Issue

54

04 November 2014

SMU Political-Economic Exchange

AN SMU ECONOMICS INTELLIGENCE CLUB PUBLICATION

This Issue in Brief:

India: After the 2014 General Elections
Now that Narendra Modi has served in the capacity of Indias Prime
Minister for more than 5 months and counting, Atima Sarda takes a
look at the initiatives that his government have spearheaded since
taking power. Is India poised for a new chapter of growth and
progress? Read on to find out more.

In collaboration with

Inequality in the USA

Is capitalism the cause for the worsening income inequality situation
in the United States? Jude Dominic discusses policies that can be
used to rectify the worsening income discrepancy, and their
individual implications on the economy.

The Effect of Ageing on Europe

Population ageing is a global challenge that could have widespread
cultural, economic and social implications. Shivika Srimal takes a
look at the effects of an ageing population in the context of Europe;
how is this shift in demographics going to affect Europe as a whole,
and is having an ageing population necessarily a bad thing?

Proudly supported by

Issue 54

04 November 2014

India: After the 2014 General Elections

by Atima Sarda

Modis swearing in on the 26th of May, 2014 announced a new chapter in Indias regional and international
relations. As stated in the Bharatiya Janta Partys manifesto, the new government looks to reboot and
reorient the foreign policy goals, content and process, in a manner that leads to an economically stronger
India, and where its voice is heard in the international fora. In other words, the government is aiming to
expand Indias reach and impact on the economic, social, cultural, scientific, and political avenues of the
world - they wish to announce India, so to speak.
India has a long history of collaboration with several countries and is considered a leader of the developing
world - this and its growing international influence can give it a more prominent voice in global affairs.
Keeping this in mind over the last 4 months, the new Indian prime minister has made official visits to Nepal,
Bhutan, Japan and the United States of America. He attended the BRICs conference in Brazil where he met
the Russian president, he gave his maiden speech at the United Nations General assembly in America and
he invited all the heads of the members of SAARC to his inauguration ceremony. Within 100 days of the
formation of the new government, Sushma Swaraj the minister for External Affairs has also made official
visits to Dhaka, Bangladesh, Kathmandu, Nepal, Naypyidaw, Myanmar, Singapore, Hanoi, Vietnam,
Manama, Bahrain, Kabul, Afghanistan, Dushanbe, Tajikistan, New York, Washington, D.C. and London.
Moreover, soon after the new government took over, important world leaders expressed their willingness
to work with Modi to strengthen their relations with India. In fact, all 5 permanent member states of the
United Nations Security Council have already sent their envoys to India, to this effect.
The Hindustan Times reads, "Mr. Modi's foreign policy over the past three months has been marked by
three distinctive traits - warmth and close engagement with smaller South Asian neighbours; reconciliation
followed by a tougher stance vis-a-vis Pakistan; and multi-layered engagement with the big powers". But
what does all of this truly mean for India, how do these so called official visits impact India and its
economy? Well for starters, this new stability in foreign relations works to increase Indias credibility as a
market and has already attracted over $40 billion in foreign investments. Also, ahead of the arrivals of their
representatives in India, countries like Sri Lanka, Pakistan and Bangladesh have freed Indian prisoners in
good faith.

Issue 54

04 November 2014

The exposure that India gets at these global platforms essentially promotes India, selling it as a viable
market option for both, countries and companies. To add to this the increased quality of this exposure
changes the traditional views on India and brings other nations up to speed with Indias transformation
since the snake charmers days. Consequently, investors have started to look at India as a great new
project, one with enough skills and resources to develop into a truly great nation. Moreover, establishing
new relations and reworking old ones have earned India a sort of welfare vote which allows Indian
embassies at countries like Libya, Iran and Iraq to provide safety and security facilities to the Indian
nationals living there. It also opens up several opportunities for the Indian youth in a global environment
and on a whole, it boosts Indias growth and development as an economy.
In conclusion, the government still has some work to do specially in the defence department. The national
border issues with Pakistan and China that have been going on ever since Indias independence need to be
resolved rather than just being managed. However, it is worth acknowledging that this new government
seems to have taken the right steps as far as the Ministry of External Affairs is concerned. In a short time,
they have managed to remodel Indias international relations structure so that it is more relevant and
comprehensible. And most importantly, there are evidences of the efforts being made, along with trends
that are now emerging to point towards a very favourable future for India.

Issue 54

04 November 2014

References

l

l

BBC Monitoring, Indian media: Modis 100 days in power. (2014, Sept 2) retrieved from
http://www.bbc.com/news/world-asia-india-29026072
Akhilesh Pillalamarri, What did Narendra Modis US trip accomplish? (2014, Oct 2) as reported by The Diplomat:
know the Asia Pacific, retrieved from http://thediplomat.com/2014/10/what-did-narendra-modis-us-trip-
accomplish/
Cleo Pascal, Will Modis India reinvent international relations? (2014, May 30) as reported by The Huffington Post,
retrieved from http://www.huffingtonpost.com/cleo-paskal/will-modis-india-reinvent_b_5412886.html

Issue 54

04 November 2014

Inequality in the USA

by Jude Dominic

The answer to the question
Would you say capitalism is a successful system? is one that seems obvious
at face value. The past century has seen the fall of the centrally planned Soviet Union and the rise of
capitalist America. Yet, the answer to that question is being challenged today by a phenomenon that
presents an uncomfortable problem for anyone concerned with governance and national strategy the
phenomenon of inequality. The extent of this problem is illustrated clearly by this chart:

This chart shows the growth in income for the bottom 90% in the US (in light blue) and the top 10% (in dark
blue). As the years went by, the top 10% has experienced and increase in income growth, while the income
growth of the remaining 90% has gone the opposite direction.
It is an oft-held view that inequality is a healthy phenomenon which is a natural by-product of capitalism.
Indeed, inequality does play a part in motivating those who earn lower incomes to work harder and increase
their productivity. However, high levels of income inequality is certainly a major economic and social
problem which may end catastrophically like it did in Russia, when workers rose up against the Czar and his
family in the Russian Revolution of 1917.

Issue 54

04 November 2014

One of the most commonly-suggested solutions to the problem of inequality is increased taxation on the
wealthy. This can be done through taxes on income, wealth and consumption among others. The idea is
that this money can be returned to the less well-off by means of welfare spending. While Robin Hood-style
policies may be popular with the general populace, the rich will naturally try to prevent them through
methods such as lobbying and campaign financing. This is a problem inherent with unpopular policies it
is hard to win elections on a platform promising more taxes, especially if those affected by such policies
have the power to influence these elections. In addition, taxes add to business costs and can discourage
business activity. Recently, Burger King made plans to merge with Tim Hortons in Canada to avoid the
USAs higher taxes. This example highlights a key consequence of raising taxes - they encourage
corporations and the wealthy to move their wealth and investments out of the country, in turn leading to
reduced economic growth, lower wages and higher unemployment. In fact, some economists advocate
lowering taxes to get firms to step up production and hiring as this reduces unemployment.
Another way to reduce inequality is through policies focused on giving more to the poor as opposed to
taxing the wealthy. This can be achieved through various policy tools such as healthcare subsidies as well
as scholarships to ease the financial burdens of the needy. These policies will eventually help to reduce the
entrenched income gap present in society today.

Issue 54

04 November 2014

Economists have asserted that even regressive taxes may be used for social systems geared towards
improving the skills of workers in an effort to improve their salaries and thereby reduce the income gap,
citing Swedens example.
However, not all degrees or educational certifications are useful to the country, or even to the individual.
Governments can try to influence public behaviour by subsidising only certain types of education. For
example, they can choose to subsidise only medicine or engineering in order to encourage more students
to choose these faculties as their chosen field of study. However, picking and choosing which degrees to
subsidise raises questions of fairness and also requires the government to implicitly concede that certain
types of education are more valuable than others.
Besides education, the government may also offer healthcare subsidies to help lighten the load of medical
bills on individuals and households. The downside to this kind of welfare is that it may reduce the incentive
for individuals to take care of their own health. Also, while some countries like Sweden have a social
contract whereby the public tolerates taxes in exchange for well-planned government spending, this may
not be the case in the US where many are fundamentally opposed to the welfare state and taxation.
As with all economic problems, there are many solutions to the problem of inequality. There is much the
government can, and should do, especially in its efforts to improve the situation of those on the wrong side
of inequality, so that they may catch up with their richer counterparts. Taxation will not solve all problems,
but neither will a complete reliance on welfare. A judicious mix of the two types of policies will be needed
to ensure that inequality is reduced, but not at the expense of Americas economy.

Issue 54

04 November 2014

References

Bureau of Labor Statistics (2013) Earnings and Unemployment Rates by Educational Attainment. Retrieved
from: http://www.bls.gov/emp/ep_chart_001.htm

Martin, C. (8 October 2014) How Sweden Fights Inequality Without Soaking The Rich. Retrieved from:
http://www.vox.com/2014/10/8/6946565/progressive-taxes-are-not-the-solution-to-inequality

Moratta, D. (3 October 2013) Should We Raise Taxes to Balance the Budget? Retrieved from:
http://www.forbes.com/sites/davidmarotta/2013/03/10/should-we-raise-taxes-to-balance-the-budget/

Picket, K. (3 October 2011) Occupy Wall Street Protestors Post Manifesto of Demands. Retrieved from:
http://www.washingtontimes.com/blog/watercooler/2011/oct/3/picket-occupy-wall-street-protesters-post-
manifest/

Obama, B. (9 October 2011) Why Im Betting On You to Help Shape the New American Economy. Retrieved
from:https://medium.com/@PresidentObama/why-im-betting-on-you-to-help-shape-the-new-american-
economy-e80a775b44ee

Issue 54

04 November 2014

The Effect of Ageing on Europe

by Shivika Srimal

Population ageing is becoming a key global challenge that will have profound economic, social and cultural

implications for decades ahead. Many countries in Europe have rapidly ageing populations, yet
significantly less income and wealth than other regions to deal with the adverse economic consequences
of ageing. According to WHO, the European Region has the highest median age in the world, and includes
9 of the 15 countries with the longest life expectancy.
An ageing population raises challenges for societies and economies, culturally, organisationally and from
an economic point of view. Policy makers worry about how living standards will be affected as each worker
has to provide for the consumption needs of a growing number of elderly dependents. Markets worry
about fiscal sustainability and the ability of policy makers to address timely and sufficiently these
challenges in several Member States. The seriousness of the challenge depends on how our economies
and societies respond and adapt to these changing demographic conditions. Looking ahead, policy makers
need to ensure long-term fiscal sustainability in the face of large but predictable challenges, as well as
significant uncertainty. This is all the more true as Europe has experienced the deepest recession in
decades, which is putting an unprecedented stress on workers and enterprises and has had a major
negative impact on public finances.
In some countries this process is particularly fast. Poland, for example, has one of the fastest ageing
populations in the European Union but had a fertility rate of just 1.30 in 2012. Furthermore, the ratio of the
countrys population over 65 as a percentage of the population aged 20-64 (the old age dependency ratio)
is expected to increase from 20.9% in 2010 to 58% in 2050 while the share of the working age population
(15-64) is projected to drop from 71.3% in 2010 to 53.4% by 2050. All of these trends spell potential
economic trouble for Poland.
Another recent impact which can be seen is on Finland. On 10th October 2014, Standard & Poor cut its
credit rating from the top level AAA to AA+. Finland was one of the few countries in the Euro Zone to be
left with a top credit rating. S&P cited ageing population as one of the main factors behind this move.

9

Issue 54

04 November 2014

The fact that ageing across the globe will have an impact on economies, healthcare systems, retirement
policies, culture, lifestyle and virtually every other aspect of society is undeniable. What is not known,
however, is how big this impact will be and how we can prepare for this ageing world.

Some Statistics
The demographics of Europe have been rapidly changing. In the second half of the 20th century, the
progressive decline to low levels of fertility and lower mortality rates among the elderly resulted in
population ageing in Europe. Positive or negative net migration flows tended to attenuate or intensify
countries ageing processes. In particular, in the post-World War II period, fertility increased and
subsequently declined in several countries: this demographic event, commonly labelled as the baby
boom, has been a further factor in the population ageing process of the 21st century.
Fertility rates across the continent have fallen to between 1.3 and 1.4 - below the replacement rate of 2.1
children. Recent demographic analysis predicts that the average age in Europe will be 42.2 by 2020,
compared to 39.8 in 2010. Life expectancy rates will also significantly increase in the coming decades -
from 75.34 in 2005-2010 to 77.84 for 2020-2025. Old age-dependency ratios (the ratios of the population
aged 65 years to that aged 2064) have grown in Europe over the last two decades, and the latest United
Nations projections (from 2010) indicate that they will grow faster over the next 20 years.

A Grandparent Boom Approaching?

No matter what the indicator used for the analysis, no country is projected to have a lower value of aged
population in 2060 than in 2010. In fact, these projected values are unprecedented in any human
population: over the course of history, populations may have boomed or shrunk, but their age distributions
have never been shaped almost like reversed pyramids, with the oldest age classes bigger than the
youngest ones. Whereas in 1960 there were on average about three youngsters (aged 0-14 years) for every
elderly person (aged 65 or over), by 2060 there may be more than two elderly people for each youngster.
What is more, the oldest may, on average, outnumber the children of less than five years of age by about
the beginning of the next decade. Thus, the presence of great-grandparents may also become more
common, and the family more vertical (more generations) than horizontal (more siblings): so maybe we
are in for a grandparent boom?
10

Issue 54

04 November 2014

Ageing Phenomenon Sweeping Southwards

For a large part of the 20th century, Sweden was the country with the highest median age; it was finally
overtaken only in the mid-nineties, when Italy took the lead, until the beginning of the new century. The
next oldest country, Germany, was also almost always in the top ranks (even in first position for a while).
After 2040, Latvia and then Romania are projected to have the highest median ages, evidencing the
southward shift of the ageing process. In fact, by that time, Sweden is expected to have one of the
youngest populations in Europe, together with most of the Nordic and Western Europe countries, while
most of the Southern and Central-Eastern Europe countries may still face population ageing.

Older People are Not a Drain Northern Irelands Case

A research for Northern Ireland's Commissioner for Older People conducted in in 2014 claims that older
people will contribute almost 25bn to the local economy over the next 50 years. Although Northern
Ireland has a rapidly ageing population, and by 2027, the number of people aged 65 and over is projected
to rise by 44%, this study challenges the negative perception that older people are a drain on the public
purse.
This study calculated that financial contributions more than offset the costs of an ageing population. The
countrys Active Ageing Strategy offers "the most robust protections" to the elderly and aims to lay the
building blocks for the future generation of older people to age with respect, dignity, choice and good
health.

Looking Ahead
Since different age groups have different needs and productive capacities, a country's economic
characteristics will likely change as its population ages. A standard approach to assessing these changes is
to assume constant age-specific behavior with respect to employment, consumption, and savings, and to
assess the implications of changes in the relative size of different age groups for these fundamental
contributors to national income. Investing in education and training so that workers are more productive
should be a policy priority. Also, expanding child care to allow more women to join or stay in the work
force should be implemented.
11

Issue 54

04 November 2014

However, this simple approach is likely to be misleading as changing norms and expectations are likely to
alter individual behavior in a way that will influence the economic consequences of ageing. In particular,
expectations of living longer than previous generations may induce individuals to remain in the workforce
for longer and to begin to draw down savings at a later age. In addition, the links between population
ageing and macroeconomic performance are mediated by the institutional context. With increasing
longevity and ageing populations, retirement policy, pension and health care finance, the efficiency of
labor and capital markets, and the structure of regional and global economic systems are likely to adjust.
The magnitude of these shifts may in turn depend on various factors affecting different countries or
cultures.
Thus, ageing is one of the greatest social and economic challenges of the 21st century for European
societies. It will affect all EU countries and most policy areas. The European Union as well as individual
country governments have started making efforts to mitigate the drastic effects ageing can have on
economies. Hopefully, these will work out in the best interests of Europe.

12

Issue 54

04 November 2014

References

European Commission (2012), The 2012 Ageing Report, Retrieved from

http://ec.europa.eu/economy_finance/publications/european_economy/2012/pdf/ee-2012-2_en.pdf
European Commission, Ageing and Policy, Retrieved from http://ec.europa.eu/health/ageing/policy/index_en.htm
Feldstein M. (2006), The Effects of The Ageing European Population on Economic Growth and Budgets, NBER
Working Paper Series, Retrieved from http://www.nber.org/papers/w12736.pdf
Lanzieri G. (2011), The greying of the baby boomers, Eurostat Statistics in Focus, Retrieved from
http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-SF-11-023/EN/KS-SF-11-023-EN.PDF
Wheatley A. (2013), Aging deepens debt-laden Europe's economic woes, Reuters, Retrieved from
http://www.reuters.com/article/2013/04/24/us-europe-economy-demographics-insight-idUSBRE93N09B20130424
World Health Organisation (2014), World Health Statistics 2014, Retrieved from
http://www.who.int/mediacentre/news/releases/2014/world-health-statistics-2014/en/
World Health Organisation, 10 facts on healthy ageing in Europe, Retrieved from
http://www.euro.who.int/en/health-topics/Life-stages/healthy-ageing/data-and-statistics/10-facts-on-healthy-
ageing-in-europe

13

Issue 54

November 2014

SEIC Correspondents for Issue 54:

Wong Shi Jun Aaron (Vice President, SPEX) Zhou Li (Creative Director)
Undergraduate
Lee Kong Chian School of Business
Singapore Management University
aaron.wong.2012@business.smu.edu.sg

Atima Sarda (Writer)

Undergraduate
School of Economics
Singapore Management University
atima.sarda.2014@economics.smu.edu.sg

Shivika Srimal (Writer)

Undergraduate
School of Economics


Singapore Management University
li.zhou.2012@economics.smu.edu.sg

Jude Dominic (Writer)

Undergraduate
School of Economics
Singapore Management University
judeds.2014@economics.smu.edu.sg

Undergraduate
School of Economics
Singapore Management University
shivikas.2013@economics.smu.edu.sg