Month: July 2015

As oil prices drop, will Islamic extremism suffer?

Posted on by Ashton Wenborn

On February 14 1945, after having just left the Yalta Conference where he and the other allied powers had began laying the foundations for post-war Europe, US President Franklin D Roosevelt met with King Abd al-Aziz of Saudi Arabia to negotiate a very different deal. A deal that would allow Roosevelt to secure American hegemony throughout the world, but one that would simultaneously, and unintentionally, create the basis for a movement that would later seek to undermine that very plan.

On that day, the pair chose to meet aboard the USS Quincy, a Baltimore class heavy cruiser that was anchored in the Great Bitter Lake, a body of water situated smack bang in the middle of the Suez Canal. This meeting of king and president became the subject of a BBC documentary by the filmmaker Adam Curtis, titled Bitter Lake. In it, Curtis describes Roosevelt as a man who, near the end of his life, had tried to exercise his position and power to “transform the world”.

“After the Wall Street crash and the terrible depression that followed, Roosevelt had taken charge”, narrates Curtis. “He had passed laws that broke up the banks so that they would never run out of control again and he had rebuilt America with a series of giant dams that brought electrical power and employment for millions of people.”

The fundamental dynamic to militant Islam, which does not come from fluctuations in oil price, occurs when you get small Muslim countries that cannot fight against the pressure of Islamic fanaticism

New deal
What the father of ‘The New Deal’ believed, was that politicians, and the great power they wield, should be used to improve the lives of those they represent and that they should attempt to reshape the world in the image of this new, progressive, and modern America. But Roosevelt knew at the end of the Second World War that in order to secure and create this brave new world, he must maintain access to Saudi Arabia’s vast oil fields. But to do so, he would have to provide Abd al-Aziz with the wealth and security that he required to maintain power.

In their conversation the two men agreed to the each other’s terms. “But the King was well aware of dangers of opening up his country to the influence of the modern West”, Curtis explains, “and in the negotiations that followed, he laid down a condition: ‘We will take your technology and your money’ the King said,’ but you must leave our faith alone.’”

The faith that Abd al-Aziz was referring to was Wahhabism; an extremist pseudo-Sunni religious movement that Curtis claims rose up in reaction to modern western imperialism, which its followers believed was subverting and corrupting the true nature of Islam.

Roosevelt could not have known that the deal he struck with King Ibn Saud would help fuel a movement that would grow within Saudi Arabian society, and years later, threaten America’s global ambitions. Neither could he have known that it would create a link between oil and militant Islam that would allow Saudi Arabia to export Wahhabism and help its followers in attempting to create a caliphate across the Muslim world.

Rise and fall
Max Singer, an expert on US defence policy and co-founder of the Washington-based Hudson Institute, once noted that: “The rise of terrorism by militant Islam against the US and the West coincided with the rise in oil prices of the 1979-80 and the subsequent transfer of hundreds of billions of dollars from the West to Muslim countries.”

The 1979 oil crisis that shook the US and the West, as a result of suppressed supply in the wake of the Iranian Revolution, pushed the price of crude oil to $39 per barrel – the highest ever at the time. Since then the price of oil has fluctuated immensely and risen far higher. Between July 2014 and January 2015 the price of oil plunged by over 55 percent, with the price of crude falling below $50 per barrel for the first time since May 2009.

Today, the price of oil sits at $60.79 (Crude Oil WTI) – a moderate rise – but many commentators such as BBC business reporter, Mark Lobel, don’t think that there will be a return to the $90-plus levels for a while.

The reason being two-fold: OPEC appears reluctant to step in and address over-production, and more importantly, the US has benefitted from an oil and gas boom from fracking that has the potential to give the country its energy independence by 2030. “[Energy independence] has huge implications for energy, for [the] economy and for geopolitics”, Fatih Birol, the Chief Economist at the International Energy Agency (IEA) in Paris told Aljazeera. “The United States is becoming an energy exporter, [a] completely new role, and the new US energy strategy, foreign policy will be based on this new reality.”

Birol goes on to explain how in just short space of time, the US will be able to claim the number one spot in the world for oil production, capable of overtaking even Saudi Arabia. But will a fall in oil prices coupled with a dramatic increase in production in North America change the dynamic between the US, Saudi Arabia, and the militant arm of Islam (Wahabbism), which Curtis says is at the heart of Saudi Arabian society?

Singer certainly doesn’t think so. “I think it will play a small role”, he says, “but I do not think it is like a clap of thunder, but rather a part of a slow development”. The fact is, he explains, is that the US is affected by fluctuations in price as much as any oil exporter. Not only that, but singer questions whether oil prices have really fallen that much, at least in relative terms.

“For one thing, people talking about the big fall in oil price do so because the price once sat at just over $100 [per barrel] for a short period prior to its decline”, says Singer. “The area where the oil price seems to have settled now, around $60 to $70 is, in historic terms, quite high, not low at all.

“As a matter of fact, oil is the one major resource that has had a long-term increase in price. I do not think of this as a time of historically low oil prices”, adds Singer.

Overblown threat
It appears the link between oil prices and the prevalence of militant Islam that Singer once alluded to has diminished somewhat. In fact, the co-founder of the Hudson Institute believes that groups such as Boko Haram in Nigeria are not related to oil prices or energy independence in the West at all.

“The fundamental dynamic to militant Islam, which does not come from fluctuations in oil price, occurs when you get small Muslim countries that cannot fight against the pressure of Islamic fanaticism”, he says. “If it had not been for oil the degree of strength and importance of radical Islam would be less than it has been, and as you say the trend to less excess oil money would be helpful, but it is more a contributing factor to its decline than the primary metric for determining militant Islam’s demise.”

Once the governor of Turkey’s Central Bank and currently an Associate Professor of Finance at the Wharton School of the University of Pennsylvania, Bulent Gultekin, recently said: “I don’t think the Islamic State will be a sustainable proposition. It’s like a bush fire. There will always be these extremists, but I don’t think it’s going to be a systemic problem in the long run.”

His sentiments were echoed by Singer, who contends that the Islamic State will struggle to be successful in its aims and will gradually see its supporters both internally and externally turning their backs on the organisation.

“In the end, the Arab and Muslim countries will choose to get on the path to modernity, which will provide health, wealth and freedom for the people of these states”, says Singer. “I think these countries have been held back by strong religious sentiments for a while, but I do not think it will be able to hold back the process of modernisation for long.”

No one really knows what will provide the catalyst for militant Islam’s eventual demise, but in the war of ideologies, unfettered and uncontrollable acts of violence will never convince people of the merits of a particular set of beliefs. If anything, the chaos and destruction being unleashed by these terrorists look more like the death throws of a desperate fundamentalist minority that is losing its grip on a Muslim world looking to modernise – a trend that is bolstered, though only slightly, by cheaper oil prices and greater energy self-sufficiency in the West.

Germany vs. Google

Posted on by Ashton Wenborn

American tech companies are under unprecedented attack by EU regulators. The European Commission has charged Google with abusing its near-monopoly over internet search in the EU to favour its own shopping services. It has also opened a probe of Google’s Android mobile operating system. And, as part of its just-announced ‘Digital Single Market Strategy’, the Commission is calling for a comprehensive investigation of the role of (mostly American) internet platforms, such as social networks and app stores.

Questionable practices by companies from any country should be addressed in a fair, impartial way. But that seems unlikely to happen here. The key driver of the EU’s regulatory onslaught is not concern for the welfare of ordinary Europeans; it is the lobbying power of protectionist German businesses and their corporatist champions in government. Germany’s government boasts about how “globally competitive” the country is, and its officials lecture their EU peers on the need to emulate their supposed reformist zeal. And yet, while the country remains a world-beating exporter in industries like automobiles, it is an also-ran in the internet realm. There is no German equivalent of Google or Facebook. Stymied at home by red tape and a risk-averse culture, the most successful German internet entrepreneurs live in Silicon Valley. While US-based companies conquer the cloud, Germany is stuck in the mud.

While US-based companies conquer the cloud, Germany is stuck in
the mud

Tech envy
With Germany’s digital start-ups stifled by overregulation and underinvestment, dinosaurs from the analogue world set the policy agenda. Traditional media companies resent their reliance on Google to direct traffic to their sites and its ability to sell advertising based on snippets of their content. The partly state-owned Deutsche Telekom hates that it does not earn additional revenue when people use its network to make calls on Skype, send messages on WhatsApp, and watch videos on Netflix and YouTube. TUI, the world’s largest travel agency and tour operator, feels threatened by TripAdvisor. Retailers fear Amazon’s ever-expanding empire.

Germany was the first EU country to institute a national ban on Uber, at the behest of taxi drivers fearful of competition. And Germany’s powerful industrial lobby frets that American tech companies could eat their manufacturing lunch. As Günther Oettinger, the EU’s (German) digital commissioner, put it, “If we do not pay enough attention, we might invest in producing wonderful cars, but those selling the new services for the car would be making the money.” Whereas Oettinger’s predecessor, Neelie Kroes, championed the potential of disruptive technologies to benefit consumers and boost economic growth, Oettinger is unashamedly corporatist in advancing German business interests.

German companies are not alone in fearing American competition, but their influence within the European Commission is decisive. Indeed, Germany has never had more clout in the EU. The debt crisis, which distracted France and alienated the UK, has thrust Germany, the eurozone’s largest creditor, into the European driver’s seat.

European Commission President Jean-Claude Juncker owes his position to the European People’s Party, the centre-right political grouping dominated by German Chancellor Angela Merkel’s Christian Democratic Union, which in turns holds sway over the European Parliament. Juncker is also indebted to the Axel Springer media group, the publisher of Bild, Germany’s best-selling tabloid newspaper, which strongly backed him last summer when Merkel was wavering. And his German Chief of Staff, Martin Selmayr, ensures that his country’s concerns are heeded across the Commission.

Last year, Germany pressured Joaquín Almunia, the EU’s then-competition commissioner, not to settle its antitrust dispute with Google, enabling his successor, Margrethe Vestager, to pursue it. In fact, the investigation into internet platforms comes at the demand of Germany’s economics minister, Sigmar Gabriel. And its outcome seems preordained; in a leaked position paper, Oettinger proposes a powerful new EU regulator to rein in online platforms. He recently spoke of the need to “replace today’s web search engines, operating systems, and social networks”.

A digital single market
No one forces Europeans to use Google as a search engine; competitors are only a click away. For shopping, Europeans increasingly bypass it, searching directly on Amazon or eBay, or navigating through Facebook. So Google scarcely controls, much less monopolises, this rapidly evolving landscape. Nor have shoppers suffered. But, whereas US antitrust law rightly focuses on whether consumers are being harmed, EU competition authorities also consider whether rival firms have lost out – including old-fashioned shopping portals, such as Ladenzeile.de, owned by Axel Springer.

Creating a digital single market makes sense. Whereas every American internet start-up benefits from a huge domestic market, their European counterparts are limited by domestic regulations to smaller local markets. Unfortunately, the European Commission’s proposals are not focused on enabling Italians to buy from British websites or opening a market of 500 million Europeans to Spanish start-ups. Their main goal seems to be to constrain American digital platforms. As Gabriel put it in a letter to the Commission last November: “The EU has an attractive single market and significant political means to structure it; the EU must bring these factors into play in order to assert itself against other parties involved at the global level.”

Instead of conspiring to hobble its American rivals, stifle innovation, and deprive Europeans of the full benefit of the internet, Germany should practice what it preaches and make the difficult reforms it needs to raise its game. It should make it easier to start and expand internet businesses. It should boost investment in broadband infrastructure and digital technologies. And it should throw its weight behind a genuine EU digital single market that benefits consumers and enables start-ups to flourish, instead of a backdoor industrial policy that favours Germany’s digital flops.

Philippe Legrain is Visiting Senior Fellow at London School of Economics’ European Institute.

© Project Syndicate 2015

Economic policy turned inside out

Posted on by Ashton Wenborn

The world economy is in the grips of a dangerous delusion. As the great boom that began in the 1990s gave way to an even greater bust, policymakers resorted to the timeworn tricks of financial engineering in an effort to recapture the magic. In doing so, they turned an unbalanced global economy into the Petri dish of the greatest experiment in the modern history of economic policy. They were convinced that it was a controlled experiment. Nothing could be further from the truth.

The rise and fall of post-World War II Japan heralded what was to come. The growth miracle of an ascendant Japanese economy was premised on an unsustainable suppression of the yen. When Europe and the US challenged this mercantilist approach with the 1985 Plaza Accord, the Bank of Japan countered with aggressive monetary easing that fuelled massive asset and credit bubbles.

The focus on speed and force – the essence of what US economic policymakers now call the ‘big bazooka’ – has prompted an insidious mutation of the Japanese disease

The rest is history. The bubbles burst, quickly bringing down Japan’s unbalanced economy. With productivity having deteriorated considerably – a symptom that had been obscured by the bubbles – Japan was unable to engineer a meaningful recovery. In fact, it still struggles with imbalances today, owing to its inability or unwillingness to embrace badly needed structural reforms – the so-called ‘third arrow’ of Prime Minister Shinzō Abe’s economic recovery strategy, known as ‘Abenomics’.

Undeterred by failure
Despite the abject failure of Japan’s approach, the rest of the world remains committed to using monetary policy to cure structural ailments. The die was cast in the form of a seminal 2002 paper by US Federal Reserve staff economists, which became the blueprint for America’s macroeconomic stabilisation policy under Fed Chairs Alan Greenspan and Ben Bernanke.

The paper’s central premise was that Japan’s monetary and fiscal authorities had erred mainly by acting too timidly. Bubbles and structural imbalances were not seen as the problem. Instead, the paper’s authors argued that Japan’s “lost decades” of anaemic growth and deflation could have been avoided had policymakers shifted to stimulus more quickly and with far greater force.

If only it were that simple. In fact, the focus on speed and force – the essence of what US economic policymakers now call the ‘big bazooka’ – has prompted an insidious mutation of the Japanese disease. The liquidity injections of quantitative easing (QE) have shifted monetary-policy transmission channels away from interest rates to asset and currency markets. That is considered necessary, of course, because central banks have already pushed benchmark policy rates to the once-dreaded ‘zero bound’.

Monetary delusion
But fear not, claim advocates of unconventional monetary policy. What central banks cannot achieve with traditional tools can now be accomplished through the circuitous channels of wealth effects in asset markets or with the competitive edge gained from currency depreciation.

This is where delusion arises. Not only have wealth and currency effects failed to spur meaningful recovery in post-crisis economies; they have also spawned new destabilising imbalances that threaten to keep the global economy trapped in a continuous series of crises.

Consider the US – the poster child of the new prescription for recovery. Although the Fed expanded its balance sheet from less than $1trn in late 2008 to $4.5trn by the fall of 2014, nominal GDP increased by only $2.7trn. The remaining $900bn spilled over into financial markets, helping to spur a trebling of the US equity market. Meanwhile, the real economy eked out a decidedly subpar recovery, with real GDP growth holding to a 2.3 percent trajectory – fully two percent below the 4.3 percent norm of past cycles.

Indeed, notwithstanding the Fed’s massive liquidity injection, the American consumer – who suffered the most during the wrenching balance-sheet recession of 2008-09 – has not recovered. Real personal consumption expenditures have grown at just 1.4 percent annually over the last seven years. Unsurprisingly, the wealth effects of monetary easing worked largely for the wealthy, among whom the bulk of equity holdings are concentrated. For the beleaguered middle class, the benefits were negligible.

“It might have been worse”, is the common retort of the counter-factualists. But is that really true? After all, as Joseph Schumpeter famously observed, market-based systems have long had an uncanny knack for self-healing. But this was all but disallowed in the post-crisis era by US Government bailouts and the Fed’s manipulation of asset prices.

Copycat economics
America’s subpar performance has not stopped others from emulating its policies. On the contrary, Europe has now rushed to initiate QE. Even Japan, the genesis of this tale, has embraced a new and intensive form of QE, reflecting its apparent desire to learn the “lessons” of its own mistakes, as interpreted by the US.

But, beyond the impact that this approach is having on individual economies are broader systemic risks that arise from surging equities and weaker currencies. As the baton of excessive liquidity injections is passed from one central bank to another, the dangers of global asset bubbles and competitive currency devaluations intensify. In the meantime, politicians are lulled into a false sense of complacency that undermines their incentive to confront the structural challenges they face.

What will it take to break this daisy chain? As Chinese Premier Li Keqiang stressed in a recent interview, the answer is a commitment to structural reform – a strategic focus of China’s that, he noted, is not shared by others. For all the handwringing over China’s so-called slowdown, it seems as if its leaders may have a more realistic and constructive assessment of the macroeconomic policy challenge than their counterparts in the more advanced economies.

Policy debates in the US and elsewhere have been turned inside out since the crisis – with potentially devastating consequences. Relying on financial engineering, while avoiding the heavy lifting of structural change, is not a recipe for healthy recovery. On the contrary, it promises more asset bubbles, financial crises, and Japanese-style secular stagnation.

Stephen Roach is a faculty member at Yale University and former Chairman of Morgan Stanley Asia.

© Project Syndicate 2015

Cracking the US copyright code

Posted on by Ashton Wenborn

With the IMF having just cut its forecasts for economic growth in Latin America for the fifth year in a row, the region’s countries are casting about for ways to reignite investment and boost productivity. They should look to fast-growing Asia, argue advocates of the Transpacific Trade Partnership (TPP), the proposed mega-regional trade accord that would bind together 12 Pacific Rim countries. But should they?

If done right, the TPP could help Mexico, Peru and Chile – the accord’s Latin American members – make the leap to high-productivity exports based on innovation. But that would require the TPP to foster, not impede, the flow of knowledge around the Pacific Rim. Regrettably, the US is insisting on a series of intellectual-property provisions that serve the interests of US-based firms, but do little to create a sound environment for innovation elsewhere. That needs to change – and soon – so that years of talks can be concluded successfully.

Restricted access
The growth challenges for the three Latin American TPP countries are very different. In the last two decades, Mexico has managed to diversify its export base and is now a major supplier of industrial goods to the US and Canada. The bad news is that Mexico’s growth prospects have become inextricably tied to those of its huge neighbour to the north. The good news is that the US is growing faster than any other major industrialised economy, so Mexico can look forward – according to the IMF – to a couple of years of accelerating economic expansion.

If inventors cannot expect to be rewarded for their achievements, they will stop inventing or investors will stop funding
their ventures

By contrast Peru and Chile are natural-resource exporters deriving huge benefits from the China-driven commodity boom of the last decade. Today commodity prices are down, and so is growth. Because it is difficult to become ever-more efficient at producing a ton of copper or a pound of fruit (and, in Chile’s case, the grade of copper ore is fast declining), further growth has to come from diversification: moving capital and labour to new sectors, where productivity is higher.

That is where Pacific Rim trade and the TPP come in. A firm in Thailand, the Philippines or Vietnam can develop a new product line by plugging into the huge East Asian value chain and producing, for example, a tiny component which, along with myriad other components, will be assembled into a smartphone at a factory in China.

Firms in Chile or Peru – or Colombia or Uruguay, for that matter – enjoy no such opportunities. South America is outside the world’s main value chains. Innovative firms face the uphill challenge of developing entirely new products and selling them in geographically and economically distant markets.

The TPP could help change this by easing trade in intermediate inputs and helping build Pacific-wide value chains. Particularly valuable would be straightening out the spaghetti bowl of ‘rules of origin’ – the regulations dictating when inputs produced in other countries can be used in products that will qualify for free-trade benefits. So far so good.

Optimists can envision a new generation of trans-Pacific flows of trade, investment, and knowledge, with benefits for all. But then the TPP’s boosters have to contend with the obstinacy of Japanese rice farmers (Prime Minister Shinzō Abe is vowing to address that) and have US patent and copyright holders.

Read between the lines
Intellectual property has become one of the most contentious issues in the TPP negotiations, and it is not hard to see why. The US is pushing for longer copyright protection for published works, music, and films. It also wants technical changes that would effectively mean much longer patent terms for pharmaceuticals, make the approval process lengthier for generic drug makers, and extend protections for biologic medicines.

The list of controversial US demands is long. One that has particularly enraged online activists would classify cache copies of websites resulting from internet searches as temporary copies, so that users would potentially be subject to fines for copyright infringement. There are also concerns about limits to freedom of expression if materials are taken down for alleged copyright violations.

Many of these provisions are absent from international agreements currently in force – such as the World Trade Organisation’s TRIPS accord – and from the bilateral free-trade agreements that the US itself has negotiated with a host of countries. In other cases, protection periods would rise considerably. For copyrights, the US is demanding 95 years of protection after publication, or 120 years after creation, whereas TRIPS provides for 50 years and US agreements with Australia, Chile, Korea and Peru specify 70 years.

No one disagrees with the need for strong intellectual-property protection. If inventors cannot expect to be rewarded for their achievements, they will stop inventing or investors will stop funding their ventures. But most economists agree that such incentives must be balanced against the need to accelerate knowledge dissemination and absorption, and that the optimum is somewhere in the middle. In this sense, the US demand for longer terms of patent and copyright protection is arbitrary, because they are not founded on a clear-cut case for enhanced economic efficiency.

The politics of the issue is tricky for the TPP’s Latin American members. All three have negotiated intellectual-property agreements with the US, achieving what seemed like mutually agreeable levels of protection. Why should that change now?

The conundrum is especially vexing for Chile, a country that already has bilateral trade agreements with every potential member of the TPP. If Chile is unlikely to gain substantial new market access, ask critics, why should Chile make trade concessions at all?

That is going too far. Precisely because of the urgent need to diversify their exports, Chile, Peru, and other middle-income countries could benefit tremendously from agreements like the TPP. But that potential will be realised only if more knowledge, not less, flows across member countries’ borders.

The US itself would benefit from having trade partners that can innovate, instead of serving only as passive buyers for American movies and songs. The sooner US trade negotiators understand that, the better for everyone.

Andrés Velasco is former financial minister of Chile

© Project Syndicate 2015

Argon Asset Management on building trust in retirement reform

Posted on by Ashton Wenborn

When we talk about retirement fund reform both globally and in a South African context, the natural tendency for people in the financial services industry is to focus on the statistics and metrics that we are comfortable with and tend to understand. Aspects such as the number of funds, the population dynamics, longevity, structural changes, contribution rates, tax reforms and spreadsheet after complicated spreadsheet with annuity rates, and the like, are typically the key points discussed.

While this conversation has much merit and serves as a basis for many dialogues about retirement fund reform, in our view, in addition to this, we need to take a step back and focus on three objectives of retirement reform from a member and potential new member point of view. These objectives are: to increase participation in the system, to increase coverage and to improve the overall savings rate.

In 2015, is it natural and right to simply expect less financially literate members to trust us because we are investment managers and can speak the language of wealth? 

When we do this it is very obvious that apart from the traditional approaches to discussions about retirement reform – which are by their very nature exclusive in that the language of reform is one of industry jargon – we believe we need to broaden this dialogue and talk in a more inclusive way about how we improve both the quality and the level of our engagement with the people whose hard-earned money we are investing. The key question is what is the industry doing to improve the levels of trust in retirement funding, retirement provision and investment management and what could and should we be doing? In 2015, is it natural and right to simply expect less financially literate members to trust us because we are investment managers and can speak the language of wealth?

Measuring trust
How do we measure and talk about trust? Interestingly, there is an independent and international survey that has been running for 15 years that does exactly this. The Edelman Trust Barometer measures trust in institutions, including business, media, NGOs and government. In 2015, they surveyed 33,000 respondents in 27 countries. For companies looking to build or restore trust in themselves and in their innovations, the 2015 Edelman Trust Barometer offers actionable insights on the attributes and behaviours that shape trust.

According to them, trust is built through specific attributes, which can be organised into five performance clusters: integrity, engagement, products and services, purpose and operations.

Of these clusters, the barometer reveals that integrity is most important, followed closely by engagement. As in past years, areas such as excellence in operations or products and services, while important, are simply a ‘ticket to the game’ or what is expected from consumers.

According to the barometer, there is hope to increase trust against what has become a complex backdrop. Innovations that touch consumers on a personal level can counter balance security concerns. Companies can act to chart a path to public trust. Some 82 percent of respondents agreed that ‘making their life easier’ is an important trait for building trust.

Benefits of reform
Extracting and applying the lessons directly from the barometer, the following become obvious for a retirement reform process.

We must focus on discovery, while establishing personal and societal benefits of reform. According to the barometer, communicating the financial stability of institutions, listing the steps they are taking in data security and highlighting the innovations that traditional institutions are developing can make a difference. Mobile banking and electronic payments are a good example. Only 30 percent of respondents believe that businesses are interested in ‘improving peoples’ lives’. The innovation story so proliferate in financial services needs to resonate with consumers through regular, two-way engagement and active consumer participation in product development and also in the reform process itself.

Another lesson is the need to act with integrity, rigor and self-awareness. Take sustainability into consideration. Be consistent in reporting and tell people how you are doing. This is a long-term, not short-term strategy. Start with social listening; having a well-communicated culture that is focused on an institution’s people and the communities in which they live and work. Only 24 percent of respondents expect that businesses will ‘make the world a better place’ (see Fig. 1), while 54 percent say they will refuse to do business with companies that do not. Consumers are sending a crystal clear message with this finding. Companies that are listening to their customers on this will gain the greatest advantage.

Finally, we must listen, share information and improve products. Do not be afraid to acknowledge problems, but be sure to take steps to solve them. It is vital to communicate across all platforms and in every priority area – operations, purpose, products and services, engagement and integrity. Of those surveyed, 83 percent said that keeping their family safe was an essential attribute – but only 56 percent thought the financial services industry was performing well on this measure. Strengthening collaborative approaches to data security and privacy, standing for consumer protection and making sure the institutions themselves remain strong will help to close the gap. The good news is that the 2015 Edelman Financial Services Trust Barometer shows a public willing to partner and engage and one that is open to innovation. Now is our chance to build on that. We need to make them aware of what the industry is doing to improve security, safeguard our financial systems and bring greater access to developing communities around the world.

Perceived drivers of change in business and industry

Integrity and engagement
The trust-building opportunity for the reform process, therefore, lies squarely in the area of integrity and engagement. These areas encompass actions for individual participants in the retirement industry such as having ethical business functions, taking responsibility to address issues or crises, having transparent and open business practices, listening to customer needs and feedback, treating employees well, placing customers ahead of profit and communicating frequently on the state of the business.

Unsurprisingly, these are the qualities also evidenced to build trust in innovation and change. When it comes to retirement reform, integrity and engagement with members is therefore critical. But unfortunately, the financial industry dialogue currently tends to focus on the technical jargon, tax, product and contribution changes rather than embracing the challenge of deepening our understanding of what integrity and engagement may mean to the process and what is required to build trust with consumers.

At Argon Asset Management, we are entrusted to be stewards of hard-earned money from members of retirement funds. We therefore proactively maintain a strong, non-negotiable values orientation. Our values are honesty, integrity, thoroughness, accountability, respect for self and others, and a solid work ethic. This combination allows us to engage with external stakeholders with care, attentiveness and a proactive and socially consciousness approach to meeting their needs. We believe a key aspect of this is our culture and healthy internal people dynamics. We recognise that the effectiveness of our engagement with clients and members depends on the quality of our people, our discipline and passion to really listen to evolving needs and respond appropriately in a culturally sensitive way.

It is important to understand that engagement is a two-way thing. As an industry, we are very good at talking at people, perhaps because the consequence of listening and really paying attention across all of society in an inclusive way could change our paradigm and appear too costly in the short term. So, as an industry we don’t tend to stop and ask what members want and understand, never mind listen when they tell us. We fall into the trap of patronising many members or ignoring their financial, cultural, language and other needs, which, unfortunately, we believe will be much more costly to us as a society locally and globally, in the long run.

We are embracing the challenge at Argon and we will continue to deepen and broaden the quality and reach of our investment management services and the level of engagement with the clients whose needs we strive to meet and whose trust we seek to earn.

Financing the future

Posted on by Ashton Wenborn

According to the ILO, the garment and textile industry employs 60 million people around the world. Investment in the sector has been a priority for IFC and other development finance institutions as it provides formal jobs for low-skilled workers, furthering the goal of reducing poverty. Moreover, since many of the workers are young women with few opportunities to earn their own income and become independent, creating jobs in the sector can also improve gender equality.

To achieve these goals, however, investments must combine financial sustainability and profitability with strong social and environmental standards. This can be a challenge in countries where laws and governance are weak, which are also usually the places where poverty is widespread and investment and jobs are scarce. It is particularly challenging in the garment industry, where intense competition leads some suppliers to disregard basic safety standards and worker rights.

Recent factory disasters, such as the Tazreen fire and the Rana Plaza collapse that together took the lives of 1,200 people, have prompted the IFC to identify innovative ways to improve the garment sector in developing countries. While traditional audits and supervision are important to ensure environmental and social compliance, we must move to the next stage and create the financial incentives for suppliers to upgrade their processes and factories. To demonstrate that this is possible, IFC partnered with Levi Strauss – one of the largest apparel companies and a leader on environmental and social standards in its supply chain – to roll out a new kind of supplier financing product.

Using our $500m Global Trade Supplier Finance Program we are providing short-term finance to emerging-market suppliers. The key is to offer lower interest rates to suppliers who score better on Levi Strauss’ sophisticated evaluation system for labour, health, safety, and environmental performance. The program works on a sliding scale – as suppliers improve their environmental and social performance, they are rewarded with lower interest rates, reducing the cost of their working capital. In short: the higher the supplier’s score, the more they will save. Through this innovative partnership, Levi’s suppliers have access to cheaper capital than they could otherwise obtain in their home country. Moreover, the benefits go beyond monetary savings. Suppliers can differentiate themselves from competitors through positive environmental and social scores. This is a win-win solution for all parties, including international buyers, who want to improve safety and working conditions in their supply chains.

IFC has also been spearheading other partnerships to make positive changes in the textile and garment sector. In 2007, we launched the Better Work Program with ILO to improve labour standard compliance in global supply chains, both to protect workers’ rights and to help enterprises become more competitive. The program, which is currently active in eight countries, focuses on scalable and sustainable solutions that build cooperation between governments, employer and worker organisations, and international buyers.

In Bangladesh, where the garment and textile sector accounts for 80 percent of export earnings and employs 4.2 million workers in 4,500 factories, we launched the program following eighteen months of collaboration with the government to improve national labor laws and develop the national “Framework for Continuous Improvement.”  The objectives are to provide assessments of factory compliance with national law and international core labor standards, and to report the findings in a transparent manner, as well as to provide advisory support for factories to make improvements.

These kinds of partnership between governments, employers, unions, buyers, and other industry stakeholders can bring about sustainable change in the garment sector by helping factories improve working conditions, and foster factory-level capacity for worker-management relations. We hope that other major international apparel brands will follow the lead of Levi Strauss and other countries will emulate the example of Bangladesh and sign on to the Better Work Program.  It’s the right thing to do and also makes good business sense.

Olaf Schmidt is Global Sector Lead of Retail, Real Estate & Hotel Investments at IFC, the private sector arm of the World Bank Group.

Technology enriches the wealth management sector

Posted on by Ashton Wenborn

In the wealth management industry, technological developments have taken hold to such a degree that prominent managers no longer enjoy the monopoly over market information they once did. Easy and immediate access to performance metrics, and the tools to break down and digest complex data patterns means that wealthy individuals need no longer put their faith in asset managers to secure a healthy return. Advantageous for moneyed individuals in that the digital age allows them to decide for themselves how best to spread the wealth, the upshot for financial services is that the business of wealth management is shrinking.

“Technology advancements, client demand for digital services, and current industry dynamics are creating an environment conducive to the development of self-service capabilities”, according to a recent Capgemini report titled: Self-Service in Wealth Management. “In the past, self-service capabilities in wealth management have been restricted to online accessing of account information and transacting online. However, firms can offer richer features to promote a collaborative investment management experience.”

This rise of the digital consumer (see Fig. 1), coupled with a real and growing pressure on fees, has asked that wealth managers embrace technology, if only to keep a hold of a shrinking opportunity. Though the transition is not all one sided, and a second look at the market shows that technology is unlocking new opportunities elsewhere.

So far, the internet has been used as a weapon against the
adviser community

Digital invasion
The realisation that revenues were on the decline set in last year when studies compiled by ComPeer showed that wealth management firms in the UK were being squeezed, increasingly so, by a changed operational environment, born largely of technological innovation. “The first rule of any technology used in a business is that automation applied to an efficient operation will magnify the efficiency. The second is that automation applied to an inefficient operation will magnify the inefficiency”, said Bill Gates in an ATKearney study titled Wealth Management in the UK: Survival of the Fittest. And in many ways this quote perfectly encapsulates the issues dogging wealth management currently, with technological change interpreted both as a threat and an opportunity.

The age-old method of face-to-face delivery has been overhauled recently, as a technologically orientated financial landscape, in which access to information is immediate and expert opinion never less than a few clicks away, has taken hold. Cognitive computing technology has made data far easier to digest, and a greater degree of independence has piled the pressure on operating costs. Yet wealth management, even in mature markets, has been slow to adjust, to the extent that private banks are losing ground to new market entrants.

Perceived by slow-to-move parties as a threat more than an opportunity, the proliferation of technology in financial services has brought a swift and decisive end to the days when traditional wealth managers were considered the singular authority in handing out investment advice. With fees bordering on the extreme and their services reserved only for the ultra wealthy, a new breed of wealth management is encroaching upon their ever-diminishing slice of the pie.

Newcomers and game-changers
Promising reduced fees, lower entry costs and more immediate access, online wealth managers are snatching customers away from the competition, and will continue to do so for as long the competition’s competencies fall short. “Technology has always been at the heart of how wealth managers do business”, according to an Ernst & Young report titled Digital Disruption and the Game-Changing Role of Technology in Global Wealth Management. “The emergence of digital technologies for delivering services is forcing wealth managers to invest in their front-office digital capabilities or run the risk of falling behind. The digitisation of the wealth management value chain and the increasing use of mobile devices for doing business is making it easier for new entrants to challenge the status quo and exploit areas of dissatisfaction and underinvestment.”

With this, so-called ‘digital disruptors’ such as Nutmeg and Wealth Horizon have crashed the party, with expertise comparable to that of their better-known counterparts and at a reduced rate. In a market dominated still by business on a face-to-face basis, access to multiple platforms, whether on tablets, mobiles or computers, is doing much to quell frustrated clients for whom old systems are failing to meet their lofty standards.

Though in its infancy, this online wealth management subsector has succeeded so far in attracting investors with modest portfolios, yet failed to reel in the ultra-high-net-worth individuals (UHNWIs) that traditional wealth managers have worked so hard to retain. “The current market share of these firms is marginal (concentrated mainly in the lower end of the market), and their underlying business models are still untested in down markets”, according to another Ernst & Young report. “However, we believe their steps to streamline the client online experience, provide greater transparency and improve the economics for the mass segments are irreversible. While traditional firms will continue to focus on the wealthier segments, those that also want to compete for the lower end of the market and/or improve their clients’ digital experience will need to determine if and how to adjust their offerings accordingly. All in all, this offers new opportunities for expansion while challenging some of the aspects of the traditional advice model.”

In this respect, web-based advisory firms have done little to threaten the collective might of the industry’s larger powers, having collected only a small share of assets lower down the pecking order. However, as their presence grows, as indeed it looks certain to do so, online managers could conceivably profit from the frustrations of more sophisticated clients, should they – like their lesser counterparts – opt to depart from the traditional model.

Analysts have been quick to draw parallels between the wealth management industry of today and that of tourism in the 1990s, during which time travel agents lost market share to online alternatives such as Expedia. And while it’s unlikely, at least in the short-term, that start-ups will alter the traditional wealth management landscape in quite the same way, or to the same degree, new models of wealth management have succeeded at least in unlocking underserved segments of the investment community.

“New digital technologies – mobile, analytics, social and cloud – are enabling both unencumbered development and unprecedented disruption, right across the wealth management value chain”, according to an Accenture report on digital wealth management. “Using readily available components that cost little or are actually free, digital disruptors leveraging open platforms can enter the market directly, with more cost-effective, more innovative, more customised solutions that compete with incumbents on all three core value disciplines: operational excellence, product leadership, and customer intimacy.”

The consulting firm goes on to stress that clients expect wealth management solutions to be designed with both transparency and customisation held in high regard; a feat made possible by the latest technological developments. And with lesser clients migrating to lesser-known names in the business, more experienced firms are exploring new methods, again utilising technology, albeit for different purposes altogether.

Wealth matchmaking
“So far, the internet has been used as a weapon against the adviser community”, said one spokesperson on behalf of broker-client matchmaker Advisor Finder, in an interview with welathmanagement.com. Dreamed up by Boston-based Dalbar Financial and Microsoft, the firm entered the scene as far back as 1999, though only in recent months and years have wealth management matchmaking services come into their own. “We’re turning the equation around here.”

Far from alone in the market, rival matchmaker FindAWealthManager.com secured a £500,000 ($768,792) investment earlier this year to launch its service in Asia, and similar such solutions are fixing a much-needed element of digitisation to otherwise traditional models. Even today, those at the top of the pile depend largely on face-to-face interactions, though by honing their focus on UHNWIs, ambitious managers must employ technology in matching their services to the right clients.

While the broker to client matchmaking business represents only a fraction of the changes sweeping the industry, it goes some way towards demonstrating the lengths by which technology has infiltrated wealth management.

For those looking to slash costs, technological improvements will prove a popular strategy. However, more important than these broad-based improvements even are the smaller concessions of larger names that – despite their leanings towards traditional models of doing business – depend largely on technological improvements. True, the digital revolution has cost certain segments of wealth management dear, but succeeded also in bringing fresh opportunities to the fore.

Global review: countries whose economies are most fuelled by tourism

Posted on by Ashton Wenborn

Global review 1

1. UAE (Rank 4)

As a small collection of cities along the Persian Gulf, the UAE offers little in the way of natural diversity beyond its endless sand dunes and beaches. What it lacks in natural assets it makes up for in impressive engineering feats, and being home to the world’s largest man-made island, the Palm Island. Amid its impressive skyline is the Burj Khalifa, the world’s tallest man-made structure. With its world-class airport infrastructure and liberal visa system, travel is relatively easy. The government has carried out a successful branding campaign in recent years, and in 2014 tourism amounted to 4.1 percent of GDP.

2. Switzerland (Rank 5)

With no standing army, no official capital city and three linguistic groups, Switzerland is a unique country. The mountainous nation – home to the Swiss Alps – has impressive landscapes and views for tourists, kept pristine through stringent environmental laws. Geneva, one of the country’s main cities, is also a major centre for luxury shopping. Outside the eurozone, the Swiss Franc has a high exchange rate, making visiting expensive, and Geneva and Zurich rank among the most expensive cities in Europe. For those visiting from outside of the Schengen Area, obtaining a visa can often be a lengthy process.

3. South Africa (Rank 15)

It has been five years since South Africa hosted the 2010 World Cup, and the country is still reaping the benefits, with the large stadiums built for it now available for various entertainment events. Outside of the cities, the country is home to an abundance of wildlife and a number of classified World Heritage sites, such as the Mapungubwe Cultural Landscape, where structures and buildings dating back to the 15th century still stand. The government places a high emphasis on environmental and cultural conservation. However, South Africa’s visa restrictions, due to a set of immigration reforms, are set to become more stringent.

4. Panama (Rank 33)

Aside from being the trade hub of Latin America, Panama also has a significant tourist industry, totalling six percent of its GDP. The country, with the Gulf of Panama on one side and the Caribbean Sea on the other, has very attractive beaches. In contrast to much of the region, Panama has strong tourist infrastructure and a skyscraper dominated capital in Panama City. Its airport – the busiest in Central America – is a regional travel hub, which allows for easy access to the country. Panama is also one of the safest countries to visit in Central America, with relatively low levels of tourism crime.

Global review 2

5. Israel (Rank 51)

Home to holy sites of the world’s three major religions – Judaism, Christianity and Islam – and the birthplace of two of them, Israel houses various sites of historical and cultural importance. However it also has more secular attractions, with a vibrant nightlife scene in the modern city of Tel Aviv on the Mediterranean coast, and wineries in the Golan Heights in the north and Negev Desert in the south. Although Israel has ploughed investment into improving its tourism infrastructure, navigation is sometimes not so easy. The cost of living – and therefore cost of visiting – is also rather high.

6. China (Rank 80)

Nearly 130 million people visited China in 2014. Cities such as Shanghai and Beijing offer visitors the experience of a lively modern megacity, replete with skyscrapers, luxury shopping and expensive bars and restaurants. For those wishing for a glimpse into China’s more traditional past, the country ranks third in the number of World Heritage natural sites and is home to world-famous cultural heritage sites such as the Great Wall, the Forbidden City and the Mogao Caves. The country’s government continues to invest in infrastructure, easing travel. However, within the coastal cities, air quality is often low.

7. Spain (Rank 100)

Since the 1970s, Spain has proven popular among Northern Europeans seeking sun for a few weeks a year. In recent times, however, the country’s tourism numbers have been boosted by other parts of the world, with those in developing nations growing richer. Spain receives approximately 60 million tourists a year, with a growing number of visitors from emerging economies such as Mexico, Brazil and China. The country boasts a rich cultural history, from the Alhambra palace – which dates back to the medieval years of Muslim rule – to tours retracing Pablo Picasso’s early 20th century youth in Barcelona.

8. Colombia (Rank 108)

Every year Colombia hosts Barranquilla’s Carnival, a four-day folklore festival dating to the 19th century. Ranked by UNESCO as a Masterpiece of the Oral and Intangible Heritage of Humanity, it is part of the country’s rich cultural heritage on offer to tourists. The Latin American nation is also home to a highly diverse ecosystem, with over 3,000 species. Although the country has been troubled by a civil war in some regions, Colombia has grown a safer place over the past few years, reflected by an increase in tourist numbers. The country also has a liberal visa policy, allowing for easy access.

Source: World Economic Forum

Grexit averted after bailout deal reached

Posted on by Ashton Wenborn

Today, the eurozone summit agreed to commence negotiations for a third Greek bailout under the European Stability Mechanism (ESM) programme.

“EuroSummit has unanimously reached agreement. All ready to go for ESM programme for #Greece with serious reforms & financial support,” explained Donald Tusk, President of the European Council, on his Twitter account early in the day.

The new stimulus package will be “subject to strict conditions”

The new stimulus package will be “subject to strict conditions” and “accompanied by a growth and employment package in the order of EUR 35 billion,” according to a statement released by the EU Commission.

“There will not be a ‘Grexit’,” said Jean-Claude Juncker, President of the European Commission during a press conference. “I am satisfied both with form and substance of the agreement.” 

The Greek parliament, along with the legislative branches of several other member states still needs to “give [its] blessing” for formal proceedings to commence, with finance ministers required to convene in order to discuss short-term bridge financing.

Revising international trade agreements

Posted on by Ashton Wenborn

Trade is high on the agenda in the US, Europe, and much of Asia this year. In the US, where concern has been heightened by weak recent trade numbers, President Barack Obama is pushing for Congress to give him Trade Promotion Authority (TPA), previously known as fast-track authority, to conclude the mega-regional Trans-Pacific Partnership (TPP) with 11 Asian and Latin American countries. Without TPA, trading partners refrain from offering their best concessions, correctly fearing that Congress would seek to take ‘another bite of the apple’ when asked to ratify any deal.

In marketing the TPP, Obama tends to emphasise some of the features that distinguish it from earlier pacts such as the North American Free Trade Agreement (NAFTA). These include commitments by Pacific countries on the environment and the expansion of enforceable labour rights, as well as the geopolitical argument for America’s much-discussed strategic ‘rebalancing’ toward Asia.

Trade boosts productivity, which is why exporters pay higher wages than other companies

Following a similar direction
As with consumer products, the slogan ‘New and improved!’ sells. NAFTA and other previous trade agreements are unpopular. So the Obama administration’s argument is apparently, “We have learned from our mistakes. This agreement will fix them.”

But the premise is wrong: The previous agreements did benefit the US and its partners. The most straightforward argument for TPP is that similar economic benefits are likely to follow.

The economic arguments for the gains from trade of course go back to David Ricardo’s classic theory of comparative advantage. Countries benefit most from producing and exporting what they are relatively best at producing and exporting, and from importing what other countries are relatively better at producing.

Moreover, trade boosts productivity, which is why exporters pay higher wages than other companies, on average – an estimated 18 percent higher in the case of US manufacturing. And the purchasing power of income is enhanced by households’ opportunity to consume lower-priced imported goods. The cost savings are especially large for food and clothing, purchases that account for a higher proportion of lower-income and middle-class households’ spending.

American trade debates have long been framed by the question of whether a policy will increase or reduce the number of jobs. This concern is a first cousin to the old mercantilist focus on whether a policy will improve or worsen the trade balance. A ‘mercantilist’ could be defined as someone who believes that gains go only to the country that enjoys a higher trade surplus, mirrored by losses for the trading partner that runs a correspondingly higher deficit.

Even by this sort of reasoning, one could make an ‘American’ case for the on going trade negotiations. The US market is already rather open; TPP participants such as Vietnam, Malaysia, and Japan have higher tariff and non-tariff barriers against some products that the US would like to be able to sell them than the US does against their goods. Liberalisation would thus benefit US exports to Asia more than Asian exports to the US.

The late 1990s offer a good illustration of how trade theory works in the real world. The volume of trade increased rapidly, owing partly to NAFTA in 1994 and the establishment in 1995 of the World Trade Organisation as the successor to the General Agreement on Tariffs and Trade.

Balancing the numbers
For the US during this period, imports grew more rapidly than exports. But the widening of the trade deficit had no negative effect on output and employment. Real (inflation-adjusted) GDP growth averaged 4.3 percent during 1996-2000, productivity increased by 2.5 percent per year, and workers received their share of those gains as real compensation per hour rose at a 2.2 percent annual pace. The unemployment rate fell below four percent – as low as it goes – by the end of 2000.

A stronger trade balance in the late 1990s would not have added to output growth or job creation, which was running at full throttle. Further increases in net export demand would have been met only by attracting workers away from the production of something else. That is why the gains from trade took the form of bidding up real wages, rather than further increasing the number of jobs.

Admittedly, it is harder to make the case for freer trade – particularly for unilateral liberalisation – when unemployment is high and output is below potential, as was true in the aftermath of the financial crisis and recession of 2007-2009. Under such circumstances, there is a kernel of truth to mercantilist logic: trade surpluses contribute to GDP and employment, coming at the expense of deficit countries.

Of course, if one country erects import barriers, its trading partners are likely to retaliate with ‘beggar-thy-neighbour’ policies of their own, leaving everyone worse off. That is why the case for multilateral renunciation of protectionism is as strong in recessionary conditions as ever. In response to the 2008-2009 global recession, for example, G-20 leaders agreed to refrain from new trade barriers. Contrary to many cynical predictions, Obama and his counterparts successfully fulfilled this commitment, avoiding a repeat of the debacle caused in the 1930s by America’s introduction of import tariffs.

In any case, mercantilist logic is no longer relevant. The US unemployment rate has fallen well below six percent – not quite full employment, but close. If output and employment were rising this year as rapidly as in 2014, the Federal Reserve would probably have felt the need to start raising interest rates early. As it is, the Fed will almost certainly delay raising rates for a while longer. If trade deals do boost US exports more than imports, the Fed will probably have to put a brake on the economy that much sooner.

But the bottom line is that if the US can boost auto exports to Malaysia, agricultural exports to Japan, and service exports to Vietnam, real wages will be bid upward more than by the creation of more jobs. That is why, if it is allowed to proceed, the TPP will, like past trade deals, help put real median US incomes back on a rising trend.

Jeffrey Frankel is Professor of Capital Formation and Growth at Harvard University.

© Project Syndicate 2015

Indian private equity set for record breaking year

Posted on by Ashton Wenborn

Private equity firms in India are on track to have their best year yet. The country has been subject to a flurry of investments so far in 2015 and if the trend continues for the remaining months, it will be a record-breaking year for Indian private equity, which has previously struggled.

Private equity has had a troubled past in India

The prediction is based on data from PwC, which estimates that so far this year, total deals in private equity reached the record level of $7.5bn. “Without a doubt, at this point I will be very surprised if 2015 comes second best to any year we have seen,” said Sanjeev Krishan, PwC’s Head of Private Equity in India, speaking to the Financial Times. “At the current run rate we should easily surpass 2007, which was the sector’s best [year] to date.”

Private equity has had a troubled past in India. Between  2001 and 2013 about $93bn worth of Private equity deals poured into the country, according to a paper published by McKinsey&Company in February 2015. According to the paper, “returns fell sharply in following vintages; funds that invested between 2006 and 2009 yielded seven percent returns at exit, below public markets’ average returns of 12 percent. In fact, India’s PE funds in recent years have come up well short of benchmarks: with a nine percent risk-free rate and a 9.5 percent equity risk premium.”

As the paper also notes, just “$16bn of the $51bn of principal capital deployed between 2000 and 2008 has been exited and returned to investors.” The first half of 2015, however, saw an uptick in exits, over $5bn, according to PwC data, and including big names such as Apax Partners TPG Capital.

Economics’ big bipolar problem

Posted on by Ashton Wenborn

Readers of this column, no doubt concerned for my wellbeing, have occasionally asked how my book Economyths – a critique of mainstream economics from the point of view of an applied mathematician – was received by economists.

The book, which also served as the basis for many Econoclast articles, did muster a number of positive reviews, from publications ranging from Bloomberg to Handelsblatt. The science writer Brian Clegg called it “probably one of the most important books I’ve ever read” (he’s not an economist, I just wanted to mention it, before we go on). Perhaps the strongest endorsement was from Czech economist Tomas Sedlacek, who co-wrote a subsequent book with me.

Not everyone was so complimentary. In an online discussion at the leading Canadian economics blog Worthwhile Canadian Initiative, a group of university economists, wrote off my book based on what they could find on Google, describing it variously as juvenile, idiotic, intellectually lazy, semi-articulated, ignorant, and “sort of like Malcolm Gladwell without the insight” (ouch). One poster even compared me to a climate change denier. They could have thrown a copy on a fire, if they’d bought one.

[A] common criticism of economics is that it is based more on theory or ideology than on empirical evidence

The site linked to a review, which a World Finance reader alerted me to, written by Christopher Auld from the University of Victoria in Canada. It displayed a similar lack of enthusiasm. According to this economics professor, Economyths is “a terrible, wilfully ignorant, deeply anti-intellectual book. The characterisation of economic thought presented is ridiculous. The level of scholarship is abysmal.”

Hmm. For context, compare this with the straightforward description of the same book from William White – former Deputy Governor of the Bank of Canada, and current chairman of the OECD’s Economic and Development Review Committee – who cited it as a Bloomberg Best Book of 2013: “Lists 10 crucial assumptions (the economy is simple, fair, stable, etc.) and argues both entertainingly and convincingly that each one is totally at odds with reality. Orrell also suggests that adopting the science of complex systems would radically improve economic policymaking.”

Get the kindling version
Of course everyone has a right to their own opinion, but the contrast between White’s “best book” recommendation and Auld’s “there is nothing an interested layman could possibly learn from this book” assessment seems extreme. So what is going on? Is the book – and by implication this column – total rubbish, suitable only for incineration, or does it have some redeeming features? And what does this tell us about how economics is developing now?

I would argue that this type of ill-tempered, get-the-matches-out response is symptomatic of a wider denial in economics – more prevalent among academics than practitioners – about the subject’s role in the crisis, and its need for reform. One of the themes of the book is that economics needs to bring in ideas from people such as complexity scientists or biologists. While some specialised centres, such as the Soros-funded Institute for New Economic Thinking, were designed to encourage such interactions, in many academic departments they are still largely perceived as a threat.

This defensiveness is illustrated, in a revealing way, by Professor Auld’s review. A common criticism of economics is that it is based more on theory or ideology than on empirical evidence, and that is certainly the case here, where the facts are twisted to fit the argument – though it appears he at least obtained a copy of the book, which is more than can be said for the Worthwhile reviewers.

The review claims for example that I spend “several chapters discussing the scandalous fact that economists oppose any and all government intervention to protect the environment” which would surprise most readers, especially since the book only has 10 chapters. It also takes remarks out of context – even turning a humorous question into a statement by omitting the question mark – and generally misrepresents the book.

Feedback is always useful, and no book is perfect. But even negative reviews should try to give an accurate sense of what a book is about – especially when they come from university professors who have a special role to play in society, as publicly funded arbitrators of knowledge. It seems more about angry denial than anything else – not so much about my book, I suspect, than about the changing status of economics.

Lighten it up
In the last year or so, the field of economics has come under increasing criticism for its rigidity and insularity. Student groups such as Rethinking Economics – with branches in seven countries – Manchester University’s Post-Crash Economics Society, and many others around the world, have sprung up to demand reforms in the way that economists work and teach. A consistent theme is that economics need to relax a little and adopt a more open, pluralistic style.

In Quebec, for example, a student petition noted that the field “isolates itself from criticism, leaving little room for ethical, epistemological, philosophical, political and historical reflection, which would allow the discipline to reflect on itself and renew continuously”. As Keith Harrington from the activist group Kick It Over told YES! Magazine earlier this year: “Despite its enormous failings in the face of the financial crash, the mainstream of the profession has by and large failed to embrace self-criticism or open itself up to different approaches.” From my own experience with the book, I can understand how hard it must be for a student to question their professors. At least they don’t grade me.

Auld maintains a list of “anti-economists” on his site, which also includes, apart from yours truly, the economist Steve Keen (author of Debunking Economics), the environmentalist David Suzuki, and the biologist David Sloan Wilson – all people from outside the mainstream establishment who have questioned the basic assumptions of economics. Keen, together with White, was among the few people credited with giving advance warning of the financial crisis.

Silence those voices, and what hope is there to predict the next one? Shut out the biologists and anyone with a different background, and how can economics reform? When these academics get out of book-burning mode and start listening to those other than critics and their own students, maybe the field can start to move forward.

Investment drives Latin America’s Southern Cone

Posted on by Ashton Wenborn

Over the last decade, Latin America’s economic growth has been grounded on favourable trade terms and ample global liquidity. With commodity prices on a downwards trend, growth drivers will need to shift. For Argentina, Paraguay, and Uruguay – part of Latin America’s Southern Cone – the shift represents an opportunity to diversify their economies and to move up in the value chain beyond the primary sector.

Economic activity has been ignited in the primary sector across different industries, yet for many in Latin America, productivity still lags relative to the agriculture and livestock farming sectors. To lever up on the decade’s momentum, those sectors will need to garner productivity gains through capital accumulation and innovation. Capital-intensive growth, however, will require funding. Some emerging market Latin American countries – such as Chile, Mexico, and Brazil – have well-oiled financial sectors that can intermediate between investors and companies, and others such as Colombia and Peru are following suit.

However, for Latin America’s Southern Cone, deeper financial markets are part of the ‘to-do list’ for the 21st century. This is where Puente’s expertise and local presence in these markets comes in. Puente’s regional coverage, in-depth research and knowledge of local players provides investors with a sold link to companies looking to exploit attractive opportunities. At Puente we have a team of more than 250 highly qualified and specialised professionals who are prepared to generate value in our clients’ businesses by offering a superior customised service based on our expertise and knowledge of both local and international markets.

The lack of capital markets development denotes a weakness, but also an opportunity

Though Southern Cone countries have successfully tapped international markets at the public sector level, most private companies have not followed suit, unlike their counterparts in Peru, Colombia, Chile, and Brazil. Corporate issuances are a small fraction of bank loans, and IPOs are rare events. Market capitalisation represents less than 10 percent of GDP, compared to an average of 36 percent for their largest Latin American neighbours.

Looking forward, financial depth will need to increase, hand-in-hand with the development of new drivers for growth. At Puente, we believe our expertise and human capital can make a contribution towards this leap. Our main areas of business are capital markets, corporate finance, wealth management, sales and trading, and asset management – leveraged by solid strategy and research areas that provide strategic, timely and forward-looking information to optimise our clients’ decision making.

Sustaining emerging markets
In Latin America, emerging markets have performed well over the last decade. Favourable in terms of trade, an expansive global monetary policy and a constructive view from foreign investors has boosted demand and inflows. The Southern Cone countries have enjoyed rapid economic growth, with soybean and beef prices as the instigators of that trend. Still, their economies are lagging behind their notable neighbours in two aspects: productivity gains have not fully spilled over the value chain; and capital markets remain mostly untapped.

Fig 1

The primary sector remains the main driver of foreign inflows on the goods side. Uruguay is the only partial exception, with FDI flowing towards other sectors, such as paper mills. For the three countries, the banking sector remains the main channel for financial intermediation. Corporate debt issuances are secondary in Paraguay and Uruguay, and mostly local for Argentina. IPOs are rare, and the number of listed companies is less than 150 for the whole group.

The lack of capital markets development denotes a weakness, but also an opportunity. For these economies to sustain a growth momentum, financial intermediation will need to blossom. It’s an interesting time for Argentina – after several years of mismanaged economic and monetary policies that drove investments away from the country, the situation is changing. There are several things that make both us at Puente and investors very optimistic.

Superior sovereign ratings will spill over to corporate issuances, reducing borrowing costs. Uruguay is already an investment grade country, with Paraguay looking to become one in the next few years. Argentina has the most to gain, following a credit event in 2014 amid a conflict with holdout creditors from the 2005 and 2010 exchanges, which most analysts expect to be resolved by 2016. Lower borrowing costs will increase competitiveness for sectors currently protected or in infant stages.

Uruguay will need to face the challenge of finally taming inflation pressures, as well as returning fiscal accounts to a sustainable path. Its monetary policy has been safe for a long time, only becoming slightly hawkish since last year, with inflation now at 8.5 percent, remaining above the target during the last five years. The Central Bank still faces a challenge to regain credibility by anchoring inflation expectations. Fiscal accounts have deteriorated in the last decade, with increasing social assistance programmes, public employment, and public utility companies’ tariffs growing below inflation, driving the fiscal deficit above 3.5 percent of GDP. Still, a favourable and stable institutional framework and growing credibility in authorities have allowed Uruguay to attract the highest ratio of FDI in Latin America, above four percent of GDP recently, (see Fig. 1), behind only Chile.

Fig 2

Infrastructural change
Paraguay started its path towards the investment grade rating introducing a set of fiscal reforms, and improving governance and institutional strength. The country has also introduced a fiscal responsibility law (FRL) that keeps expenditure bounded by a cap on the structural deficit. Looking forward, the government will need to abide by the limits imposed by the new law. This constitutes a challenge, but also an opportunity to demonstrate its commitment with the FRL, and its efficiency to approve several infrastructure projects.

In the monetary sector, the adoption of an inflation-targeting regime in 2011 has kept it under control, within the target range of 6.5 percent to 2.5 percent throughout the last five years, anchoring inflation expectations around the 4.5 percent target. This predictability of monetary policy – which has helped to reduce currency and interest rate volatility – was an important driver behind the rating upgrade. Beyond these efforts, the country will also need to reach a more diversified growth path, reducing the volatility that has characterised its economic activity, mainly as a result of climate events.

For Argentina, regaining market access is expected to reduce borrowing costs for both the public and the private sector, unlocking medium-term opportunities for growth. Reaching a settlement with holdouts from the 2005 and 2010 exchanges (following the 2001 default) will remove obstacles for the government to issue external debt in deeper markets. In turn, this will allow the next administration, taking office by the end of 2015, to build a buffer of external savings to correct macroeconomic imbalances – giving the private sector more space to function.

Fig 3

Argentina’s public and private sector leverage is among the lowest of the region, after declining steadily over the past decade. Increasing the availability of external savings will likely lead the government to remove some controls on its current account situation (see Fig. 2) and encourage investment, which is lagging behind its potential (see Fig. 3). This will unlock the full potential of GDP growth, estimated to be 4.5 percent. In this context, low-developed financial and capital markets are expected to face an increased demand. Foreign inflows and higher revenues would take pressure off central bank transfers to the treasury, mitigating inflation, and opening space to reduce fiscal pressure.

The country has a reputational problem that generates lack of credit, which is translated into bond and equity prices. There’s not a solvency problem. As we get closer to the change in the administration, equity prices will probably rise along with an interest in Argentine assets. We recommend investors to become positioned in Argentine bonds and equities as we think they are paying a very high premium over their real risk. There are already some investors that are getting ahead of the market by investing in real economy and financial assets.

The reduction in borrowing costs should open opportunities across different sectors where growth drivers will need to shift from commodity prices and cheap funding to investment and productivity gains.

In Paraguay, economic diversification has been improving along initiatives from both the government and the private sector. In particular, light manufacturing industries have been developed and value-added in agricultural manufactures has increased.

Mind the gap
The expansion is likely to continue due to Paraguay’s competitive advantages over Brazil, including lower labour and energy costs, and a more favourable tax environment. Paraguay’s salaries are among the lowest in the region, and currently most of its energy production from Itaipú and Yacireta is exported to its partners Brazil and Argentina. Another challenge for Paraguay is to close the infrastructure deficit gap, as it is the highest among the Southern Cone countries.

Fig 4

Authorities took on this issue by approving the Public Private Partnership (PPP) law, generating a proper environment to develop infrastructure projects by allowing mixed funding from the public and private sector. Three projects are expected to start the construction stage by the end of 2015 under the PPP programme, for a total investment of around $1.4bn, representing 40 percent of the last five years’ average investments. In addition, the public sector is expected to carry out investments in infrastructure for $1.8bn.

Uruguay’s investments have been concentrated on agro-businesses and the construction sector. Soybean-led agriculture productivity is at a record-high, and the exports profile is changing, with production diversifying to other activities, such as the forest industry, where the country is expected to become a main global player. Following the construction of a second-cellulose pulp plant last year and the potential installation of a third-one, cellulose exports will be among the three main exports – around 15 percent of total exports –together with soybean and beef.

Pulp exports will amount to more than 2.5 million tons per year ($1.5bn, around 2.5 percent of GDP), and will represent around four percent of global cellulose production, above Uruguay’s share of global soybean and meat production, which is around one percent of the global output.

But in this context, infrastructure investments have not accompanied the highly-dynamic growth of the last decade. Authorities, who estimate an infrastructure deficit of $3.6bn, are conscious that an investment shock is required to safeguard growth. Considering the need to reduce fiscal deficit, private investment is required to finance the construction of roads and railways, so the government is auctioning projects via PPP agreements. Part of the funding will come from local pension funds, allowed to invest up to 50 percent in productive projects ($5.5bn), but foreign savings will need to also contribute.

Fig 5.1

In Argentina, two sectors that have great growth potential are infrastructure and the oil and gas industry. With gross fixed capital formation having contracted in real terms since 2011, Argentina has an infrastructure deficit in key sectors, particularly in energy distribution, transport and technology. Electricity shutdowns and low quality of communication services are evidence of some of the infrastructure bottlenecks in the country. In the case of utilities, this is mostly a consequence of years of frozen tariffs, which have vanished utility companies’ profits in a backdrop of two-digit inflation.

It’s expected the next administration will allow tariff increments to boost investments in the sector, increasing the quality of the services. Improved utility services, transportation and communications will in turn improve efficiency in most sectors, particularly manufacturing and a whole array of services, for which infrastructure bottlenecks have been an obstacle to operate at full potential.

Argentina’s oil and gas sector (see Fig. 4) is also expected to have a game-changing role in the future, particularly in the hand of rich unconventional shale resources in the region of Vaca Muerta. This is the second-most extensive shale gas resource and the fourth-largest shale oil resource in the world, with a potential output of 27 billion barrels of unconventional oil and 802 trillion cubic feet of unconventional gas. The reservoir is seen as the main magnet to attract FDI in the long-term, with high potential to boost growth and domestic demand, and reduce balance of payments risks. Fully exploiting Vaca Muerta would require investments for over $20bn per year (around five percent of GDP), which would spill over into steel and transportation.

Lower expected energy prices have made profitability of the reservoir more uncertain, although at least for shale oil – for which productivity is lower than for gas – expected inflows could be postponed to the reservoir until price expectations increase. Vaca Muerta’s average break-even price is estimated to be around $84 per barrel of oil, which is above both current domestic regulated prices, as well as international prices.

Growth potential is bound to boost demand for consumer goods, particularly those targeted at the middle class, which amounts for 50 percent of Argentina’s population. Production of consumer goods should be increased once currency overvaluation is corrected, boosting exports and, once consumption rebounds, bringing higher growth (see Fig. 5.1 and 5.2). The manufacturing industry and commercial activity represent 30 percent of GDP, two sectors strongly dependent on consumer sales.

Fig 5.2

 

Competing local markets
Other promising sectors include agribusiness and financial sectors; however investors are looking at opportunities in all industries. Argentina shows asset prices at significant discounts compared to those in the rest of the region. And if expectations change following this recent period of volatility, there is a high potential for foreign investment. This is not only reflected in the financial markets; the local investment climate’s view of real assets has also started to change. Investors are no longer buying liquid assets from their offices abroad, but are increasingly visiting the country to understand how economics and politics work in order to make long-term investments in the real economy.

Both the public and private sectors present very low levels of leverage (current foreign debt to GDP stands at 47.8 percent), which will provide high flexibility for the new administration to face these challenges, once access to international financial markets is regained. At Puente, we saw these opportunities several years ago, and we have positioned ourselves as the leading investment bank in the country, ready to take advantage of the significant opportunities we see for Argentina in the coming years. This is a key aspect of our regional expansion plan to become the leading investment bank in the Southern Cone.

We believe the Southern Cone can sustain the last decade’s momentum through a more diversified economic structure, which will require financial intermediation as a key ingredient. At Puente, our expertise in the region can become an essential link in the value chain, to exploit opportunities in up-and-coming sectors that will become an integral part of these economies over the next few decades.

Syriza scrambles to get last minute bailout

Posted on by Ashton Wenborn

The Greek government has submitted to Brussels its latest proposals for economic reforms to meet conditions for a new three-year bailout, late at night on Thursday July 10. The new plan (published in full at The Wall Street Journal) must be accepted by EU leaders on the following Saturday to ensure Greek banks do not run out of money, potentially forcing the country to drop out of the eurozone.

The plan is seen as a huge compromise on behalf of the Greek government, led by the left-wing Syriza. The deal they have proposed concedes to a number of measures put forward by the EU, which the party has been fiercely opposed to in its time in power. It also seems to go against the referendum result, in which the party campaigned for a successful “no” vote, much to the anger of European officials. This has led some commentators to question what the purpose of such grandstanding – which caused a run on Greek banks and forced Greece to institute capital controls – really was.

Five of the 10 economic reforms Greece has proposed to Brussels

1. VAT reform
2. Pension reform
3. Changes to public administration, justice and anti corruption
4. Amendments to the financial sector
5. Increased privatisation

One major sticking point in past negotiations between Greece and EU creditors has been the exemption of certain Greek islands from VAT. The latest proposal has agreed to begin abolishing these exemptions, starting with islands with the “highest incomes and which are the most popular tourist destinations.” Other climb downs include agreeing to raise the pension age to 67 as well as cutting supplementary pensions for the least well off.

Within the plan there was no mention of debt relief. The recently resigned finance minister Yanis Varoufakis had long been an advocate for such relief and often spoke of it as a requirement for any future deal. Varoufakis left shortly after the referendum, claiming that his presence at negotiations with creditors – with whom he became deeply unpopular – could hinder talks.

Prime Minister Alexis Tsipras is facing mounting opposition from within Syriza, which has a rather large base of support spanning from far left to centre left, over the contents of the plan. Many on the left of the party feel that the plan goes too far in compromising with creditors and betrays the principles upon which Syriza was elected and the July 5 referendum decision made.

US is a drag on global growth, says IMF

Posted on by Ashton Wenborn

The IMF has downgraded its global growth forecast for this year, citing the US slowdown as the most significant factor in what could prove the slowest year since the world economy contracted back in 2009. The IMF clipped its previous forecast by 0.2 percentage points to 3.3 percent and revised its estimate for the world’s number one economy also, down to 2.5 percent from 3.1 percent previously.

[T]he IMF’s chief economist Olivier Blanchard attributed a weak US performance mostly to “a series of accidents”

“The shortfall reflected to an important extent an unexpected output contraction in the United States, with attendant spillovers to Canada and Mexico. One-off factors, notably harsh winter weather and port closures, as well as a strong downsizing of capital expenditure in the oil sector contributed to weakening US activity,” according to the IMF outlook.

The document went on to add that demand support and structural reforms were key focal points on a global front, and, in advanced economies, accommodative monetary policy could do much to raise both economic activity and inflation. An enduring low growth climate underlines the fragility of the global economy still, though, in a press conference held after the announcement, the IMF’s chief economist Olivier Blanchard attributed a weak US performance mostly to “a series of accidents.”

Assuming there are no more “one-off factors”, the US should play out the rest of the year on a relatively positive note, and another contraction before the year’s end is unlikely.

Elsewhere, the IMF maintained its 1.5 percent forecast for the eurozone, despite the situation in Greece, and China’s 6.8 percent forecast was also unchanged, despite stock market volatility of late. In 2016, growth is expected to strengthen and reach a far healthier 3.8 percent.