DUBAI KEYNES SOCIETY NEWSLETTER JUNE 2019 ISSUE
editorial As our last term as heads of Dubai Keynes Society draws to a close, we can only hope that we have served the Society well and left an indelible impact. Our goals this year were to broaden the scope of the club, both in terms of our regular attendees and the range of topics and activities and we believe we have achieved what we set out to do. Our sessions in the 3rd term were indicative of this growth- with students from Y9 to Y13 in attendance, and from engineers to lawyers to actual economists, everyone brought something original to the table. Aanya, Jaahnvi and I would like to take the opportunity to sincerely thank Mr. Christopher, who will be guiding the Society long after us. Aanya and Jaahnvi have also been a pleasure to work with, and their organisation and dedication to the Society have been commendable. The following newsletter showcases insight from those in the DC community into the 2008 financial crisis- in which Mr. Teasel from the maths department was heavily involved- along with an essay regarding the current and future foreign aid predicament of the UK. Our newsletters have consistently aimed to showcase and celebrate the inherent subjectivity of economics- the final of the year is no different. Enjoy, and farewell!
diptasri gupta editor
risk and the financial crisis of 2008 sheridan teasel
Drawing on first-hand experience from within the very heart of the crisis of 2008, this article briefly
In particular, we will consider default risk. Default risk is
shares some insights regarding some of the real
the chance that companies or individuals
underlying factors that influenced the major global
(‘counterparties’) will be unable to make the required
crisis, especially those which are often overlooked or
payments on their debt obligations. Say you lend
oversimplified.
someone AED 10,000 for one year. You may wish to be
At its core, the crisis animated from decision makers at various banks, agencies and governments misunderstanding and miscalculating certain risks, at least partially.
paid more or less for the risk that they do not repay you. This is determined by many factors, including whether you believe them to be creditworthy and willing and able repay you. In many markets, this payment is in the form of the interest rate charged on the loan. If you believe your ‘counterparty’ to be very
I would assert that erroneous factors were made
good risk, you may be prepared to accept a lower
despite huge efforts to do the right thing, were
interest rate on the loan, but your counterparty is a
without malice, simply a function of the fabric of the
worse risk, you would want to be paid more in the form
playing field at the time. Risk plays a major part in
of a much higher interest rate. This would be a
economic theory and practice, yet is often
premium over the official interest rates (such as the
misunderstood. Various forms of risk can, and
Bank of England Base Rate) but how can we determine
should, be considered a commodity with a price
the right risk premium for any given counterparty?
attached to it. However, a “sensible” price for some risks, such as credit risks can be incredibly difficult
This risk premium was partly determined by market
to determine and too often risk is mispriced. Those
forces- whoever will lend to a borrower at the lowest
who are happy to take on risk need to be paid for
rate gets the business. If a bank lends money to Ford,
taking on other people’s risk, but the big question is
by lending the money the bank has “bought” Ford
how much should anyone be paid per “unit risk”.
default risk.
The bank probably had to lend the money at the lowest rate, and now owns both the default risk and the associated income stream of interest payments, which is higher than government interest rates. However, once that loan was made, it used to be extremely difficult for the bank to “sell” (i.e. offload) that Ford risk. Therefore, in practice, the credit “market” was only a one-sided market place, until about 24 years ago. In the mid-1990s, teams at several big investment banks pioneered the creation of a market for a new and innovative product to solve this problem called Credit Default Swaps (“CDS”). These CDS are tradable contracts which allow anyone to buy or sell protection on a given name. For instance, in the previous example, if the bank wanted to offset its risk to Ford before the loan is repaid, it could now go out and buy protection on Ford under a CDS. In one sense, you could consider buying CDS protection as analogous to taking out an insurance policy, although in practice the two are extremely different in very many ways, not least that you can normally buy and sell your CDS contracts freely. As there is no lending in a CDS, there is no base interest rate, only the risk premium for the default risk of Ford. The bank would now be receiving the premium it agreed under the loan but paying out another premium, which it agreed to pay for the CDS protection. If the bank gets it right, it can pay out less than it receives and “lock in” a profit; or vice versa. When considering the preceding paragraph it is important to note that there was, and still is, a very real need for the CDS product, and to this day, it still fulfils an incredibly important role in the efficient operation of credit markets. Even more important is that the CDS market can operate as a true market, with enough buyers and sellers of every tradable risk in order to ensure liquidity, efficient pricing and to avoid or prevent any price manipulation. In exchange regulated markets like the London Stock Exchange or New York Stock Exchange, which trade equities or shares, can take significant measures to ensure these goals. But even then it is distinctly imperfect, because some stocks just aren’t traded that often and few dealers wish to make a two-way market to buy and sell every stock (or share) in any size. Credit markets dwarf the equity markets according to some estimates: even ignoring bank loans and CDS, the US bond markets alone hold more than double the value of the US equity markets and the value of US bonds traded each day is more than three times the value of US stocks traded per day. Just like the bond markets, the CDS market is traded over-the-counter (OTC) by private negotiation, rather than on a formal exchange system. So each piece of CDS protection is bought from, or sold to, a specific counterparty.
So now there is another problem. From whom did the bank in our example buy the “protection”? Clearly it would be very foolish to buy CDS protection on Ford from Ford, or a subsidiary of Ford, or any business which relied heavily on Ford for its income. The former is obvious, but the latter less so. For the purposes of this hypothetical example, let’s say the bank bought the Ford protection from a trading company that let’s call Enron. The bank now has a contingent risk on Enron: if Enron went bankrupt, the bank would no longer have any CDS protection on Ford, and if that protection costs more to replace now than when the bank originally bought it from Enron, the bank will have suffered a loss because Enron defaulted, even if Ford doesn’t. Even worse, what if both Enron and Ford default within a small period of time and the bank loses all of the money it loaned to Ford before it can replace the protection. This risk of two entities defaulting is a correlation risk, which is very hard to quantify, not least because the probability of any big company, or most countries, defaulting is so small, therefore the variations in the probability of two of them defaulting at the same time is immeasurable. Yet this correlation risk is crucially at the heart of the crisis. Ideally you would want to carefully analyse how much more likely Enron is to default is Ford does, and vice versa, and repeat that for every single pairing of every counterparty the bank does business with. However, there is simply not enough computing power to do that, and there definitely wasn’t enough back then, so the very fabric of the financial universe then relied, and still does, on making some huge simplifying assumptions about the correlation between two or more default risks.
Comprehending the magnitude of this correlation problem gives you a chance of understanding the difficulty of pricing the next product: Collateralised Debt Obligations (or CDOs). To make a CDO, we create at least one new company, called a Special Purpose Vehicle (SPV). At first, these CDOs were based on corporate bonds (which became known as Cash CDOs) and the SPV company would go and buy say USD 1 million each of 100 bonds (or IOUs) from 100 different companies and these bonds generated an income stream from the interest these USD 100 mllion of bonds paid. The CDOs resliced the risk of these 100 bonds defaulting into sequential default risk: the assumption was that not many of these bonds would default but a few might. So buyers of the bottom slice took all the first say USD 10 million losses no matter which of the bonds defaulted first and caused these losses and they got paid a lot for this risk, but only on their USD 10 million of risk, whereas the bonds where generating a smaller income on USD 100 million. At the low risk end the large top slices of CDO risk were paid less than the portfolio paid on average. In between the two extremes were normally many layers of mezzanine risk. The idea is over simplified in Figure 1. Using all this, people realized that you didn’t even need to raise cash to buy the bonds. Instead, the assets could be CDS, and this gave rise to what were known as Synthetic CDOs.
Figure 1: An overview of a basic CDO structure.
Key to this was the credit rating agencies. There are 2 main credit rating agencies, Moody’s and S&P (or Standard and Poor’s) and a slightly less well recognised agency called Fitch. Their three very similar scales are shown in Figure 2. The agencies are very important because very many bond investors are limited by their charter regarding what is the lowest rating they are allowed to buy. For instance if a fund was only allowed to buy BBB bonds, those corporate bonds may only yield LIBOR plus 100 basis points (100 basis points = 1%), but a CDO slice with the same rating might pay LIBOR plus 250 basis points. A fund manager could quickly make annual returns which are 1.5% higher than a competitor which was very tempting. When competitors saw others getting higher returns they genuinely wanted to make sre the owners of their funs got those returns too. There was nothing wrong with this because the credit rating agencies genuinely thought they modelled the risks correctly, and they assigned ratings which the fund managers were allowed to buy. The only trouble was that no-one really knew what the correlation was like between these 100 different bonds defaulting, yet most of these CDOs never had a realized loss in the senior or even mezzanine tranches. The real problem comes when we put funkier assets in the CDOs.
Figure 2: scales of 3 credit rating agencies.
CDOs came about as an arbitrage opportunity, where one could get paid a certain amount to take on an existing set of risks, repackage them, and then pay less to offload all the risk. In the middle one takes out a small percentage without taking any of the risk. In some senses this is no different to the old model of a stock broker who matched buyers and sellers at slightly different prices, making a small percentage without actually taking any risk of whether the stock goes up or down. As CDOs appeared to offer the creators money for no risk, (if the very complex and intricate task of building one properly was done well), originators started to look for other assets to place in the CDOs. The disaster was US sub-prime mortgages. Basically sub-prime mortgages offered initially low interest rates to home-buyer borrowers who cannot really afford to pay for a mortgage, but after normally 2 years the interest rate steps up to a proper level. As long as the house price has gone up the borrower just refinances their mortgage, getting a new loan with the low “teaser rates�. Everyone knew that this would be problematic if house prices ever fell on a nationwide basis, but the whole system, including regulators and government agencies, supported and pushed this product to allow more people to buy homes, on the basis that the housing market would never suffer a nationwide decline. Guess what happened next.
That’s right! People started repackaging these (highly correlated) subprime mortgages to get slices of risk with high credit ratings, and then putting these repacked slices (which were also highly correlated with each other) into CDOs (see Figure 3). These became known as CDOs of ABS (Asset Backed Securities). And more and more people bought them because they paid high returns (for a reason), as can be seen in Figure 4. To complete the circle Synthetic CDOs of ABS were created in which CDS were bought and sold on the CDO of ABS. These were the most convoluted, least tradable, and least liquid of the products in the oversimplified tale (and I know it is not simple by any stretch of the imagination). Figure 3.
Figure 4.
As the precarious nature of sub-prime mortgages became more apparent, and doubts over the correlation models used by the credit rating agencies grew, several major players scaled back their operations in CDO of ABS, just as late entrants were joining. But the damage was already done. The amount of CDOs of ABS that had been issued was many hundreds of billions of USD, and many of them used CDS in some form or another. The real crisis became one of liquidity. As the value of the underlying assets declined, the value of the CDS protection increased. Those who had sold CDS protection were asked to pay billions in unexpected, and often disputed, collateral (to negate the counterparty risk). Those who had bought protection often needed this cash collateral to fund their own operations. The problem was that there was no real trading, so liquidity evaporated and there no true market price for the CDS that had been written on CDOs of ABS was available. Accountants had to rule on whose estimates of the value of the CDS they thought was most accurate. Those who lost had to stump up billions in cash which caused huge liquidity problems.
This article has very briefly covered many aspects of several large and hugely complicated markets which were at the heart of the global financial crisis of 2008, but which are often misunderstood. I hope this article has shed some light one the basics of these markets, although, in the space available, I have barely scratched the surface. There is so much more to learn about these products and markets so feel free to reach out to me if you wish to learn more. At the core of the crisis though, both default risk and correlation risk, were misunderstood and mispriced on a widespread basis, especially in US sub-prime mortgages.
government response to the financial crisis suryansh loya The international response to the financial crisis of 2008 was nothing short of extraordinary. From direct injections of government capital into financial institutions to coordinated central bank interventions (quantitative easing) and overall massive fiscal stimuli, this unprecedented response has been analyzed ever since. Years later, we can now see which actions led the quickest recoveries and which unfortunately did not. I will be talking about the American & British response to the crisis. US GOVERNMENT RESPONSE With panic spreading across the world and capital markets drying up, the initial actions of the Federal Reserve included a broad-based guarantee of bank accounts, money market funds and liquidity. However, with the situation rapidly plummeting, policy makers realized that this would not be enough and with bipartisan approval signed the Troubled Asset Relief Program (TARP). This program allocated $700 billion (later lowered to $475 billion by the Dodd-Frank Act) to purchase assets from financial institutions, “the purchase of which is necessary to promote financial stability�. From the program’s inception, $245 billion went to stabilize banks, $68 billion went to stabilize AIG, $27 billion went to programs to increase credit availability, $80 billion went to the U.S. auto industry (specifically GM and Chrysler), and $46 billion went to foreclosure-prevention programs, such as Making Home Affordable. It is important to note that ARP recovered funds totalling $441.7 billion when the program ended in 2014 from $426.4 billion finally invested, earning a $15.3 billion profit or an annualized rate of return of 0.6% and a small loss when adjusted for inflation. An important goal of the program was to encourage banks to resume lending again at levels seen before the crisis, both to each other in the central bank and to consumers and businesses. If the program can stabilize bank capital ratios, it should in theory allow them to increase lending instead of hoarding cash to cushion against future
unforeseen losses from troubled assets. Increased lending equates to “loosening” of credit, which the government hopes will restore order to the financial markets and improve investor confidence in financial institutions and the markets. Other than addressing the financial industry, several other acts significantly increased the government fiscal injections into the economy along with the automatic stabilisers including the the Economic Stimulus Act of 2008, a $152 billion stimulus designed to help stave off a recession and the American Recovery and Reinvestment Act of 2009, a $787 billion bill covering a variety of expenditures from rebates on taxes to business investment. But putting out the fires wasn’t enough. The incentives for the high-risk loans that had led to the creation of the financial bubble had to be stopped and this lead to the Dodd-Frank Wall Street Reform and Consumer Protection Act, a law that enforced greater transparency, created a new governing office called the Financial Stability Oversight Council (FSOC) and other significant regulation measures. The US government continued to invest into the economy through the stimulus programs, with large funds allocated to do so. With the rapid fiscal response to the financial crisis as well as continuation of these programs, the economy had recovered to pre-crisis levels in 2010 and has not contracted in the last decade. Although both sides of the economic debate argue on the final impact of the response, the economy has done well since. EXPANSIONARY AUSTERITY We have to take a small break here to talk about a concept called expansionary austerity (formally known as the Expansionary Fiscal Contraction Hypothesis). The theoretical idea was that a reduction in debt levels of the government would reduce the “crowding-out” effects caused by the borrowing of the government and would lead to higher private investment. This reduction in the debt would also hypothetically increase the confidence of the markets and would lead to higher consumption & investment. It’s important to mention this here, because even though it was brought up in economic discussions in the United States, it did not take over the discussion and became the main response as it did in Europe. UK GOVERNMENT RESPONSE In 2008, the British government was one of the major economies calling for fiscal injections to stimulate the aggregate demand and economic growth. Along with a variety of public investment projects such a £20 billion Small Enterprise Loan Guarantee Scheme, several tax cuts, and significant automatic stabilisers, the UK government had a similar plan to the UK government’s TARP plan to stabilise the financial system. Totalling some £500 billion, the plan aimed to restore market confidence and help stabilise the British banking system, and provided for a range of what was claimed to be short-term “loans” from the taxpayer and guarantees of interbank lending. The mechanism through which they injected funds into the system was by buying ordinary and preferential shares from the bank, the amount negotiated with each bank. The long-term government plan was to offset the large costs of this injection by receiving dividends from these shares, and later, to sell the shares after a market recovery. The extent to which different banks participated varied according to their needs. HSBC Group announced it was injecting £750 m of capital into the UK bank and therefore has no plans to utilise the UK government’s
recapitalisation initiative. Standard Chartered declared its support for the scheme but its intention not to participate in the capital injection element. Barclays raised its own new capital from private investors. The plan was open to all UK incorporated banks and all building societies, however, Abbey, Barclays, Clydesdale, HSBC, Nationwide, and Standard Chartered chose not to receive any government money, leaving Lloyds (Lloyds took over HBOS) and RBS as the only major recipients. The RBS (Royal Bank of Scotland Group) raised £20 billion from the Bank Recapitalisation Fund, with £5 billion in preferential shares and a further £15 billion being issued as ordinary shares. HBOS and Lloyds TSB together raised £17 billion. . However, after the bailouts of 2008, with significant debt levels of around 80% of GDP, the UK was limited in its ability to take large fiscal actions such as the US. In 2010 the UK began a fiscal consolidation program after the government’s fiscal stimulus package was withdrawn and the new coalition government implemented spending cuts and increases in indirect taxation. With the expansionary austerity message taking over the conversation in mainland europe and the UK, additional fiscal consolidation measures continued under the government elected in 2015.However, statistical analysis shows that the austerity implemented in UK has hit GDP per person by £1500 a year according to new analysis from the New Economics Foundation (NEF) – just over £3600 per household – . The analysis shows that the isolated effects of government policy have been to reduce GDP growth every single year since 2010. This has suppressed the level of GDP by just under £100bn (£99.4bn) in 2018/19
TOO BIG TO FAIL Some commentators noted that, although under the capitalist model inefficient private commercial enterprises should be allowed to go bust, the banks were “too big to fail”. This idea centers around the thought that certain businesses, such as the biggest banks, are so vital to an economy that it would be disastrous if they went bankrupt. To avoid a crisis, the government can provide bailout funds which support failing business operations, protecting companies from their creditors and also protecting creditors against losses. Those financial institutions which fall into the “too big” category include banks, insurance, and other finance organization. This corporate socialism has been the topic of great controversy and anger especially with the fact that not a single bank chief or chairman went to prison in the UK or in the US after the crisis.
“Money would be better spent in the UK instead of on .
overseas development.” Do you agree? Explain your answer.
rhea kale
The UK has a relatively long-standing history of spending money on overseas development, and over time this commitment to foreign aid has intensified. Since the Pearson Commission’s 1969 Report ‘Partners in Development’ (OECD, 2003), a greater emphasis has been placed on Western countries aiding the developing world in the idealistic hope of mitigating inequality (Lunn & Brien, 2019). Politically, the UK has developed its foreign aid policy from acknowledging the UN’s target of contributing 0.7% of GNI to Official Development Assistance (ODA) to enshrining it into British law (Lunn & Booth, 2016) and achieving it in 2015, as can be seen in Graph A (Department for International Development, 2017). A similar improvement that reflects an increased focus on foreign aid can be seen through a rapid rise in the UK’s spending on overseas development, from £4 billion in 2000 to £12.5 billion in 2015, as shown in Graph B. Although foreign aid benefits the recipient country and the donor country, it could be mismanaged or could act as a burden on the donor country. Hence, social debate has been ignited – is the commitment to foreign aid justified? There are three key factors that must be considered in order to reach a judgement: Is foreign aid used effectively to achieve tangible results? Can the current structure of foreign aid be improved? And what is the opportunity cost of these contributions? The controversy surrounding foreign aid extends past ideology, so we must consider the real effects of the UK’s foreign aid.
Graph A
Spending £14.1 billion in 2017, which is equivalent to 1.7% of government expenditure (as shown in Graph C (Warwick, et al., 2019)), on overseas development, the UK has demonstrated its cross-party dedication to foreign aid. It is widely accepted that foreign aid, which is used for educational infrastructure or disease prevention, not only eliminates issues like absolute poverty within the country receiving aid, but it also benefits the donor country through its indirect effects, like improved trade. MP Justine Greening’s statement that “tackling poverty overseas [through ODA] is about addressing the root causes of global challenges such as disease, migration, terrorism and climate change, all of which are the right things to do and firmly in Britain’s own national interest” (Anderson, 2015) explains the UK’s commitment to foreign aid. The case of Rwanda, one of the key beneficiaries of UK aid given its mutilated past of genocide, exemplifies this. With a poverty rate of 57% in 2015 (Hutt, 2016), Rwandan society has struggled. Despite this, it is now one of the fastest growing economies in Central Africa, with an average GDP growth rate of 7.5% (The World Bank, 2019), and is winning its battle against poverty – this is due to foreign aid. Specifically, the UK’s funding of agricultural programmes, including the Programme of Support to Agriculture in Rwanda and the Improving Market Systems for Agriculture in Rwanda, has played a significant role in Rwanda’s economic successes. These programmes aim to shift the agricultural industry “from a subsistence-based to a more commercial-based sector” in order to “sustainably increase the agricultural productivity” by providing the “necessary agricultural expertise and finance” to address existing market failures (Department for International Development, 2019). As productivity improves, a larger surplus of agricultural goods can be produced – this is evident through the 25% rise in exports between July 2015-June 2016 and July 2016-June 2017 (Semwaga, et al., 2017) – which can be used for commercially hence providing farmers with greater incomes. Not only would this help reduce poverty, especially given that 70% of the population relies on subsistence farming (Hutt, 2016), but it would also benefit the UK by strengthening their trade opportunities. Without foreign aid, such rapid improvement would be difficult to achieve.
Graph B
Graph C
However, the success of foreign aid is not consistent as it depends on the process through which money is spent on overseas development, and its cause. For example, £115 million of the aid budget was spent on “subsidising relatively affluent students going to university” (Elliott, 2019), clearly exemplifying a poor usage of aid. This is not an isolated issue – the UK’s ranking fell by 12 places, to 24th out of 40 countries, on the index of aid quality created by the Centre for Global Development (Gulland, 2018). The primary reason for the deteriorating quality of aid is the distribution of ODA. Although the DfID plays a prominent role in managing foreign aid, ODA is distributed amongst a variety of government branches (e.g. Foreign and Commonwealth Office – FCO). Recently, the dispersive distribution of ODA within the government has intensified – DfID spending fell from 79% of ODA in 2012 to 75% in 2016 (Ibid.) – and it can be argued that not all departments are as effective as the DfID at providing aid. The FCO experiences “unsatisfactory achievement[s]” according to the Independent Commission for Aid Impact (an independent body dedicated to analysing the UK’s aid spending) (Mitchell & Baker, 2019) and only effectively spends “16% of their £1.05 billion budget” according to the ONE Campaign’s Real Aid Index (Elliott, 2019). Hence, a meaningful proportion of foreign aid is being used ineffectively and a lack of transparency – proven by the lack of public knowledge regarding what £1.5 billion of aid is being spent on (Ibid.) – makes this issue more difficult to solve. Whilst it is crucial for the DfID to receive a greater proportion of ODA given their success rates and high levels of transparency, it is equally as important to prevent wasteful spending through organisations like the FCO. Therefore, money spent on overseas development could be considered wasteful and ineffective, but this is due to structural issues within the UK rather than the theory of foreign aid itself.
Concerns regarding the effectiveness of foreign aid are often accompanied by consideration of the opportunity cost of spending money on overseas development instead of the UK itself. Having faced a prolonged period of austerity, UK nationals are justifiably concerned with the contrast between the lack of domestic spending and increased spending abroad. Since 2009, spending on adult social care has fallen by 9.9% (Thorlby, et al., 2018), resulting in many people falling through the cracks within the social care system. The expectation of the government prioritising its own citizens has led to critics of foreign aid claiming that it is unfair to spend money on overseas development instead of in the UK, especially as both causes are altruistic. Not only has social care spending been cut, but the local authorities who would have been able to prevent this have also been weakened through budget cuts. Given that “adult social care is the largest controllable element of a local authority’s budget” (The King's Fund, 2015), it has become more difficult to protect the social care system. As the key issue is funds, it seems logical to reorganise the government’s budget. However, reducing foreign aid spending to achieve this is not the answer. Unlike expenditure on overseas development, spending on defence has become unnecessarily excessive. Along with other wasteful expenditure, like £26 billion being paid to ineffectively upgrade computer technology for the NHS, the Ministry of Defence (MoD) plans to spend more than £5 billion on nuclear weapons. Although defence is essential, the volume and manner of the MoD’s investment is unwarranted. At the expense of struggling citizens, the MoD has chosen to fund a plethora of military projects at an unsustainable rate. For example, the Queen Elizabeth-class aircraft carriers have not only costed over £6 billion, exceeding the initial forecast of £3.9 billion (Norton-Taylor, 2018) thus making it financially precarious, but they have also been rendered partially ineffective given the lack of UK-owned fighter jets. A recent report from the Commons Defence Community stated that the lack of fighter jets under sovereign control made this operation “complacent at best and potentially dangerous at worst” (Great Britain, Parliament, Commons Defence Committee, 2018). Clearly, such spending is excessive and can therefore be reduced and instead transferred to social care. Through this, the global community will be able to prosper as the UK government’s spending will become more effective and, given the effects of foreign aid, other countries will benefit too. Given the current socioeconomic climate, it is essential that the UK continues to spend a minimum of 0.7% of GNI on overseas development. Whilst it is easy to be swayed by hyperbolic rhetoric, it is important to consider the tangible effects of foreign aid. As outlined in the Rwandan case study, foreign aid helps the recipient country develop and compensates the donor country through positive indirect effects such as improved trade, minimal conflict, and better labour. Although the UK suffers from austerity, the significance of overseas development outweighs this opportunity cost. As a developed nation, the UK must behave altruistically and, in return, they will benefit in the long-run. The gaps within the social care system can be addressed through other means instead. However, the issue of ineffective aid is still prevalent. Although most foreign aid is used successfully, approximately 15-20% is wasted. In order to ameliorate this, we must restructure ODA: a greater share of ODA must be allocated to the DfID given their competency. It has been evidenced that other departments, like the FCO, are not as successful. By ensuring that the right body distributes foreign aid, we can guarantee that a greater proportion of foreign aid will be transparently distributed to countries that have a good record of spending aid successfully.