Tricky Situation

Government’s current stance with regards to the potential Pfizer takeover of AstraZeneca sends mixed messages about UK recovery. 

Chairman & CEO Ian Read

Chairman & CEO Ian Read

David Cameron’s stance with regards to Pfizer’s potential takeover of AstraZeneca is somewhat peculiar. Research & Development especially in the Science industry signals innovation, persistence and longevity. Therefore the employment associated to the Science industry appears to be the kind that the UK economy desperately requires in order to aid the fragile recovery. The anomaly comes as a surprise because both the Prime Minister and the Chancellor favour a takeover bid from US firm Pfizer, albeit with “more assurances” from Pfizer. The government are of course powerless to stop the takeover and Pfizer have no obligation to pander to Westminster’s requests, still, supporting a takeover bid that is most likely to remove highly skilled jobs away from the UK is not exactly a favourable position to adopt. More potently, the wrong message about the UK labour market is being sent.

Pfizer Chairman Ian Read will have fully comprehended the saving potential by transferring 20% of AstraZeneca’s R&D department to a more cost-effective location. Pfizer shareholders will support the move away from the UK as dividends will rise due to the vast savings, an estimated £595million will be saved if the Pfizer manage to forsake the UK for a more cost effective location. Savings on such levels will provoke a reaction from shareholders who will always look to maximise their dividends. It is their right to exercise that privilege and governments are powerless to stop such an action. It should be noted however that governments have a debt to its citizens to ensure that everything is done to at least show firms why the UK is an attractive place to conduct business. To stay silent would be questionable; supporting the bid that possibly ends some 6,700 jobs in such a specialist and labour-rich sector such as Pharmaceuticals is a surprise. When one considers the economic rhetoric propagated by the governments has been focused on full employment, safeguarding highly skilled jobs should subsequently be high on the list of priorities for the government.

Shadow Business Secretary Chuka Umunna said the assurances Pfizer had given ministers were “not worth the paper they are written on,” as it had declined to rule out breaking up AstraZeneca in the future.

“The government could act immediately to work to put in place a stronger public interest test encompassing cases with an impact on strategic elements of our science base and seek a proper, independent assessment of the potential takeover as Labour has called for. Instead, ministers have sat on their hands.”

Although it is the job of the opposition to opine an alternative perspective to that of the government, Chuka Umunna’s point does reflect the public interest and the Society of Biology, Biochemical Society, British Pharmacological Society and Royal Society of Chemistry all reflect his views. Nobel Prize winning Professor Andre Geim “fears” for the future of R&D in the UK. They all concur that recent mergers have led to firms seeking economies of scale, simultaneously translating to laboratory closures and job losses. This makes it even more astonishing that the government would encourage this particular takeover.

Hitherto both the Prime Minister and the Chancellor have maintained their faith in British business, especially in creating long-term employment opportunities. Just last month the Chancellor pledged to “fight” for full employment and of course he was referring to employment on a much larger scale. In the case of Pfizer, some 6,700 jobs could be lost. This case is more poignantly about what kind of message the public receives. Economies need something that is not tangible to fully recover and that is confidence. This contradiction does make the government look somewhat inconsistent. Had the government distanced itself or highlighted some of the features that make the UK an ideal place to conduct business, features such as the lowest corporation tax in the EU or Universities with rich heritage and so on it could at least tie in with the other messages they are sending about the recovery. Its current stance however leaves them looking somewhat flustered.

 

 

Great Read

Hello World.

Liam Halligan has a reputation as a straight-talking, logical and insightful journalist and this piece is no different. In his piece in The Telegraph Halligan discusses the present banking system in place in the UK and more specifically highlights the link between Investment and retail divisions. He goes on to explain and clarify that only complete separation will ensure catastrophic government bail-outs will not occur in the future, which could potentially save taxpayers billions. I’ve touched on this issue here.

 

http://www.telegraph.co.uk/finance/comment/10822521/Only-full-separation-will-make-our-big-banks-safe.html

Great Read

Hello world. This is a post from the fantastic Systemic Disorder blog. It relates to my previous feature, where I detail the changing London landscape. The piece featured highlights some of the synonymous traits parts of New York City have undergone as a result of gentrification.

http://systemicdisorder.wordpress.com/2012/08/08/the-corporate-steamroller-of-gentrification-is-a-deliberate-process/

London: Gentrification Capital of the World

London is undergoing rapid transformation. It has been the case since the mid-1990s and it shows no signs of slowing down. With this upsurge of development are qualities lost in the areas that are developed? Are the newer traits and trends in developed areas better than what was there before? 

Savilles

Savilles

London Mayor Boris Johnson has been a stark proponent of inviting wealthy foreign investors to London. In October he suggested that VAT and import tax should be relaxed for our foreign neighbours in order to encourage Foreign Direct Investment (FDI).

“VAT and import duty – those it seems to me are classically things that can be resolved by growing trade and co-operation between London and China, London and Beijing. We need a proper, thoroughgoing free-trade agreement. If the EU won’t do it we can do it on our own”

If this were to occur, many non-domiciles would be spending even more of their wealth in London. The idea of facilitating foreign wealth on new enterprise opportunities in London is one fully supported by the Mayor and several other politicians, including Chancellor George Osborne. The video below outlines some of Johnson’s plans for London. When you combine the Right To Buy scheme proposed by the Government it could be suggested that both the London and National government are looking to create another property boom.

The idea of new business, new stylish housing developments, newer communities and a new beginning for those who concur with the Mayor strike a positive cord. The fact that a prosperity bomb if you like, can explode and a plethora of new businesses can suddenly replaces older ones surely translate to a better, more profitable society. The fact that bigger businesses seek to expand to areas that are ripe for development ensures that plenty of jobs will be created, more of us will work and in a macro sense the economy will grow. Surely this is what we desire….

Or is it the case that newer developments and everything associated with it impose a revised culture that virtually replaces the existing one. Ensuring that this newer culture, this different way of life that imposes itself on existing residents is cohesive with the established culture is not usually a priority for developers or investors. In fact you could suggest that their priorities take precedent because their interests are deemed more important and their main priority is profit maximization. Much of the rhetoric is aimed at what is coming, what the future holds; new developments rarely acknowledge the qualities that the area had or look to uphold or maintain some of the non-monetary merits a community had. So residents that reside in areas that are listed for development are often left marginalised because the rate at which they usually have to adapt is relatively quick and it could be suggested that they no longer feel they are part of their community.

London is undergoing rapid transformation, many people welcome the new age of “prosperity” and many view it as an inevitable outcome of what our society eventually leads to. Nevertheless, there is a growing concern that the rate of change tends to strip away some of the qualities some communities once had, qualities that cannot be monetized, nor measured, nor necessarily tangible, but certainly potent and very much real.

This movement of people towards inner city London is peculiar because it tends to be to areas that were written off by several, deemed not fit for purpose by some, but home to so many who are now marginalised. What is even more striking is the fact that property prices, both rents and house prices are increasing. So demand is inelastic, in the sense that it is relatively unresponsive to a change in price. Therefore if you are a landlord or a developer the profits are virtually guaranteed due to this wave of perpetual inner city London demand.

New Dwelling house prices

New Dwelling house prices

New Dwelling house prices

New Dwelling house prices

Both graphs illustrate the rise and rise of property prices and the second graph clearly highlight the disparity between London and another large economic area: the North West.

According to the latest Census, Newham (East London) lost 38% of its white British population. This does suggest that many of its residents are opting for areas such as Essex to reside. On the contrary, between 2001 and 2011 Brixton, an area that used to be associated with a predominately Caribbean demographic has seen ten continuous years of increases. The same is noted in areas such as Hackney, Wandsworth, Camden and Islington. Moreover, Stoke Newington and Dalston have had increases from 15% in 2001 to 26% in 2011. What this highlights is that inner city areas ( mainly Zones 1 & 2 on the Tube map) have gradually become more accessible and more appealing to many.

My qualm lies with the fact that this movement of people inflates prices of rents, property, goods and services and it leaves existing people, many of whom have lived in that area for a long time financially constrained. Should more be done in order to reduce the negativity associated with prices you can no longer afford? Or does the onus lie with the individual? Clearly, this conundrum is not a priority for a government, especially this Tory led coalition that favours individualism and self-sufficiency. They have not hid the fact that they are looking more people to buy their homes. Perhaps they are merely continuing a legacy they prospered from so it is a continuation of what they believe in. It should be noted that I personally believe in helping yourself and becoming self-reliant, but helping each other is critical to upholding what is left of any community. This does seem to be eroding rapidly however. If you can unite and help one another, you are helping yourself whilst helping others and that is the current that binds a community. But this new wave of social cleansing and this message sent out by property developers and the government of profit over people gears our society for something that we are just at the beginning of. The future of London seems to be gearing towards only those that can afford it and prices do not seem to be going down. It will be a shame if the vast majority of London transforms into a city where only those with enough money can afford it. The way government policies are aimed, market power is structured and consumption trends are there only seems to be one outcome. The next twenty years will see the London demographic rapidly transform.

The illusion of competition

Hello world. My posts on this blog have been sporadic, I’m generally moved to write by economic activity and the global economy (Africa excluded) has been, by and large plodding along in its sluggish manner. There has been no breakthrough policy shift; no ideological shift away from the current set of policies, rather, a continuation of what we’ve seen, which is public sector cuts and the detrimental consequences of such actions.

What this prolonged period of economic activity has shown us is the fact that profits will always by certain sections of our society. Despite policies that have had a nefarious effect on large sections of our community, profits have been made and if we look at the market structure of the firms making profits then it is clear that they mainly resemble oligopolies and monopolies.

Before I explain the ramifications of this apparent anomaly, I should stress that I am not here to lambast profit making. Profits are a sign of an efficient business, whereby costs are controlled and a business can expand. Without profit business would not exist, not only would there be no incentive to innovate and take ideas to market, but a firm would have no means in which to continue producing their good or service. In an ideal world however, profits would be generated in a naturally competitive market. And a competitive market has no room for oligopolies and/or monopolies to form.

My previous pieces here and here show how oligopolies are bad for consumers because they allow firms to charge whatever prices they feel suitable, leaving consumers with no choice. What is so distasteful is the fact that goods and services that are essential to our wellbeing are the ones where competition is non-existent and legal barriers are erected in order to prevent newer entrants from challenging established firms.

It may be coincidence but as the weather gets cooler the utilities market seems to increase prices and this year is no different. If we look at British Gas, one of the largest firms in this market, they are increasing gas by 8.4% and electricity by 10.4%. Ian Peters of British Gas admits it is “unwelcome news” but in an industry where there is no effective competition comments such as his could act as a condescending reminder of the contrasting fortunes of our increasingly divided society. Whilst I do not doubt the sincerity of his comment, it comes during an extremely difficult period of stagnant economic activity, where households have been forced to cut spending therefore demanding less. Comments such as his can only add insult to injury. The Energy Secretary Ed Davy was not pleased, adding that the price increases in general were “extremely disappointing news.” He and the Prime Minister advocated that consumers “shop around” for the best deals. Therein lies the fundamental problem. Even if consumers switch from one energy company to another the market structure itself dictates similar prices, thus the savings are marginal at best. For savvy consumers looking to save every penny (and in this climate, who could blame them?) this is a restrictive option. It should be noted however that collusion in any oligopoly is either deliberate (which is illegal) or tacit. So firms will mimic their rivals.

Source: BBC

Source: BBC

The formation of the energy cartel in the UK is an explicit example of market failure. Market failure is where the free market fails to effectively distribute resources efficiently. In order for governments to erode this failure there are a number of political and economic tools it could utilise in order to help correct this failure. Governments often spout the notion that markets are regulated. Regulation is a surrogate form of competition that probably disrupts the flow of business activity as oppose to aiding it. What governments should do and what they claimed they were doing when they privatised several important industries was ensure that market power cannot become concentrated into the hands of a few large firms. This has not happened. Rather, the inefficient government owned industries have been replaced by the inefficient privately owned firms. In fact, when government owned them they had to answer to the taxpayer, now these firms answer to shareholders, the stakeholders i.e. consumers have no say. Their acquiesce is a formality.

The same situation is prevalent in transport where prices will rise again in January by 4.1%. Again the traits are synonymous with other oligopolies, consumers have no choice.

Powerful firms often use branding as a way to create the illusion of competition. Branding allows consumers to associate that good or service on its own merits, but as the diagram below highlights, rather poignantly, so few firms actually have substantial control over goods and services we have to demand.

The 10 major food companies

The 10 major food companies

I began this piece by stating that profits are still being made by sections of our society. I am not advocating for some quasi profit distribution to the lower echelons of society. I am however suggesting that the public demand much more from national government. Where oligopolies are formed, governments should be pressured by the public to erode the legal barriers preventing a number of newer entrants challenging the dominant firms. Until actual competition is established and markets resemble a monopolist market structure, where there a lot of firms and new entrants can enter the market easily, prices in essential industries are only going to go in one direction.