition-ally, lower price levels would theoretically lead to deflation (according to monetarist theory), a problem that is already threat-ening the economy. In November, the ECB has lowered its benchmark rate to a re-cord low in an effort to combat deflation.

Many economists have also pointed out the contradictory nature of the poli-cies set by authorities: implementing expansionary monetary policy while si-multaneously reducing money supply.

Liquidity Ratios:Furthermore, Basel III has mandated that banks must comply with 2 new liquidity ratios, the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).

The main source of concern would be from the LCR, which states that ‘high quality high-ly liquid’ assets must exceed the net cash flow of the bank’s next 30 days. This essen-tially means that in the event of a crisis, the bank will have enough cash and liquid as-sets that allow it to stay solvent for 30 days.The new ratio aims to address the issue of banks being ‘too big to fail’, and to prevent bank runs that have been continually seen around the world during financial crises.

The problem, however, is that despite the deadline for the implementation being extended till 2019, banks still face a short-fall in liquid assets required to attain the ratio, with the Federal Reserve Board esti-mating this shortfall to be as huge as 200 billion Euros in the industry. This would mean a further siphoning of liquidity from the economy over the next few years.

Fall in Corporate Funding:The same report by Fitch estimates that lending to corporates has fallen by 9&, or 440 Billion Euros. This should hard-ly come as a surprise, and is one of the greatest criticisms of the Basel accords.

Technically, with higher capital require-ments and lower leverage, there would be greater investor confidence in the banking sector, thereby making the cost of its debt lower. A case in point of cheaper costs of


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borrowing due to assured investors would be Deutsche Bank, where the low spreads on it’s debt has been attributed to the public perception that Germany will never let it fall.

Greater financial reserves in large banks should therefore lower their WACC (Weighted Average Cost of Capital), which might mean lower cost of fund-ing passed to consumer/corporates.

However, within the LCR framework, corpo-rate debt is considered a level 2 asset, which means that banks will be forced to hold onto fewer corporate bonds. This problem is exac-erbated by the leverage ratio cap introduced, which states that banks should not hold as-sets 33 times more than their capital, regard-less of the risk weighting of these assets.

Already being forced to hold liquid as-sets with low returns, banks will have to be pickier about lending to corporates in order to generate greater returns on their equity. In essence, bank loans to cor-porates have become more expensive.

The chart by S&P shows that following 2008, the increase in lending to corporates by Eu-ropean Banks has fallen drastically to 0% and we see decreases in lending instead.

The results is that large corporations have to turn to debt markets to finance their pro-jects, which would mean, of course higher costs of funding. The greater impact, how-ever, would be on SMEs, as hitherto, their only means of funding was through banks.

36 | the analystFundamentals

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The ECB, recognizing this, has taken steps 2013 targeted at SMEs, such as reinforc-ing the venture capital market in Europe and making adjustments in the capital re-quirements to extend lending to SMEs. One can only wonder if such a step was taken too late, as the Eurozone contin-ues to see poor economic performance.

Sovereign debt bubble:A peripheral, negative implication is the miscreation of incentives for banks to ac-quire sovereign debt. This issue arises from the fact that within the calculation of ‘High quality highly liquid assets’, sover-eign debt of certain countries is considered a Level 1 asset. Level 1 asset are to make up 60% of the bank’s ‘high quality highly liquid assets’; only the most liquid of as-sets, such as cash are considered level 1.

Due to its nature of being easily liquidated, sovereign debt of certain countries was therefore classified as a level 1 asset. A re-cent report by Fitch has shown that banks in Europe have increased their exposure to sovereign debt by 26%, or 550 Billion Euros since Basel III was implemented.

The problem here is that the sovereign debt of PIIGS (Portugal, Italy, Ireland, Greece and Spain) is similarly classified as level 1, due to them being part of the Eurozone. The soundness of such a policy should defi-nitely be questioned: the Eurozone debt crisis and Detroit’s default have shown us that government debt should no longer be viewed as traditional safe havens. Fur-thermore, due to this increased exposure to sovereign debt, a sovereign default would heavily affect large banks and central banks.

ConclusionThere is little doubt amongst even the harshest critics of Basel III that the imple-mentation of the capital requirements will reduce the chances of a leveraged-induced crisis. This however, comes at the cost of slower growth and recovery: the classic trade-off between risk and return in finance. We have seen the negative side of Basel: contraction of the money supply in Europe and higher costs of funding for corporates.

An idealistic alternative would be to per-haps relax the regulatory requirements to cash-strapped countries such as Greece and Spain, and extending the deadline for these countries. Governments should consider more independent, flexible actions to deal with the specific weaknesses of their econo-mies. Regardless, the onus will on be the ECB and individual governments to identify gaps in the regulations and take decisive steps to mend them. Otherwise, the next 6 years promises to be challenging times for Europe.


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Dubai: Islamic Finance as FocusBy: Oxford Business Group

39Inside Analysis | the analyst

Plans to establish Dubai’s credentials as a centre for Islamic finance took a step forward in July with the opening of a new academic institution to train pro-fessionals for employment in the sector.

A joint initiative backed by the govern-ment and the Hamdan Bin Mohammed e-University, the Dubai Centre for Islamic Banking and Finance is expected to sup-port the emirate’s push to become a leader in Islamic finance. Included in its curricu-lum will be master’s degrees, foundation certificates and short-term training pro-grammes in Islamic banking and finance.

According to Dubai’s crown prince, Sheikh Hamdan Bin Mohammed bin Rashid Al Maktoum, the centre repre-sents a “major step forward in the eco-nomic development agenda of Dubai”.

Part of that agenda was set out in Janu-ary 2013, when the emirate’s ruler Sheikh Mohammed bin Rashid Al Maktoum an-nounced that Dubai would work to de-velop itself as a centre for Islamic business, actively promoting sharia-compliant bank-ing and insurance, as well as other areas in-cluding the arbitration of Islamic contracts and setting quality standards for halal food.

The boost to the economy could extend beyond financial services, according to Hamad Buamim, the director-general of the Dubai Chamber of Commerce and Industry. By gaining recognition as a

centre for Islamic finance, Dubai would also be able to capitalise on other aspects of the sharia-compliant economy, such as the services, lifestyle and food sectors, he told the local media in early August.

If the initiative proves successful, the emir-ate will have to overcome stiff competition as it looks to expand its presence in the $1.5trn global Islamic finance market, which is estimated to be growing by 15-20% per year. Saudi Arabia, Kuwait and Qatar are all looking to broaden the base of their sharia-compliant financial sectors, while Bahrain has long been acknowledged as the industry leader in the Gulf region, hav-ing developed many of the instruments that have become standard in the market-place. Further afield, Malaysia is considered to be a major player on the global stage.

Some positive signs have emerged from Dubai so far, including an uptick in the number of sukuks issued and listed in re-cent months. In April, Sharjah Islamic Bank (SIB) floated a $500m sharia-compliant bond, bringing the nominal value of sukuks listed on the emirate’s exchanges to more

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40 Inside Analysis | the analyst

than $12bn, with $4.25bn of that coming since the launch of the Capital of Islamic Economy initiative was announced in Janu-ary. In total, 15 sukuks are listed in Dubai – five on the Dubai Financial Market (DFM) and 10 on NASDAQ Dubai.

Both DFM and NASDAQ Dubai have been active in the push to bolster the Islamic fi-nancial services sector. In January, the DFM released new draft standards for the struc-turing of sukuks, calling for industry com-ments. The hope is that new regulations, if adopted more broadly, would attract inves-tors to the emirate. Bahrain and Malaysia have both built up their positions in the Is-lamic finance sector in part by establishing regulatory regimes that are now influential worldwide.

Then in May, NASDAQ Dubai announced it was adding a platform that would allow trad-ing of both Islamic and conventional bonds. The new system is expected to boost trans-parency and liquidity, as prices of NASDAQ Dubai-listed bonds will now be visible to all investors at the same time. Previously, these debt securities were traded only through banks offering over-the-counter trading.

While Dubai has the advantage of already being a recognised centre for banking and business, with the technical infrastructure in place, challenges remain when it comes to developing the broader sukuk market, not only in the UAE but elsewhere in the re-gion. In part this is a general issue related to bond markets, quite apart from the Islamic finance sector. To date, the number of debt instruments issued by the government and corporations has been fairly modest, which has meant that the associated services sec-tor – including market makers and primary dealers – has yet to develop fully.

Assuming that hurdle can be surmounted, the specialised concerns of the sharia mar-ket increasingly come to the fore, including a need for lawyers and bankers who spe-cialise in Islamic finance. To some extent, the Dubai Centre for Islamic Banking and Fi-nance should help in this regard, by training people that can staff these businesses and support the development of a more robust Islamic financial services sector in Dubai.

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In this issue of The Analyst, we talk to two LSE students regarding their summer internship experience.

Kevin KilpatrickBSc Mathematics and Economics Citi, Investment Banking Division What is the function of the division you interned at?Where I was based, the main function was advising companies on possible and current Mergers & Acquisitions (M&A) transactions.

What were your responsibilities?My main responsibility at the begin-ning was preparing presentation materi-als for client meetings. But as the intern-ship progressed, I moved on to carrying out valuation techniques, sitting in on meetings and financial modelling work.

What was the most challenging and in-teresting aspect of your internship?The most challenging aspect was my personal frustration of dealing with the bureaucracy surrounding investment banking. While I had no problems work-ing long hours, I felt that things were not always done as efficiently as possible. However you quickly realise that you just have to get used to it and things seem to get better the more senior you become.

The most interesting part of my internship was getting to work on live deals, which involved some of the largest companies out there. For me this included a huge shisha business based in Dubai (and no unfortunately I wasn’t able to attend cli-ent meetings, not from a lack of trying).

What was the most important skill you gained from the internship? The most important skill I learnt was ef-ficient time management. In order to do well in investment banking, I think it is important to be efficient so you’re leav-ing the office at 2 or 3am rather than 6 (al-though sometimes staying till 6 might be necessary no matter how efficient you are).

Another important skill I gained was the basics of accounting and financial mod-elling I have never taken an account-ing module at LSE so it was all quite new.

Any advice for students wishing to apply for an internship next year?Apply as early as possible. Honestly, they don’t say applications are on a rolling ba-sis for no reason. If you apply late, by the time they even get to look at your appli-cation (no matter how good your CV is) they will most likely have filled their quota.

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THE ANALYST INTERVIEWS: IBD INTERNSHIPSBY SHU HANG LOW

42 Careers | the analyst

Any advice for students starting their in-ternship in the coming summer?Make the most of the first few weeks. Ask as many questions as you want in the early stages because they will only sound stupid if you are asking them in the later stages or if you have asked them before. And finally, try to have fun and get to know your col-leagues. Forced networking is a lot less en-joyable than making genuine friends over the summer (as cheesy as that sounds).____________________________________

Ivan ThamBSc EconomicsCredit Suisse, Investment Banking Divi-sion What is the function of the division you interned at?My division provides investment bank-ing services to clients from the real es-tate, health, technology, media and tel-ecommunications (RHTMT) industry.

What were your responsibilities?I was involved in pitch book* creation, fi-nancial modelling, conducting relevant appropriate broker research and assist-ing in the execution of ongoing live deals.

* A pitch book is a sales book created by an investment bank or firm detailing the main at-tributes of the firm. The pitch book is used as a tool to secure deals and attract new clients.

Tell us about the most challenging project you were involved in.The most challenging project I was in-volved in was to prepare a buy-side pitch and present it to the senior members of the bank within the stipulated time of one weekend. I got to work on every ele-ment of the pitch, from valuation to strat-egy analysis to finally presenting my find-ings and recommendations. I found it intellectually and personally satisfying.

What was the most important skill you gained from the internship? The most important skill I gained was the ability to work on a wide variety of tasks under pressing deadlines. I was al-ways finding new ways to boost efficien-cy, whether it was through using a new shortcut or refining my workflow process. Any advice for students wishing to apply for an internship next year?Be selective, focus on applying to only a few firms, and make every effort to attend every event that those firms have to offer to pro-spective interns. This not only demonstrates your interest, but also your consistency in making an application. Also, be early, as most firms recruit on a rolling basis Any advice for students starting their in-ternship in the coming summer?Keep up-to-date with what is happening in the industry you are interested in. Find out more about the division you will be joining so that you can make a more informed deci-sion regarding team selection later on.

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Oxford Business Group is partnering with

To offer students a free subscription to our research materialThis read-only access will give the opportunity to read all the OBG reports, including the latest directly from its new website. To read more about Oxford Business Group, please go to www.oxfordbusinessgroup.com.This online subscription is worth £500 – this resource is o�ered free of charge to university students for the students for the duration of their studies.

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The Analyst, Michaelmas Term 2013

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Transcript of The Analyst, Michaelmas Term 2013