India 1 China 0?

Does the economic rise of India make it the country to watch instead of China?

There has been much talk of the BRICs [Brizil, Russia, India and China] and then the  MINTs [Mexico, Indonesia, Nigeria and Turkey] –  newly-industrialised countries which were going to be instrumental in driving the world economy. Of these, Russia and Brazil have suffered from slow growth and falling commodity prices and the MINTs also seem to have faded from the economic horizon and so only China and India remain.

Last month China’s growth fell and India’s GDP growth rate overtook it. Previously China had consistently outpaced India so that China’s average income per head which was approximately equal to India’s in the 1970s is now four times as high. Although the change in relative growth rates is currently more to do with a slowdown in China than an increase in India’s growth, the future is bright for the latter country. China is currently facing up to the need to look after a rapidly aging population while India has a much younger population and so will not face the burden of dealing with an aging population for some time.


Economic Data

The collection of data about the economy is possibly not the most exciting element of economics however it is one of the most significant since, without accurate data, the Government and the Bank of England are unable to accurately assess the state of the economy and hence manage the economy.

Last week there were two interesting developments in the statistical world. The first was the announcement of two new measures of inflation which might shortly  replace the Consumer Price Index (CPI) which previously replaced the Retail Price Index (RPI). The new measures are CPIH – the consumer prices and housing index – and HHI – the household inflation index which aims to reflect the costs that households face so includes interest payments as well as the prices of goods and services. It is possible that CPIH might soon replace the CPI as the indicator used by the Bank of England. It is likely that CPIH will be slightly above CPI since housing costs tend to exceed the average rate of inflation. Therefore, if the measure is adopted, it is possible that the 2% target will change as well.

The other development involved an Old Brentwood, Sir Charlie Bean, who was interviewed on Radio 4 on Thursday. He was previously Deputy Governor of the Bank of England, and is now head of independent review of economic statistics, set up by the Chancellor of the Exchequer after problems with some government data, leading to many revisions.. His view is that economic data has not taken into account the changes which have taken into account the way the digital economy has changed we operate. For example,  a few years ago, when I booked a holiday, I would have gone to a travel agent and booked my holiday through them, paying them a commission which would have been counted in the UK’s GDP. Today I will go online and book my own flights and then go to Airbnb to book my accommodation. I might even avoid eating in restaurants and, instead, try one of the new schemes to eat in private homes. Similarly the way I obtain my home entertainment has changed – no longer do I buy CDs (or gramophone records!) but download music and, similarly, do not buy DVDs but use catch-up services for my TV viewing.  Not all of these transactions will be included in the GDP and Sir Charlie believes that the inclusion of such transactions might add as much as 0.66% per year to the UK’s GDP.



CEO pay – an example of economic rent, rather than transfer earnings?

A recent report by the London School of Economics (LSE) on executive pay has cast light on a rather forgotten corner of labour market theory – that of economic rent and transfer earnings.  The wages of most workers can be divided into two different parts.  The first part is the transfer earnings, or money which must be paid to the worker in order to persuade them to do the job.  This can be thought of as the bare minimum the worker will accept.  This may well be affected by such factors as the next best employment option open to them and the wages it might bring.  The rest of their salary is known to economists as economic rent, or the extra they receive above their transfer earnings.  This can be seen as the earnings equivalent of supernormal profits to a firm.  It is extra payment which the worker does not really need in order to persuade them to do the job, but which they receive in any case.

The recent LSE report, prepared after extensive interviews with the headhunters who recruit CEOs, came to some interesting conclusions.  The first is that the average annual salary for a FTSE 100 CEO is now £4.6m per year.  It is often suggested that the for most of those individuals the vast majority of this money represents transfer earnings rather than economic rent.  Why?  Those of us who earn considerably less, which is statistically most of us, are told that there are very few who can actually do such jobs and that there is a global market for this limited supply of very talented individuals.  If large UK firms do not pay these high salaries then these workers will go elsewhere, particularly the US.  In other words, the opportunity cost for them in accepting a job with a UK firm is very high because of the other options open to them.  Therefore, even if their salaries are in the eye-watering region of £4.6m, they are receiving little in the way of economic rent.

However, they LSE reveals that headhunters think differently.  Firstly, they describe most FTSE 100 CEOs as “mediocre” and they comment that 100 people could have filled the job just as ably as those who actually are chosen.  This suggests that these workers are not as limited in supply as they themselves would have us believe, and therefore that the opportunity cost for them of accepting a CEO post might not be as high as the picture they have painted because they would find it difficult to earn such a salary elsewhere.  If much of their salary is, in fact, economic rent then labour market theory suggests it can quite safely be taken in the form of tax without altering their behaviour in the slightest and without affecting economic efficiency  It is possible that Thomas Piketty could make some useful suggestions in that direction………..

Links to newspaper articles on the LSE reports can be found below: