Month: September 2015

Is nuclear fusion the best way to support rising energy demands?

Posted on by Ashton Wenborn

This December, world leaders will gather in Paris for the United Nations Climate Change Conference, where they will attempt – yet again – to hammer out a global agreement to reduce greenhouse-gas emissions. Despite the inevitable sense of déjà vu that will arise as negotiators struggle to reach a compromise, they must not give up. Whatever the political or economic considerations, the fact remains: if global temperatures rise more than 2˚C from pre-industrial levels, the consequences for the planet will be catastrophic.

But the challenge does not end with reducing emissions. Indeed, even if we make the transition to a cleaner world by 2050, we will need to determine how to meet a booming global population’s insatiable appetite for energy in the longer term – an imperative that renewables alone cannot meet. That is why we need to invest now in other technologies that can complement renewables, and provide reliable electricity for many centuries to come. And one of the most promising options is nuclear fusion – the process that powers the sun and all stars.

[O]f course, holding the sun in a bottle is no
small challenge…

Foundations for fusion
Brought down to earth, nuclear fusion – a process fuelled primarily by lithium and deuterium (an isotope of hydrogen), both of which are plentiful in seawater and in the earth’s crust –could provide a major source of low-carbon energy. A fusion power station would use only around 450kg of fuel annually, cause no atmospheric pollution, and carry no risk of accidents that could lead to radioactive contamination of the environment.

But, while the fusion process has produced some energy (16 million watts of it, to be specific), scientists have yet to create a self-sustaining fusion ‘burn’. Indeed, unlike nuclear fission, which went from the laboratory to the power grid within two decades, fusion has proved a tough nut to crack.

The problem is that fusion involves joining two positively charged nuclei – and, as basic science shows, same-sign charges repel each other. Only at extremely high temperatures – over 100 million degrees Celsius, or almost 10 times hotter than the sun – do the nuclei move so rapidly that they overcome their repulsion and fuse.

Scientists have spent the last 60 years trying to figure out the best way to create these conditions. Today, the frontrunner is a device known as a ‘tokamak’, a magnetic bottle in which the fuel, held at 100-200 million degrees Celsius, fuses, unlocking huge amounts of energy. Of course, holding the sun in a bottle is no small challenge, especially when one considers that the systems must be engineered so that they can create electricity for a price consumers are willing to pay. But in a sunny corner of Southern France, a global megaproject is coming together that will, for the first time, test the technology on an industrial scale, creating the first controlled fusion burn.

Everything about the so-called ‘ITER reactor’ is big. It will be heavier than three Eiffel Towers; the material for its superconducting magnets would stretch around the equator twice; and it has a price tag of more than €15bn ($16.8bn), making it one of the largest international science endeavours in history. The ITER partners – China, the EU, India, Japan, Russia, South Korea, and the US – represent half the world’s population. And, if it is successful, the reactor will produce half a gigawatt of fusion power and open the way for commercial reactors.

But the tokamak is not the only game in town. Other designs are emerging to join the race for fusion power. Lawrence Livermore National Laboratory’s National Ignition Facility in California is getting impressive results by firing high-powered lasers at capsules of fuel, crushing the particles together to trigger fusion reactions.

Energy’s Holy Grail
Elsewhere, particularly in the US, privately funded fusion ventures are springing up like mushrooms, each with its own concept for what some call the Holy Grail of energy. As the most advanced design, the tokamak still looks like the safest bet, but the competition from its rivals can only spur further innovation and progress.

Some discourage investment in nuclear fusion, claiming that, given how far from being market-ready the technology is, our financial resources are better allocated to tried and tested energy options. The critics have a point: given that fusion can be carried out only on a large scale, its investment requirements are considerable.

In the 1970s, American researchers estimated that getting fusion power on the grid would demand investment of $2-3bn annually in research and development until anywhere from 1990 to 2005 (depending on the amount of effort applied). They also estimated a minimum level of investment, below which funding would never be sufficient to build a fusion power plant. Nuclear fusion research budgets have remained below that line for 30 years.

But fusion’s potential is simply too great to give up. And, in fact, the progress that has been made in recent years – despite the lack of adequate investment – belies the naysayers. Machines all over the world are reaching fusion temperatures and extending our technological capabilities. The ITER experiment, when it starts up in the early 2020s, will embody those advances, achieving the long-awaited fusion burn – and place us just one step away from the ultimate goal of getting fusion power on the grid in an affordable manner.

Without nuclear fusion, future generations’ energy options will be severely limited – creating a serious problem for developed and developing countries alike. Lev Artsimovich, the tokamak’s inventor, said that “fusion will be ready when society needs it”. One hopes that he is right. But, rather than depending on fusion researchers to defy the odds, the world should step up investment in the technology. Our future may depend on it.

Steven Cowley is CEO of the UK Atomic Energy Authority and Professor of Physics at Imperial College London

© Project Syndicate 2015

Does technology offer a lifeline to corporate treasurers flying blind?

Posted on by World Finance

Today’s treasury landscape is developing rapidly, with new technological innovation changing the role of the corporate treasurer. Martin Bellin from BELLIN, a leading web-based treasury software company, explains the data-gathering challenges treasury managers face, and how new technology is improving workflows.

World Finance: Today’s treasury landscape is developing rapidly; especially with new technological innovation changing the traditional approach and the role of corporate treasurer is evolving as result.

With me now is Martin Bellin of BELLIN a leading web-based treasury software company. Well Martin let’s start with how the treasury landscape is evolving and the challenges it faces.

Martin Bellin: If you take a look back in time for a while, then you will see that treasury has become the centre of financial operations in many corporations now. In the former past it was more an extra to accounting and things like that, so it was not recognised as a very important topic.

Nowadays, treasury has become in the middle, and it’s getting more and more important for corporations. They became a department, they became a body in the corporate finance and it is going to raise attention in the meantime. Especially because treasury is not concerned about certain legal entities and divisions, they are concerned about groups, groups of companies.

So they are tearing down the walls between the different divisions and different departments and different legal entities by taking a look at global corporations and the global view. And that exactly, enables global business, and corporations are taking a closer look at global business more and more often and more and more intensively.

World Finance: And how does BELLIN fit into this?

Martin Bellin: When I started this company, I actually had that in mind already, so my idea, my problem actually at that time was, to build an environment, which could enable me to control the whole group of companies. To control not just my financing and my treasury business and my central treasury but around the whole operation – this couldn’t be fulfilled with any instruments available because it’s technology driven.

Technology is required to collect all the information in a global scale. So I developed and tried to develop – at least at the very beginning – I tried to develop a system environment, which enables me to get hold of all the data on the global level.

Now by having the data available at my fingertips, I am able to manage now, exactly what I am supposed to manage: the global financial impact, the global financial risk of my corporation.

World Finance: Treasurers are spending more and more time now on risk management, capital liquidity management and business strategy – what needs is this prompting and how do you approach this?

Martin Bellin: If you go back you’ll find a survey which has been made by Gardner and published by Gardner and I figured out, a couple of years ago, that 75 percent of the time of an average treasurer is spent on data collection.

Now imagine: none of these treasures have on their business cards a title ‘treasury data collector’ – they are all called treasury manager.

Now in the meantime, we do have systems available, which are helping me to collect all the data from the different subsidiaries together in one spot. Now if I can spend the time, which I have spent before on data collection, on management; I can exactly do what I am supposed to do; manage my risk, my liquidity, my positions, and what I am supposed to manage.

World Finance: And how is increased regulation impacting the industry?

Martin Bellin: Well treasurers are not accustomed to regulation because there was no regulation, actually, for corporate treasures in the past. Accountants are very used to regulation. Now as treasurers become more and more affected by regulations, we all know about Dodd Frank, about EMIR, which are affecting treasury business.

My concern is that corporations are starting to avoid or to change their risk management in a way that they are weakening their risk – because they do not want to follow the regulations, they cannot comply with the regulations. So there are coming more regulations in the future, we are all sure of that, because the financial industry is requiring regulation for different reasons, we all know about that. So and this is going to affect corporate treasurers as well. Now this is going to affect corporate treasurers that have to comply with regulations.

How do I comply with regulations? By implementing proper technology – which helps me to get rid of data collection again to build the reports, which are required and to do all these things, which are now regulated. We have to get used to that in corporate treasury as well, and we have to implement the systems, which are going to help me to comply with them.

World Finance: Looking at treasuries now from a global perspective and how important is it that they are connected?

Martin Bellin: Business is all about information, the more you know, the easier the business is. Just imagine a pilot – I flew in this morning to London, imagine the pilot wouldn’t have any instruments, wouldn’t have any sight were he is flying to, or a captain sailing the seas. If he would have no idea where he is going to go, then he will be in trouble very easily. Now that applies to treasury as well.

If the treasurer doesn’t have all the information at hand to manage the corporation – how could they? Now the question is, how does technology impact the future of treasury? I need systems, I need information – I need all the real-time information at hand to really do what I am supposed to do – to manage my risk for the corporation; for the benefit of the corporation.

World Finance: And finally, how do you see the industry evolving over the coming years and what trends you see impacting it?

Martin Bellin: Well, there are different trends I will say. First of all there are corporations, which have a professional treasury in place right now, so they reconsider their existing set up. They have the ability now to consolidate their existing landscape. They have implemented payment systems, risk management systems, planning systems, all these kind of things. Now there are systems available which can put all the things together in one, that’s one trend.

Another trend is that more and more corporations are going to come aware that treasury is really a core part of their financial set up – and they are just starting to implement and to run a treasury department at a professional level. That is the most important impact and the change in the future, because there are still too many companies that do not consider treasury a part of their financial set up.

And third, we do have a possibility now to increase our abilities in treasury – what does that mean? If you want to have a global set up in treasury you have to run global payments. That means you have to have one platform in place, which enables you to process all the payments from any subsidiary in the world through this one platform. Now this communication exists, more and more companies are implementing exactly this bank independent payment hub.

Now by having this payment hub available, you have the ability to communicate to banks in a professional level. Having this in same place, enables you to do much more than just payment processing – enables you to do deals conforming through finance dealings, and all kind of other deal types, that now can be processed through the same channels. So there is a bright future just in front of the professional treasuries to increase automation, SDP and efficiency in their operations, through the whole operation and whole corporation.

 

The IMF’s euro crisis

Posted on by Ashton Wenborn

The IMF’s participation in the effort to rescue the eurozone may have raised its profile and gained it favour in Europe, yet its failure, and the failure of its European shareholders, to adhere to its own best practices may eventually prove to have been a fatal misstep.

One key lesson ignored in the Greece debacle is that when a bailout becomes necessary, it should be done once and definitively. The IMF learned this in 1997, when an inadequate bailout of South Korea forced a second round of negotiations. In Greece, the problem is even worse, as the €86bn ($94bn) plan now under discussion follows a €110bn bailout in 2010 and a €130bn rescue in 2012.

At the time of the crisis, the fund was floundering once more in the aftermath of the east asian crisis

Under pressure
On its own the IMF is highly constrained. Its loans are limited to a multiple of a country’s contributions to its capital, and by this measure its loans to Greece are higher than any in its history. Eurozone governments, however, face no such constraints, and were thus free to put in place a programme that would have been sustainable.

Another lesson that was ignored is not to bail out the banks. The IMF learned this the hard way in the 1980s, when it transferred bad bank loans to Latin American governments onto its own books and those of other governments. In Greece, bad loans issued by French and German banks were moved onto the public books, transferring the exposure not only to European taxpayers, but also to the entire membership of the IMF.

The third lesson that the IMF was unable to apply in Greece is that austerity often leads to a vicious cycle, as spending cuts cause the economy to contract far more than it would have otherwise. Because the IMF lends money on a short-term basis, there was an incentive to ignore the effects of austerity in order to arrive at growth projections that imply an ability to repay.

Meanwhile, the other eurozone members, seeking to justify less financing, also found it convenient to overlook the calamitous impact of austerity. Fourth, the IMF has learned that reforms are most likely to be implemented when they are few in number and carefully focused. When a country requires assistance, it is tempting for lenders to insist on a long list of reforms. But a crisis-wracked government will struggle to manage multiple demands.

In Greece, the IMF, together with its European partners, required the government not just to cut expenditures, but to also undertake far-reaching tax, pension, judicial, and labour-
market reforms.

And, although the most urgently needed measures will not have an immediate effect on Greece’s finances, the IMF has little choice but to emphasize the short-term spending cuts that boost the chances of being repaid – even when that makes longer-term reforms more difficult to enact.

Lessons learnt
A fifth lesson is that reforms are unlikely to succeed unless the government is committed to seeing them through. Conditions perceived to be imposed from abroad would almost certainly fail. In the case of Greece, domestic political considerations caused European governments to make a show of holding the government’s feet to the fire. The IMF, too, sought to demonstrate that it was being as tough with Greece as it has been on Brazil, Indonesia, and Zambia – even if doing so was ultimately counterproductive.

The sixth lesson the IMF has swept aside is that bailing out countries that do not fully control their currencies carries additional risks. As it learned in Argentina and West Africa, such countries lack one of the easiest ways to adjust to a debt crisis: devaluation.

A fighting fund
Having failed to forewarn Greece, Portugal, Ireland, and Spain about the perils of joining a currency bloc, the IMF should have considered whether it was proper or necessary for it to intervene at all in the eurozone crisis. Its rationale for doing so highlights the risks associated with its decision.

The most obvious reason for the IMF’s actions is that Europe was failing to address its own problems, and had the power and influence to drag in the fund. The IMF’s managing director has always been a European, and European countries enjoy a disproportionate share of the votes on the IMF’s board. Equally important, however, is the fact that the IMF made its decision while facing an existential crisis. Historically, the biggest threat to the IMF has been irrelevance. It was almost made redundant in the 1970s when the US floated the dollar, only to be saved in 1982 by the Mexican debt crisis, which propelled it into the role of global financial lifeguard.

Struggling for power
A decade later, the IMF’s relevance had started to wane again, but was revived by its role in the transformation of the former Soviet-bloc economies. At the time of the euro crisis, the fund was floundering once more in the aftermath of the East Asian crisis, as its fee-paying clients did anything they could to avoid turning to it. The IMF’s participation in the eurozone crisis has now given powerful emerging economies another reason to be disenchanted.

After the US stymied their demands for a greater say within the fund, they now find that the organisation has been doing Europe’s bidding. It will be difficult for the IMF to regain the trust of these increasingly prominent members. Unless the US and the EU relinquish their grip, the fund’s latest bid for relevance may well turn out to be its last.

Ngaire Woods is Dean of the Blavatnik School of Government

© Project Syndicate 2015

The profit-sharing economy

Posted on by Ashton Wenborn

Over the last 35 years, real wages in the US failed to keep pace with productivity gains; for the typical non-farm worker, the latter grew twice as fast as the former. Instead, an increasing share of the gains went to a tiny fraction of workers at the very top – typically high-level managers and CEOs – and to shareholders and other capital owners. In fact, while real wages fell by about six percent for the bottom 10 percent of the income distribution and grew by a paltry five to six percent for the median worker, they soared by more than 150 percent for the top one percent. How can this troubling trend be ameliorated?

One potential solution is broad-based profit-sharing programmes. Together with job training and opportunities for workers to participate in problem-solving and decision-making, such programmes have been shown to foster employee engagement and loyalty, reduce turnover, and boost productivity and profitability.

Profit sharing also benefits workers. Indeed, workers in companies with inclusive profit-sharing and employee-ownership programmes typically receive significantly higher wages than workers in comparable companies without such arrangements. About half of Fortune’s list of the 100 best companies to work for have some kind of profit-sharing or stock-ownership program that extends beyond executives to include regular workers.

Get with the programme
Despite the demonstrated benefits of broad-based profit-sharing programmes, only about one-third of US private-sector workers participate in them, and about 20 percent own stock in their companies. If these programmes work so well, why are they not more widespread?

First, executives for whom shared profits already account for a significant portion of income may resist programmes that distribute profits to more workers, fearing that their own income would decline. Even when such programmes increase overall profitability, they could reduce the profits going to top management and shareholders.

Second, workers are concerned that profit-sharing may come at the expense of wages, with the substitution of uncertain profits for certain wages resulting in lower overall compensation. Effective profit-sharing schemes must be structured to prevent this outcome, and strong collective bargaining rights can help provide the necessary safeguards.

Third, if inclusive profit-sharing programmes are to have the desired effect on productivity, they should be combined with other initiatives to empower workers. One way to achieve this is by establishing ‘works councils’, elected groups of employees with rights to information and consultation, including on working conditions.

Works councils and strong collective bargaining rights, both features of high-productivity workplaces, are common in developed economies. But they are lacking in the US, where federal law makes it difficult for companies to establish works councils and prohibits negotiations between employers and employees over working conditions outside of collective bargaining, even though most workers lack collective bargaining rights. Promisingly, the United Automobile Workers union recently announced that, as it continues to push for collective bargaining rights, it is also cooperating with management to form a works council in the German-owned Volkswagen plant in Tennessee.

The fourth impediment to the establishment of profit-sharing programmes is that they require a fundamental shift in corporate culture. Though most companies emphasise the importance of their human capital, top executives and shareholders still tend to view labour primarily as a cost driver, rather than a revenue driver – a view embedded in traditional and costly-to-change human-resources practices.

Reluctant firms
Unlike the financial benefits of reducing labour costs, the financial benefits of profit sharing, realised gradually through greater employee engagement and reduced turnover, are difficult to measure, uncertain, and unlikely to have an immediate effect on earnings per share, a major determinant of executive compensation. It is unsurprising, therefore, that the advantages of profit-sharing are undervalued by many companies, especially those that focus on short-term success metrics.

Moreover, even when they do recognise the advantages of profit sharing, companies may lack the technical knowledge needed to design a programme that suits their needs. Some states have established technical-assistance offices primarily to help small- and medium-size companies overcome this gap. The federal government should create its own technical-assistance programme to build on states’ efforts and reach a larger number of companies.

From a policy perspective, much more can be done to encourage firms to create broad-based profit-sharing arrangements. Current US law allows businesses to deduct from their taxable income the wages of all employees, except the top five executives, for whom deductions are limited to $1m of annual pay, unless the excess compensation is ‘performance-related’. Spurred partly by this tax incentive, corporations have shifted top executives’ compensation toward shares, options, and other forms of profit sharing and stock ownership, largely leaving out regular workers.

Some have proposed limiting the tax deduction for performance-based pay to firms with broad-based profit-sharing programmes. But, although this approach might encourage profit sharing with more workers, it would continue to provide companies with significant tax breaks for huge compensation packages for top executives.

Clinton’s proposal
US presidential candidate Hillary Clinton has a more targeted proposal: a 15 percent tax credit for profits that companies distribute to workers over two years. By providing temporary tax relief, the scheme would help companies offset the administrative costs of establishing a profit-sharing programme. In order to limit costs and prevent abuse, profits totalling more than 10 percent on top of an employee’s wage would be excluded; the overall amount offered to individual firms would be capped; and safeguards against the substitution of profit sharing for wages, raises, and other benefits would be established. The tax credit could also foster changes in corporate culture, by spurring board-level discussions not only of the benefits of profit sharing, but also of sharing information and decision-making authority with employees.

The stagnant incomes of the majority of US workers are undermining economic growth on the demand side (by discouraging household consumption) and on the supply side (through adverse effects on educational opportunity, human-capital development, and innovation). It is time to take action to promote stronger and more equitable growth. Clinton’s profit-sharing proposal is a promising step in the right direction.

Laura Tyson is Former Chair of the US President’s Council of Economic Advisors and Professor at the University of California

© Project Syndicate 2015

Global review: a look at the WEF’s Human Capital Report 2015

Posted on by Ashton Wenborn

graph 1

Finland (Rank 1)
According to the WEF’s Human Capital Report, Finland is the top performing country in the region and in the index overall. The country scored highest on the ‘ease of finding skilled employees’ indicator, while its 55-64 age group recorded the highest attainment rate of tertiary education of any country included in the sample. In addition, the quality of primary schools is high, with the country ranking first in terms of enrolment and quality of education for the under-15 age group. Life expectancy among the 55-64 age group was the highest recorded in the study. The country shares a great deal in common with neighbouring and second-placed Norway, in terms of unemployment and education.

Japan (Rank 5)
Japan is Asia’s highest-ranking country in the index and the only one to feature in the top 10. Looking at the headline figures, the country’s employment-to-population ratio is 56.8 percent and its unemployment rate only four percent, which, while impressive, is a far cry from Singapore, Asia’s next highest ranked country, at only 2.8 percent. Japan’s under-15 age bracket scored well, owing mostly to its basic education survival rate, quality of primary schools and incidence of child labour, ranking third of 124 with a score of 95.47. Of note also is the number of healthy life years beyond the age of 65 (11) and life expectancy at birth for the 55-64 category (76).

US (Rank 17)
Within its income group, the US scored slightly above average in every age category except under-15, and clocks in at an impressive 17th overall. The study shows that the country’s labour force participation rate is 62.5 percent, while its employment-to-population ratio is 57.8 percent. Where the country scores highest is in its secondary enrolment gender gap in the under-15 bracket, its youth literacy rate in the 15-24 bracket, and its healthy life expectancy at birth for the 55-64 category. However, the US scored a less-than-impressive 88.09 overall for its under 15 category, as a result of dismal primary and secondary enrolment, although the low score was offset by an impressive showing for the 15-24 age group.

Chile (Rank 45)
At 45, Chile is South America’s highest-ranking country in the 124-country sample, and places particularly well in the 15-24 age group. Barriers to mobility in education have decreased significantly in recent years, and a more educated workforce has done a great deal to change Chile’s labour market regulations for the better. The country’s labour force rate is just shy of 62 percent and the unemployment rate, at the time of the survey, sat at six percent. Perhaps the most notable achievement is that Chile is ranked 17th in terms of its tertiary enrolment rate among 15-24 year olds, and its basic education survival rate and secondary enrolment gender gap is unmatched in the region.

graph 2

Saudi Arabia (Rank 85)
Although Saudi Arabia has performed poorly over the years, the country’s growing emphasis on human capital in driving economic development means that the picture is fast improving. The gulf between the past and the present can be seen clearly in the WEF’s Human Capital Report, and whereas the 65-and-over age group ranked at 115 overall, the under-15 category placed 66th. Saudi Arabia has done a good job of fostering a range of diverse skills, for which it ranks 30th, and its rapidly expanding workforce stands the country in good stead for the future. A continued commitment to education means that the country will likely place higher in the years ahead.

Honduras (Rank 96)
Poverty is particularly acute in the West of Honduras, and, as a result, education and educational materials are sorely lacking. Of the five age categories, the country scores most poorly in the under-15 group, and ranks outside the top 100 countries on the quality of primary schools and basic education survival rate parameters. Unusually, the country’s secondary enrolment gender gap is first rate. As far as business is concerned, there is a distinct lack of talent in Honduras, and very few are what businesses would call skilled workers. On a scale of one to seven, the ease of finding skilled employees is 3.73, and high-skilled workers’ share of the overall 25-54 market is a lacklustre 12.9 percent.

Nigeria (Rank 120)
Although Nigeria’s working age population is verging on 100 million, a significant skills shortage means that the country has been unable to make good on its human capital potential. Over 25 years of military rule has resulted in a depreciation in the learning environment, and the country requires a far greater number of specialised workers to reverse the slide. Nigeria’s youth literacy rate is particularly poor, as is its primary enrolment rate, and without changing its education infrastructure, the country will struggle to climb up through the rankings. For more of an insight into the seriousness of the situation, Nigeria scored well-below average across all five categories in its income group.

Yemen (Rank 124)
Going by the overall index score, Yemen ranked last of the 124 countries contained in the study. The median age of the population is 18 years, and scores for the two oldest categories ranked particularly poorly. For example, in the 55-64 age group, the primary, secondary and tertiary education attainment rates all rank dead last, and it is the same for the 65-years-and-older group. The country’s capacity to retain talent, on a scale of one to seven, scores 1.89, whereas its capacity to attract talent clocks in at a marginally better 2.02. Positives can be taken from the fact that Yemen’s under-15 group scored 62.7 in the index overall, but this was the only age bracket to score above 42.

Failing banks, winning economy: the truth about Iceland’s recovery

Posted on by Ashton Wenborn

News of Iceland’s catastrophic collapse reverberated around the world, but as spectacular as it was, many were already waiting for the country’s over-inflated bubble to burst. Like a child on their first visit to a candy store, full of zeal and lacking caution, chasing the high of unfettered excess, Iceland’s system inevitably came crashing down.

Its swift transition from an export-driven economy – with fishing, energy and aluminium smelting as its staple industries – into an international financial centre had quickly made Iceland a popular destination for foreign investment and currency trading. But the inexperienced, badly managed system was simply unsustainable and soon began buckling under the size of its own expansive growth. In tragically poetic timing, the 2008 financial crisis hit; with fiscal decline echoing around the globe, Iceland’s economy had no hope of saving itself from imploding.

The authorities responded with the unthinkable: they let the country’s three biggest banks collapse. It was the third-largest bankruptcy in history. Then came the implementation of strict capital controls, austerity measures and a series of reforms as Iceland set out to reinvent itself. Scepticism was rife, but contrary to the qualms of critics, the controversial model actually seems to be working. Unemployment is down (see Fig 1), interest rates have deflated and pre-crisis output levels are now being surpassed.

As the banks had become too big to save, the authorities decided to let them fail

What goes up must come down
During the 1990s, using the Irish financial model as a blueprint, the Icelandic authorities decided to revamp their economy. The country repositioned itself in the international community as a low-tax base for foreign finance and investment. Iceland’s three biggest banks – Landsbanki, Glitnir and Kaupthing – expanded exponentially, with Landsbanki in particular extending its retail operations in overseas markets. Despite being a tiny island, home to only 320,000 people, the krona became a major trading currency, surging by an astonishing 900 percent between 1994 and 2008. At one point, the banking system held assets that were worth 10 times more than Iceland’s GDP.

The badly considered deregulation of the banking system in 2001 further enhanced Iceland’s reputation as an international financial centre. With much higher interest levels than those offered in their domestic markets, traders from the around the world flocked to the Nordic island. They borrowed in dollars, converted them into krona and then made a sizeable profit from bond acquisitions. Even individuals that were not in finance played the game: the Netherlands and the UK in particular made deposits with Landsbanki under what was known as ‘Icesave’.

Iceland's performance since its financial meltdown

“In essence, after the rapid expansion of the bank balance sheets, the banks experienced a wholesale run, where bond investors simply did not have the appetite to maintain the necessary growth in bond issuance to keep them afloat,” Gudrun Johnsen, Assistant Professor of Finance at the University of Iceland, told World Finance. This was further exacerbated by poor-quality lending books, which included large shares of zero coupon loans that were extended to holding companies. The banks had insufficient equity buffers to meet inevitable losses, and their liabilities had risen to more than 20 times the budget of the Icelandic state. To make matters worse, liabilities were mainly denominated in foreign currency.

With the unprecedented flow of capital to Iceland’s financial sector, banks went on a foolhardy, debt-fuelled spending spree, rapidly snapping up real estate and companies in overseas markets. The Harpa Concert Hall, a mammoth project that was funded by Landsbanki and hyped as Europe’s biggest glass building, now looms as a reminder of Iceland’s excess and the reckless behaviour of its banks. A luxury complex comprising shops and restaurants, which was due to be constructed around the hall, never came to fruition.

Drastic measures
As the banks had become too big to save, the authorities decided to let them fail. “Bailing out the banks in the traditional sense was never an option, therefore no such decision was made,” Johnsen said. Within days, the krona collapsed. Over 80 percent of the Icelandic financial system buckled and almost all businesses on the island were bankrupted. The stock market fell by around 95 percent, interest payments on loans soared to more than 300 percent, over 60 percent of bank assets were written off within a few months after the banks collapsed, and interest rates were hiked up to 18 percent in order to curb inflation rates. In the years that have followed, the Icelandic Government has gradually reduced interest rates, progressively falling to 4.25 percent in 2011 and then impressively falling further to meet the government’s low inflation target.

Although the banks themselves were not being bailed out, the government needed an injection of capital in order to stay afloat. Iceland received a $2.1bn loan from the IMF, as well as $2.5bn from neighbouring countries. With this, the government was able to protect domestic deposits and also keep the currency from devaluing even further. In a testament to its impressive economic growth within such a relatively short timeframe, Iceland began repayments to the IMF earlier than scheduled, beginning in 2012 with 20 percent of the loan. Government officials recently announced that they expect the remainder to be paid before the end of this year.

The financial sector has made substantial reformation efforts by adopting more sustainable models and introducing a more effective regulatory framework. “After the crash, the government cleaned house in all the three banks, establishing new boards and management. Banks in Iceland are well capitalised with high equity levels, and financial supervision has been strengthened immensely,” said Johnsen. There has been success in the improvement of supervisory and macrofinancial stress tests, although more still needs to be done in terms of monitoring and the establishment of financial safety nets. Changes have also been made to safeguard the interests of customers, shareholders and the wider economy. While these legal parameters are relatively weak, they indicate an adjustment in outlook and a shift in how banks operate in order to better serve society.

Fishing boats, Seydisfjordur Harbour. Fish and fishery products remain Iceland’s most profitable exports
Fishing boats in Seydisfjordur harbour. Fish and fishery products remain Iceland’s most profitable exports

During the country’s rehabilitation, a primary necessity was to make the economy more competitive, as well as making wages lower so they fell in line with those of other countries. Rather than drastically cutting pay, which naturally reduces both spending and the ability of citizens to repay their loans, Iceland devalued its currency by around 60 percent, thereby keeping wages at around the same level but making the krona worth less.

Here lies a key advantage of a single currency during times of economic crisis, and a vital step that enabled the country to recover. The nature of the euro, on the other hand, makes it supremely more difficult for countries such as Ireland and Greece to play with this economic parameter, forcing governments instead to resort to more harmful measures in which living conditions for the population are drastically hit and the flow of capital is detrimentally restricted. The result, which has been illustrated by the case of Greece, can cause social unrest, a severe loss of confidence in the incumbent regime and an economic downward spiral that is increasingly difficult to escape from.

Fig 2 Iceland

Warm results
Iceland has become one of Europe’s top performers in terms of growth – a trend that is set to continue throughout the course of the current financial year, as GDP growth is expected to reach 4.1 percent. This would leave GDP at $17.07bn (see Fig 2). Moreover, unemployment levels have fallen to four percent and inflation has reached the target rate of 2.5 percent (see Fig 3). A number of Iceland’s post-crisis strategies have contributed to this steady progress. Capital controls, for example, provided the price and currency stability needed for economic recovery, which was aided further by debt relief and austerity measures, both in the public and private sectors. According to Johnsen: “A large part of the work of the new banks was to restructure their assets and provide debt relief both to corporates and households alike. Legal disputes had to be settled before the courts, including legal standing of foreign currency linked loans that had been extended during the boom period.”

Furthermore, through the devaluation of the krona, export revenue increased considerably. Fish and fishery products continue to dominate Iceland’s exports, raking in €945m ($1.03bn) in 2013, according to the European Commission. While cod has always been the biggest focus of Iceland’s marine sector, fruitful new opportunities are now being explored, most notably for mackerel, as the fish has recently started swimming in Icelandic waters.

More ardent interest from tourists also began to burgeon as the tiny island gained unprecedented appeal as a cheap travel destination. Tourism has grown by 100 percent since 2006, thus indicating the economic value of an extremely promising stream of revenue for the country. In recognition of this potential, Iceland is transforming: trendy cafes, restaurants and shops now populate cities, taking the place of the bank branches that once lined the streets. The country has also invested in a host of new attractions with which to lure tourists, such as a $2.5m project to tunnel Europe’s second-largest glacier, the Ice Cave. Recent additions to the travel agenda also include the Icelandic Museum of Rock ‘n’ Roll and the country’s first crime fiction festival, Iceland Noir, in 2014. Hiking tours across the country’s volcanic edifices, as well as sailing and skiing adventures, have become extremely popular. And to accommodate the influx of visitors, more hotels are opening in the capital and in areas surrounding slopes and the coast.

Spurring growth
Naturally, there are also downsides to the approach undertaken by Iceland. Despite the overall success, the private sector has suffered, primarily due to the difficulty in acquiring loans, as well as the stifling restrictions of the capital controls. Obtaining mortgages has become particularly troublesome as home loans are ‘indexed’ to inflation rates or foreign currency, while household debt has augmented as a result of the government’s recovery measures.

Despite these drawbacks, in the grand scheme of things, they are secondary to the achievements that Iceland can boast. Its success can be highlighted further by the recent pivotal moment in Iceland’s economic recovery: in June, government officials unveiled their plans to abolish the capital controls that had remained in place since 2008. The move is a vital step in the normalisation of the Icelandic economy and marks the island’s return to the global financial community.

The process will be gradual, and withdrawals are subject to a 39 percent tax in order to prevent the mass exit of capital. Investors have been categorised into three groups: the first are creditors of the three failed banks, mostly comprising hedge funds that had bought bad debt from secondary markets in a desperate attempt to recover their assets. Foreign investors that have assets stuck in Iceland will be the second group permitted to take capital out of the country, followed finally by citizens wishing to invest abroad. These steps are expected to further spur Iceland’s economic growth as both private and public sectors stand to benefit from diversification. Foreign investors will be encouraged to keep their assets in Iceland through various government-led schemes, including “an option for currency, an option for different bonds in different currencies with different maturity dates”, Iceland’s Finance Minister, Bjarni Benediktsson, told Reuters.

Fig 3 inflation Iceland

Lessons learned
“A myriad of lessons are borne out of the Icelandic story,” said Johnsen. “The most basic one that should be introduced into public policy with relative ease is the importance of equity. Banks need to be funded with equity to a much larger degree, we are starting to see such changes being made across the board at a modest level and bank lending to holding companies needs to be scrutinised much more.” The government has also enforced a policy whereby banks can no longer create the krona when new loans are issued; generating currency thus falls solely in the jurisdiction of the central bank.

Another lesson learned by the crash is the much-needed restriction on bankers’ bonuses and stricter regulations on wage packages. As Johnsen explained, despite a lack of political will, legislation stating that the variable pay of bankers cannot exceed 25 percent of their total pay was implemented soon after the crash. “Many of those bankers who transgressed against the law have been prosecuted and imprisoned, which certainly helps maintain the right incentives within the system. White-collar crime does not always pay off in Iceland,” Johnsen explained.

So much can be learned from Iceland’s highly impressive and unexpected turnaround – as such, this tiny glacial island has a lot to teach the rest of Europe, and in fact the world. The country became victim to a vicious financial trap, one which saw it become the pinnacle of wealth and status within the international community. Because of this, it is understandable for the sins of excess and greed to take over – after all, they have for so many other countries in similar situations.

The difference with the case of Iceland is that once it dipped to its lowest point, it had the freedom to start again from scratch. Of course, using the word ‘freedom’ to describe Iceland’s predicament in 2008 may seem peculiar, but that is essentially what its dire situation facilitated. The country’s government did what others would avoid at any cost, even at the anger and outright desperation of their citizenry: it let its banks fail. As shocking at it seemed, it was the best move that the Icelandic authorities could have made. This decision allowed the country to lay new foundations, implement a new framework and revert back to the strengths of the economy prior to its foray into international finance.

Iceland is now growing at one of the fastest rates in Europe and is even paying back its enormous loans early – a tremendously impressive feat and one that could never have been imagined not so long ago. Along with the individual lessons that can be taken from the Icelandic example, perhaps the most important and over-reaching is to not follow the standard protocol for escaping national debt and economic crises – these methods clearly do not work, as is perfectly illustrated by Greece at present, as well as the debt-shackled economies of post-colonial Africa. Iceland made its own success – of course, with some help from its neighbours and the ever-present IMF – but it managed to save itself from economic self-destruction and carve a positive future by doing things its own way and, ultimately, proving everyone wrong.

A woman hiking beside one of Iceland’s iconic lakes. Hiking, sailing and other activities have seen tourism grow by 100 percent in the country since 2006
A woman hiking beside one of Iceland’s iconic lakes. Hiking, sailing and other activities have seen tourism grow by 100 percent in the country since 2006

Berlin puts the brakes on rapidly rising rent

Posted on by Ashton Wenborn

The fall of the Berlin Wall on November 9 1989 coincided with the collapse of East-German industry. The event left most of the city’s commercial buildings vacant and helped to drive down residential rent prices in the area along with it. Some 26 years later and this combination has helped transform the German capital into not only one of the trendiest cities in Europe, but one of the most tech-savvy, with many of the world’s brightest, young minds opting to create the next big thing in Berlin.

Like London and New York, Berlin is ridding itself of dilapidated urban sprawls, reinvigorating areas and helping to drive up demand, which increases the overall value of property in these cities. In fact, according to a report published by Jones Lang LaSalle earlier this year, demand for housing in the capital has grown so much that it has exceeded supply.

Berlin is ridding itself of dilapidated urban sprawls, reinvigorating areas and helping to drive up demand

“Since 2010, the stock of residential space in Berlin has risen by 0.8 percent or 15,500 residential units”, writes the report’s author and principal consultant at Jones Lang LaSalle, Juilus Stinauer. “Compared to the rise in population of almost 150,000 people over the same period…” This has helped push rental prices through the roof in Berlin, with new leases reaching as high as €8.95/sqm on average during the first half of 2014, which according to the Stinauer, represents a rise of more than 9.1 percent compared to the same period a year ago – prompting politicians to take action.

Enough is enough
In an effort to stem the rapid rise in rental prices, the Bundestag passed the rental price brake law or mietpreisbremse, as it is known in Germany and, which took effect in Berlin on June 1. The new law prohibits landlords from charging new tenants more than 10 percent over the local average.

Immobilienscout24 examined that the rents in Berlin first decreased by three percent in June, which is great news in a city where, over the last year and a half, rents have risen by an average of 0.3 percent per month. However, there are those that believe it is too soon to start attributing any decrease in rental price solely down to the new rent laws.

“We assume that it is too early to draw firm conclusions about the rent laws that have only been in force for a short time”, said Wibke Werner, Associate of Management for the Berlin Tenants’ Association. “The average rent amounted to €8.53/sqm during [Immobilenscout24’s] investigation. That’s more than 10 [percent] above the average local comparative rent in Berlin (€5.93/sqm). Only the coming months will show the effect of the rent laws.”

While the mietpreisbremse seems a positive step for renters in the city, there is still a lot more that needs to be done in order to stop rental prices spiralling out of control. Members of Berlin’s Tenants’ Association stress the importance of not just building new homes, but affordable ones too. Also, what it’s likely to do to the lending side of the market is yet to be known.

“Affordable housing must occur in order to supply the majority of the population with housing”, said Werner. “In addition to that, existing affordable housing must be protected. In social housing, the rent levels must be limited and will only be rented to tenants with low incomes.”

A pro-rent economy
Germany has a long history of being very pro-tenant. It is a country where the vast majority of people rent, rather than own the property they live in – making politicians more likely to listen to them. The strength of the rent culture in cities like Berlin has led to the adoption of some powerful legislation. Existing laws allow tenants to stay in the same residence, under the same contract, for many years, meaning that rent rises are often small and are only substantial if tenants decide to move.

“In the past, the rents were in new lease agreements 30 to 40 percent above the local comparative rent”, explained Werner, but even this trend seems likely to end as a result of the mietpreisbremse law.

Millennials opt for digitally savvy banks

Posted on by Ashton Wenborn

The banking industry has undergone a quite extraordinary transformation in recent years, and the changed consumption patterns coupled with rapid technological advances have asked that the industry rethink traditional operating models if they’re to survive. As a result, banking applications have become a fixture of the modern banking industry, and, with this, technology firms have chipped away at the old guard. Long gone are the days when applications were seen as an afterthought, and recent studies serve to illustrate, increasingly so in fact, that they are a key point of differentiation when it comes to bringing millennials onboard.

Deciphering feedback
Going by the results of a recent SNL Financial survey, the majority of respondents said that they’d be willing to switch accounts based on which bank had the better app. Of the 4,371 respondents, 54 percent attested to having done so already, whereas 53 percent of the same sample said that their app was lacking. Asked whether they would pay $3 a month to use their mobile banking app, 76 percent answered ‘no’, although the responses varied significantly depending on the age of the person in question, with opinions split between boomers, generation X and millennials.

Going by the results of a recent SNL Financial survey, the majority of respondents said that they’d be willing to switch accounts based on which bank had the better app

The key takeaway was that younger consumers, more than any other cohort, believed banking apps to be among the most important factors when arriving at an account, and banks in the here and now must respond accordingly if they’re to stand up to non-traditional competitors.

SNL’s John Fisher wrote in the survey, “Smartphone users willing to jump ship for a better app in general, according to our survey data, tend to be younger, live on the coasts and be far more likely than the overall survey population to pay $3 per month to use their banking app.” Further to the findings, Fico statistics show that 90 percent of American consumers regularly use a smartphone, whereas 63 percent do much the same for their tablets, as opposed to 38 and 30 percent for boomers. With this, internet banking and – more pertinently perhaps – mobile banking are fast becoming the preferred points of contact for consumers, and app usage looks only to continue on upwards in the years ahead.

Stifled mostly by security concerns in years past, banking apps are clearly a key point of differentiation, and 26 percent of the SNL sample attested to having already switched accounts in the past year based on banking app inadequacies. Millennials and the rise of the connected consumer will dictate the rate and direction of change in the near future, and what’s imperative for banks is that they hone their focus on app development in the here and now if they’re to feature in this hyper competitive digital marketplace.

Jumping ship
The need to develop an accessible and flexible app that also holds up to security concerns is important, though so to is the threat posed by technology companies, whose superior technological understanding means that banks are struggling to compete. FinTech firms, for instance, are beginning to challenge leading names, and the likes of TransferWise, Funding Circle, Kabbage and others mean that the expectations are greater and the criticisms harsher.

Unlike previous generations, millennials feel little in the way of loyalty towards any bank, and tend not to shy away from switching accounts should another show itself to be superior. The Millennial Disruption Index, for example, commissioned by Viacom media networks, shows that a third of the segment are open to switching within a 90 day period. Banks therefore, particularly those in retail, can ill afford to rest on their reputations, and must compete with technology companies, for whom integrating new technology with age old systems is not an issue.

With customer numbers dwindling and margins under pressure, the challenge mounted by technology companies leaves those without serious technological know-how serious cause for concern. Worrying as it is, few are of the opinion that technology companies will inherit banking’s slice of the pie. Rather, the responsibility lies with banks to take note of the ways in which dedicated apps have better served consumers, and, what’s more, to incorporate these advances into their own operations.

The success or failure of any bank in the near future will be dictated in large part by their ability to bring millennials on board, and a focus on digital presence should serve to stave off the competition from elsewhere. Already a fixture of the banking landscape, expect to see apps play a far bigger part in this picture.

The who’s who of the American presidential election

Posted on by Ashton Wenborn

After eight years of a financially hamstrung presidency from Barack Obama, America is getting ready to go to the polls once again in 2016. But whereas elections in most countries tend to take a matter of weeks, the race to choose the next President of the United States usually takes the best part of two years. Candidates from both main parties – and occasionally the odd independent – jostle for attention well in advance of the actual vote, competing for airtime and campaign finances.

The two-year race to secure the position of leader of the free world involves exhaustive tours of the country, speeches, handshaking, and pleading for vital financing. Indeed, most successful campaigns require hundreds of millions in backing from donors. In 2012, the total amount of donations made were $2.6bn, but it’s thought that next year’s will almost double that figure, as the richest members of American society place their bets on their preferred candidates. While the field of candidates from the Democrats is relatively thin, the Republicans are putting forward around 20 different candidates from every branch of the party. These include a number of previous runners, such as Mike Huckabee, and previously touted ones whose popularity has waned, like Ted Cruz, but few of them have much of a chance of gaining the party’s nomination.

Here, World Finance highlights the leading contenders for both the Republican and Democrat nominations for next year’s crucial presidential election, and looks at what they would do to restore the US economy to its former glory.

Hillary Clinton

Hillary-Clinton

The frontrunner and by far and away the most recognisable Democrat candidate in the race, Hillary Clinton’s presidential ambitions have been well known for decades. She had to take a backseat during the career of her husband, former President Bill Clinton, but has spent the last 15 years since he stepped down carving out her own career as a leading Democratic politician.

A former senator of New York State, her stint as Secretary of State during President Obama’s first term in office was praised, especially as she chose to serve under the man that had ultimately defeated her during the 2008 presidential election. Her time in charge was filled with incident, not least the uprisings in Egypt, Syria and Libya, and Osama bin Laden’s death.

Her policies include backing climate change targets, although she did initially support the Keystone XL pipeline that President Obama eventually blocked.

She has proposed a major rewriting of the tax code, while fighting income inequality through equal pay for women and paid family leave. Another eye-catching policy announcement made in August was her proposal for the federal government to help students go through college without the need for large loans. Currently there is $1.2trn of student debt in the US, with eight million graduates defaulting on those loans.

However, she has been beset by a number of unfortunate scandals in recent months, mostly linked to her time in office as Secretary of State. This included the discovery in July that she had been sending classified government information from a personal email account.

Her strong corporate links to banks and long career on Capitol Hill have somewhat hindered her ability to reach out to those elusive everyday Americans. Indeed, at the end of July, The Wall Street Journal revealed that her charitable organisation, the Clinton Foundation, that she set up with her husband, had received millions of dollars in donations from Swiss bank UBS. Eyebrows were then raised after she had intervened over an Internal Revenue Service court case against the Swiss bank over the identity of some of its clients.

It remains to be seen whether Clinton can continue to sit by over the coming months as the solitary credible Democrat candidate without buckling under the pressure of prolonged media scrutiny.

Bernie Sanders

Bernie-Sanders
While many expected Hillary Clinton to have a free run at the Democratic nomination, it fell to the veteran left wing junior senator from Vermont, Bernie Sanders, to prevent there being a Clinton coronation. Sanders has been flirting with the idea of running for President since 2013, but formally announced the start of his campaign in April. Although he is broadly aligned with many of the Democrat Party’s values, he has served as an independent senator for much of his political career.

Sanders is seen by many as the figurehead of a populist, radical left wing of the political spectrum that has had little representation in US politics for many years. The focus of his campaign has been towards income and wealth inequality, as well as campaign finance reform, and he is a staunch opponent of economic austerity. It is these efforts that have placed Sanders firmly as the outsider candidate, untainted by Washington’s apparent close links with big business and the wealthy.

His candidacy has captured the attention of disgruntled young voters in a similar way to the populist left wing campaigns that have swept Europe over the last year, from Syriza in Greece, Podemos in Spain, and to a lesser extent, Jeremy Corbyn for the UK’s Labour Party.

Indeed, Sanders enthusiastically backed Greek voters in July after their rejection of a bailout package, saying, “I applaud the people of Greece for saying ‘no’ to more austerity for the poor, the children, the sick and the elderly. In a world of massive wealth and income inequality, Europe must support Greece’s efforts to build an economy which creates more jobs and income, not more unemployment and suffering.”

Sanders has said he would scrap tax deductions that benefit hedge funds and corporations, break up banks previously deemed ‘too big to fail’, oppose the Trans-Pacific Partnership trade agreement, and increase the use of worker-owned cooperatives. He would also target offshore tax havens, which he says have allowed large corporations to evade at least $34.5bn in tax since 2008. It is this radical message that has drawn huge crowds to his rallies. It seems unlikely, however, that the political mainstream in Washington will accept him over the more pragmatic Clinton.

Jeb Bush

Jeb-Bush
Like Clinton, Jeb Bush has a highly recognisable surname that gives him the sort of platform that would usually be hugely advantageous. His father, George H W Bush, was a single term president that was widely seen as pragmatic – if uncharismatic – leader that came undone due to a recession and the leftfield upstart candidacy of Bill Clinton in 1992. However, it is the rein of Jeb’s seemingly calamitous older brother George W Bush that has considerably tainted the Bush name.

Seen by many as the most credible, centrist and pragmatic Republican candidate that’s running; Jeb Bush has years of experience in public administration, having served as Governor of Florida between 1999 and 2007. He has been reluctant to pander to the more extreme wings of his party, which some feel has hampered his bid. However, Bush’s experience and recognition that the country as a whole is not made up entirely of Tea Party supporters means he is probably the most credible candidate in the field. This has been reflected in the enthusiasm his campaign has seen from donors.

Bush’s big policy statement has been to turn the US back into an “economic superpower”, with a target of four percent GDP growth each year and the creation of 19 million new jobs. He cites his record as Florida governor, where he made it the top job-creating state in the country.

GDP in the US has languished in recent years, sitting at just 2.9 percent in 2014, while only 6.9 million jobs have been added during Obama’s tenure. Bush’s goals are ambitious, but not unrealistic. He is hoping to achieve this growth through a streamlining of the tax system, as well as relaxing a number of regulations.

It is his brother’s legacy that will likely hamstring him, however. He has flip flopped over the Iraq War that his brother began, eventually stating in May that he wouldn’t have gone into Iraq given the benefit of hindsight. However, the universal ridicule and hatred for George W Bush’s presidency is likely to seriously dent Jeb’s chances of persuading the electorate to give the Bush family a third chance to run the country.

Donald Trump

Donald-Trump
While many initially saw Donald Trump as somewhat of a joke candidate, his runaway poll ratings have made people sit up and listen to his frequently controversial statements. His views on immigration have been condemned as offensive, while his statements on foreign policy – such as Ukraine being “Europe’s problem” – have made many in the international community look on apprehensively at the prospect of a Trump presidency.

Democratic candidate donors for the 2012 presidential race: Barack Obama

Candidate donors USD, $2,500 maximum:

Under $200

57%

$200 to $2,499

33%

$2500

11%

Super pac donors, no maximum:

Under $100k

11%

$100k to $1m

40%

$1m+

49%

Major donors:

James H Simons

$5.5M

Fred Eychaner

$4.5M

Steve Mostyn

$3M

Trump’s entrance into the race and soaring popularity in opinion polls has had an unfortunate effect on many of the other candidates. Indeed, his increasingly outlandish and controversial statements on immigration and foreign policy have caused many of the other previously more moderate candidates to try and outdo him.

Mike Huckabee was widely condemned for suggesting Obama’s deal with Iran would “take the Israelis and march them to the door of the oven”.

While Huckabee is certainly not one of the moderate candidates in the Republican Party, his statement was put down to the ‘Trump Effect’ by many commentators, who felt he was trying to grab some of the attention.

Much of the media spotlight has focused on Trump’s immigration policies and badmouthing illegal Mexican immigrants, going as far as describing them “criminals, drug dealers, [and] rapists”. However, his plans for the economy also warrant scrutiny. He wants to heavily reduce regulations on business to create growth and job opportunities. His simplified ‘1-5-10-15’ income tax plan would see inheritance and corporation tax scrapped, while also lowering the capital gains tax. He is also in favour of a free market energy policy. His strategy with healthcare would be to scrap the recently implemented Affordable Care Act with a free market plan.

With regards to America’s influence overseas, Trump has described Obama’s deal with Iran as “terrible”, while he would also “bomb the hell” out of Iraqi oil fields controlled by ISIS, resisting sending any troops into the region. Combined with his pronouncements on illegal immigration, Trump has proven to be an extremely controversial candidate that is repelling many of the more centrist voters the Republicans need to win. However, as things stand, he is defying all the experts and running away in the opinion polls among Republican supporters.

Rise of the democratic candidates

Joe Biden
The avuncular counterpoint to President Obama’s intellectual persona, Vice President Joe Biden has often been seen as somewhat gaffe-prone during his two terms in office. However, beneath the jokey exterior is a man with vast experience of the ins and outs of Washington, having served as the US Senator for the state of Delaware between 1973 and 2009.

The 72-year-old’s potential candidacy has come as a particular surprise to many, partly because of his age. However, after the death of his son Beau in May from brain cancer at the age of 46, Biden is said to be considering a dying plea to run for the White House. While some might question his credibility as a candidate – having failed twice previously in 1988 and 2008 and being linked to the divisive Obama – many think Biden could be a popular alternative to Clinton. It’s thought the focus of his campaign would be addressing inequality and low wages.Elizabeth Warren

Another Democrat candidate from the left of the party, Elizabeth Warren has apparently been toying with the idea of a bid for the presidency for a number of years. Despite repeated denials that she would run, her supporters have been begging her to throw her hat in the ring for a while, largely because of her stance on big business, Wall Street reform, and inequality.

A big theme of her outlook on the economy is the lack of infrastructure spending made by the US government, which spends just 2.4 percent of its GDP on big growth-driving projects, compared to around five percent in Europe and nine percent in China.

Republican candidate donors for the 2012 presidential race: Mitt Romney

Candidate donors USD, $2,500 maximum:

Under $200

24%

$200 to $2,499

37%

$2500

39%

Super pac donors, no maximum:

Under $100k

14%

$100k to $1m

44%

$1m+

42%

Major donors:

Sheldon Adelson

$15m

Miriam Adelson

$15m

Bob J Perry

$10m

A big proponent of breaking up the banks to prevent another situation like 2008’s financial crisis, Warren has also been a strong critic of the relationship between Wall Street and Washington, and in particular Citigroup’s influence on Capitol Hill.

The rest of the Republican candidates

Chris Christie
At one stage seen as the sort of bipartisan figure that could provide a serious challenger to Clinton, Chris Christie’s campaign has faltered as a result of some unfortunate scandals to emerge that went against his jovial and relaxed public image. These have included a debt-rating downgrade and some petty political actions over the closure of a bridge.

New Jersey Governor Christie came to prominence in 2012 after Hurricane Sandy devastated his state. Praised for taking a non-partisan approach to his response, he welcomed President Obama’s efforts while going as far as criticising the House Republican leadership for its delaying of an emergency relief bill, worth $60bn.

Despite his fall in media profile over the last 12 months, many donors are still pumping money into his campaign, suggesting he may still be in with a chance.

Marco Rubio
Widely talked of as the Republican Party’s answer to its critics that it lacks diversity, Marco Rubio would represent a break from the party’s past, having been born to Cuban immigrant parents. The 44-year-old junior Senator from Florida was touted as a potential running partner for Mitt Romney in 2012, but ultimately turned down the offer.

He is regarded as a charismatic and relatively moderate on immigration. His economic policies have centred on balancing the federal budget, while also investing heavily in R&D to help spur growth, citing the tech industry as central to the country’s future prospects. He is also in favour of a flat rate of tax. A relatively pragmatic candidate, Rubio would look to encourage business to power America’s economy by lowering the corporate tax rate to 25 percent, capping federal regulation costs, and allowing businesses to bring back overseas revenue to the US without being taxed.

Rand Paul
A relative outsider in the Republican Party, but yet another candidate with a famous surname and plenty of political pedigree, Rand Paul is the figurehead of the libertarian wing of his party. Like his father and perennial presidential candidate, Ron Paul, Rand believes the government should be far less invasive in people’s lives, both at home and abroad.

His economic policies involve simplifying the tax code dramatically, implementing a 14.5 percent flat rate of tax to all Americans. Business regulations would be scaled back considerably, while government spending would also be axed. His stance on foreign policy is at odds with his party, taking an isolationist view that would see the US not intervening in many overseas conflicts. Although not considered to be a likely winner, he is continuing the work of his father in promoting libertarian views in the political debate.

Scott Walker
Having announced his candidacy in July, Wisconsin Governor Scott Walker has been talked of as a likely Republican president for a number of years now. He has been discussed as a frontrunner for the Republican nomination, largely because of his down to earth style that has appealed to many Republicans. His successful leadership of Wisconsin has been praised, although he has found it hard to boost the state’s economy and increase employment.

His vision for the economy is one where Americans are less reliant on government and more on their own actions. He also wants to balance budgets, but is not as dedicated to ideological cuts as some of his rivals. He has also been a strong supporter of the oil and gas industries, backing the Keystone XL pipeline and opposing climate change legislation that would raise taxes. He is hoping that when Republicans vote on their candidate for the presidency, they will choose pragmatism over populism.

Brazil unveils $17bn austerity package

Posted on by Ashton Wenborn

In another attempt to boost Brazil’s flailing economy, the Rousseff-led government has announced a $17bn austerity package. On September 14, planning minister Nelson Barbosa unveiled plans to slash housing, social spending and sanitation. There will also be a freeze on hiring and pay rises in the public sector, as well as the abolishment of 10 ministries. Additionally, the package aims to raise around $7bn through a tax increase and the controversial reintroduction of a levy on financial transactions.

President Rousseff has an insurmountable challenge on her hands to win back public favour amid a second term of economic crisis

In August it was revealed that Brazil had entered into recession, which is expected to continue into 2016. The government forecasted the country’s GDP to fall by 1.49 percent this year, although others predict that it could shrink as much as 2.55 percent.

Just days before the austerity package was unveiled, Standard & Poor had downgraded Brazil’s credit rating to junk – which led to an overwhelming removal of foreign capital from the country. After the announcement was made, the real, which had plummeted to a 12-year low following Standard & Poor’s downgrade, has now risen by 1.5 percent to 3.8154 per US dollar – according to Bloomberg.

President Rousseff has an insurmountable challenge on her hands to win back public favour amid a second term of economic crisis, corruption scandals, growing unemployment and plunging commodity prices. In recent months, civilians have again taken to the streets to demand that the president faces impeachment and steps down. Although massive spending cuts will give the government some breathing space, a rigours stimulus package is crucial if the country is to pull out of recession.

Funding the multiverse

Posted on by Ashton Wenborn

An enduring philosophical question relates to the number of universes. In the 14th century, the French philosopher Nicolas Oresme demonstrated the theoretical possibility of multiple universes, but ultimately decided to stick with the Aristotelian principle of a single cosmos. Today, some physicists such as Lee Smolin – co-author of The Singular Universe and the Reality of Time – argue for a single universe, while multiverse theorists think there is more than one – a lot more, maybe 10,500 – or even an infinite number.

What, you may ask, are the implications of multiverse theory for the economy? Probably none, except for the knowledge that if it is right, and there are unquestionably many universes of every sort and description in existence all running in parallel, then purely by chance there has to be at least one in which economists’ predictions are consistently accurate. However, there is certainly a connection with theories of the economy.

Multiverse theory is not based on empirical observations. Barring any future discovery at the Large Hadron Collider of a portal to a parallel universe, there is no reason to believe that such things exist. Instead, the theory is motivated by the desire to provide a unified mathematical description of the physical laws that govern the universe. And this in turn is based like art, and economics, on aesthetics.

The similarity between modern cosmology, art, and economics goes beyond a shared interest in aesthetics

The art of physics
The quest for a unified model has been a longstanding goal of physics, and many physicists believe that the most promising candidate is string theory. This theory, which dates to the 1970s, models particles such as electrons as not being particles at all, but instead as very small strings oscillating in a 10 dimensional space.

The model’s predictions – such as the existence of new ‘super-symmetric’ particles – have never been verified (this has been blamed on not having a large enough accelerator). However, the main motivation for the theory seems to have less to do with predictions than with the desire to build an elegant, unified model of reality, based on aesthetic principles such as unity and symmetry.

As physicists investigated further, they found that string theory did not describe a single universe, but an entire landscape of universes, only a small fraction of which would be stable, let alone suitable for life. The multiverse is a random collection of universes, all running different versions of string theory. Our universe is a kind of cosmic accident – a physics version of a Jackson Pollock painting.

Multiverse theory and string theory therefore have a symbiotic relationship. Together, they also provide a perfect excuse for the failure to make any useful predictions. Multiverse theory is justified by string theory, but if the particular version of string theory assumed to govern our universe is just a random choice, then that makes it inherently untestable as well. They therefore perform a similar function as the Efficient Market Hypothesis in economics, which says that markets are unpredictable because they are random – therfore providing a perfect excuse for the failure of economic models to make predictions. When theories cannot be falsified, aesthetics takes over: as with works of art, they are valued more for their beauty and cultural meaning than for their utility.

The science market
The similarity between modern cosmology, art, and economics goes beyond a shared interest in aesthetics. Just as the Medicis funded both Leonardo da Vinci and later Galileo, so money plays an important role in the markets for science and art.

Consider for example the Templeton Foundation, which is responsible for a substantial and growing proportion of funding for fundamental research in physics. Provided by the estate of the famed investment manager John Templeton, it has an endowment of about $3bn, from which it doles out grants worth over $100m per year, with a significant portion going towards physics, and in particular supporters of string and multiverse theory.

On a more modest scale, the hedge fund Winton Capital recently funded an investigation into Dark Matter. It seems that investment managers (or their foundations) are buying up scientific theories the same way they buy art.

Any source of funding for science should probably be welcomed, but it is disconcerting to think that wealthy individuals may end up having the same effect on the science market as they already do on the art market, which is to distort it out of any recognisable shape. Instead of splashing out $120m for a version of Edvard Munch’s painting The Scream, as Leon Black (Founder of Apollo Global Management) did in 2012, they can direct similar quantities of money to scientists promising to paint them a portrait of other universes. And of course, economics departments at universities have long been receiving funding from banks and investment companies, which may explain the mainstream view of the economy as a beautifully rational and efficient creation.

Time will tell if these funds are as successful at picking winners in science as they are in finance. Now, if I can just interest one of them in my unified theory of economics. It will look great on the wall.

Green investing takes off

Posted on by Ashton Wenborn

While the primary goal of any investor is to make as much money as possible, a growing trend has emerged in recent years of a more conscientious approach to investing. In particular, renewable energy and environmentally friendly products are beginning to benefit greatly from investors who want to know that their money is going towards things that aren’t harming the world.

At the same time, these investments are proving to be far more resilient than previously thought, with recent studies showing that their returns can be as strong, if not more so, than traditional investments. As a result, financial institutions across the world are clamouring to get in on the sustainable investment bandwagon.

However, while some investment strategies within the green space can take a very narrow form – purely in European renewable energy, for example – there are a number of financial institutions spreading their investment strategies across a number of areas in a purely opportunistic way.

The types of businesses that investors are looking at seem to be ones that are enabling industrial sectors to use energy and resources more efficiently

One such firm is the newly launched London-based investment trust Menhaden Capital, which is targeting a whole swathe of clean energy related investments that it hopes will help improve the world, while delivering stable and generous returns. Having launched on the London Stock Exchange in July, Menhaden managed to raise an initial £80m to invest in a range of energy efficient businesses.

History in the making
World Finance spoke to Menhaden’s founder Ben Goldsmith about the reasons for establishing such a fund. Goldsmith’s background is one where an obsessive care for the environment is matched by a first rate financial pedigree. His father was billionaire financier Sir James Goldsmith, while his uncle was environmentalist and founder of the Ecologist magazine, Edward Goldsmith. His brother, Zac Goldsmith, is also a passionate environmentalist and a prominent British MP and potential future Mayor of London.

His 15-year career has been steeped in environmental investing, and he launched Menhaden after being inspired by one of his investment idols Jacob Rothschild, whose RIT Capital Partners pioneered a similar strategy to the one the new firm is taking now. “I have always respected Jacob Rothschild a great deal, and he invests through a vehicle called RIT Capital Partners, which is a London-listed investment trust. What that kind of vehicle does is allow you to match patient capital with an opportunistic investment style, while overlaying that with an asset class mix that can evolve over time, according to how you see the world”, said Goldsmith.

He added, “If you look at the history of RIT, there’s been times when he has had more than half of his total portfolio invested in public equity markets, and there have been times when that’s been less than 20 percent and he’s retrenched to fixed income, and both public and private credit. Being able to evolve your asset class mix over long periods of time is a huge advantage. Being able to invest off a patient capital balance sheet, without investment horizons, is a huge advantage. And also being able to be completely opportunistic in your approach.”

It is the fluid nature of the portfolio that has attracted Goldsmith, who has spent the last 13 years with investment group WHEB, which runs a selection of sustainability related investment strategies. Goldsmith decided to set up Menhaden after meeting a number of people who wanted a multi-asset approach to environmental investing. “I’ve spent 10 years fundraising for different funds that we manage at WHEB, and I’ve met lots of industrialists and investors across geographies. Very smart, successful and influential people, who see the opportunity from investing in an environmentally friendly way and wanted a product which would do this across multiple assets.”

Menhaden has appointed WHEB’s Listed Assets team to manage a concentrated portfolio of environmentally themed stocks, and has also invested in a couple of private equity funds run by WHEB Capital Partners.

The trust’s portfolio will be quite concentrated, with around 25 positions being taken. With the initial £80m it has raised, Menhaden are able to take a conviction-driven approach to their investment strategy. Around half of their positions will be in public equities, but they will also be investing their capital in yield assets like private wind, solar and hydroelectric businesses, which will typically operate within the most secure European jurisdictions. The final aspect to the portfolio will be special situations investments, likely in the form of private equity, which will be direct deals where Menhaden take the lead investor role and have a greater say in the running of the business.

Enthusiastic support
Many of the world’s key investors are taking the idea of sustainable and green investment seriously. Big institutions like Morgan Stanley and Bank of America have already bolstered their green initiatives, while many individual investors want to ensure that at least some of their portfolios are made up of sustainable holdings. For Menhaden, this is no different. While the company is very much in its early stages, it has still managed to secure backing form a number of prominent investors, including Belgian hedge fund manager Pierre Lagrange, Coller Capital’s founder Jeremy Coller, Lyndon Lea of Lion Capital, Easyjet founder Stelios Jaji-Ioannou, and New Look Group founder Tom Singh. There are also a number of industrial families tentatively backing the firm, such as the Mittal and Reuben families.

Goldsmith said, “Part of our mission for the next year or two is to build a portfolio that’s transparent, that people can really look into and understand. There’ll be no rocket science – it’ll be pretty concentrated, with around 25 positions. We want to show that we can generate great risk adjusted returns from this kind of a portfolio. Then we can diversify the shareholder base.”

The trust’s biggest backer, however, is the Italian insurance giant Assicurazioni Generali. It is these bigger institutions that are likely to really transform the market, once they start taking big stakes in sustainable investments. Once this happens, there is likely to be a tipping point for the industry.

The reason’s that bigger institutions are getting involved in sustainable investing may have initially been a public relations exercise in the aftermath of such a bad period for the financial services industry in recent years. However, now these large firms are realising that they can invest in ‘good’ stocks without compromising on strong returns. “I think the big move is that large institutional investors are trying to reduce the amount of negative impact that they do through their investments. The biggest trend in this direction is the rise of screened investing, where in some cases certain types of investments – such as fossil fuels – are screened out. Tilting portfolios for reduced environmental impact. That’s the big trend. Investors doing the right thing by saying, ‘actually, not only is reducing the environmental impact of our portfolio the right thing to do, but it also makes us more money.’

“The types of businesses that investors are looking at seem to be ones that are enabling industrial sectors to use energy and resources more efficiently”, added Goldsmith. By investing in businesses that are able to provide industries with a solution to their efficiency problems, those companies are helping to dramatically bring down costs. That in turn will make whole industries much more efficient and ultimately profitable.

Energy’s tipping point
One of the key themes affecting the global energy market is the dramatic fall in the price of oil over the last year (see Fig. 1). With OPEC leader Saudi Arabia keeping production at high levels, it has been speculated that the country recognises that the days of oil’s dominance are coming to an end and that renewables – led by solar – are set to take over. Around this backdrop of falling prices has been a steady increase in investment in both renewable energy and technologies designed to boost energy efficiency.

Goldsmith believes that this is only going to continue, and that unlike resources, an increase in demand will only bring down the price of these technologies. “I think it’s fascinating that even though resource prices – and in particular oil prices – have declined significantly, the wave of investment in both the efficient use of resources and alternatives to fossil fuels has only grown and been magnified. I think that’s because the whole trend towards efficiency and renewables has become unstoppable.

“The technology just gets cheaper and better. That’s the beauty of technology – the higher demand for the technology, the lower the price. Whereas with resources, typically the higher demand, the higher the price. I think we have reached a tipping point, and it’s partly about technology and innovation, and the rise of cheap, effective technology”, he continued.

From an investor’s point of view, price volatility is always something to be wary of. Resource prices have been increasingly unpredictable in recent years, and for businesses seeking to budget for the future, it makes more sense if they know what their energy costs are going to be. Therefore, renewable energy tends to be more attractive to them now, said Goldsmith. “Commodity prices are volatile, and while prices may have come down over the last few months, they’re also all over the place.

“So if you’re a CEO or a finance director who buys a lot of raw materials or energy, those volatile prices keep you awake at night. You can achieve stability and improve the resilience of your business against that volatility by becoming much more efficient and by investing in more predictable alternatives.”

While renewables are certainly seeing greater interest from investors, they are still relatively hampered by the reluctance of governments to offer the industry the sort of generous subsidies afforded to fossil fuels and nuclear. Indeed, in the US, renewable subsidies were scaled back after a number of bigger firms, like solar power business Solyndra, went bust. Across Europe, governments have chosen not to renew clean energy subsidies, as they’ve had to tighten their fiscal belts.

Ben Goldsmith, founder of Menhaden Capital
Ben Goldsmith, founder of Menhaden Capital

Levelling the playing field
By contrast, the oil, coal and nuclear industries still receive extremely generous subsidies in order to keep them running. According to Goldsmith, it is this discrepancy that needs to be addressed if there was really to be a level playing field in the global energy markets. “Everyone bangs on about subsidies for renewable energy, without acknowledging the fact that the nuclear industry has benefitted from vast and ever-increasing subsidies for 70 years now. 97 percent of the budget of the UK’s Department for Energy and Climate Change is spent cleaning up the mess created by the nuclear energy industry. And this also applies for fossil fuels, where there are vast tax breaks and subsidies. I think that we need a level playing field.”

Instead of offering long-term subsidies to such industries, governments should instead be focusing on allowing early-stage technologies to take off and invest in further innovation. “I’m instinctively opposed to long-term subsidy for any industry, and I believe subsidies should be there to support R&D and to kick-start new industries for a short period of time. In energy, I would support the phasing out of subsidies for renewables, but we’ve got to see a concurrent phasing out for subsidies for fossil fuels and nuclear too”, said Goldsmith. Remarkably, there seems to be a growing consensus on both ends of the political spectrum for subsidies to be scrapped and energy markets to have to fend for themselves. He mentions the establishment of the Green Tea Party in America, which is an offshoot of the right wing Tea Party group of the Republican Party that wants the state scaled back dramatically. “They’re big on this. They don’t believe government should be dishing out tax payers’ money to vast energy interests – fossil fuels or nuclear.”

This organisation has found common ground with another from the opposite end of the political spectrum, the left-leaning environmental lobbying group the Sierra Club. “On that topic, you have the Green Tea Party arm in arm with the left-leaning Sierra Club. They’re highly supportive of the decentralisation of power generation that solar brings, which is by its very nature distributed.”

Whereas more conservative members of the political establishment have traditionally not been enthusiastic backers of renewable energy in the US, Goldsmith feels that the industry is one that they should be inherently supportive of. “It’s a profoundly conservative idea that farmers, small communities, and individual homeowners can generate power from their rooftops and sell it to the grid. It’s in direct contrast to a centralised, government supported, monopolistic model that we have today.”

According to Goldsmith the energy industry is going to undergo profound changes. With those changes, there will be significant opportunities for investors to make considerable amounts of money. He points to the solar industry as being at the forefront of this energy revolution. “I think we’re going through a solar revolution and you can’t overstate just how exciting it is, the rise of solar power and the complete crash in the price of solar panels.

Crude oil price

“And it just keeps on falling. I recently met the CEO of Canadian Solar, who told me that he believed they could continue reducing the cost of solar panels at their manufacturing facility by 10 percent a year. The list of places where solar is the cheapest electricity option is growing every year, and I think that’s one of the most exciting trends in energy today. Solar is winning the day.”

He also believes that the electrification of the transport industry will come far sooner than many predict, and it is “years, not decades, away”. And there will continue to be a push by many industries to boost their efficiency in both energy and raw materials. For investors in this space, all of these trends are presenting plenty of opportunities.

For Goldsmith and Menhaden, the ambition is to be both ahead of the curve, and to become the “reference investor” for the sector. “We’d like to be the first people to get the call from a smart team looking to build, for example, a hydroelectric damn in Vietnam or a portfolio of solar assets in Central America, or creating a new private equity fund in San Francisco. We want to be the first phone call to make when people have a great idea. We want to back world-class people across this space, across the world.”

Synthetic rhino horns could alter black market

Posted on by Ashton Wenborn

In the early 20th century, there were more than 500,000 rhinos living throughout Africa and Asia, but due to excessive poaching their numbers have dwindled to alarmingly low levels. In fact, according to recent figures published by Save the Rhino, there are now just 29,000 rhinos left living in the wild.

Rhino numbers have plummeted in recent years because of increased demand for their highly coveted horn, which can fetch up to $100,000 per kg (the average horn weighs between one and three kgs each) in countries like Vietnam and China. Users of rhino horn believe it to have medicinal value, capable of curing a variety of ailments ranging from headaches and hallucinations to snakebites and demonic possession – though there is no evidence supporting such claims.

Nevertheless, the rhino-poaching crisis has reached such levels as a result of increasing demand in Asia – driven by improved economic performance – that if the killing continues at the current rate, the number of deaths could overtake births as early as 2018. In fact, the problem has got so bad that biotech company Pembient has come up with a solution to the poaching crisis that is as controversial as it is clever – the manufacturing and distribution of synthetic rhino horn that is indistinguishable from the real thing. While it may sound like a brilliant solution to a seemingly impossible problem, the product has been met with scepticism from conservationists, who don’t believe it will reduce poaching of wild rhinos, but instead, drive up demand for the wild horn. But will this market-based solution manage to put a stop to poaching or exacerbate the situation further?

The illegal rhino horn trade

$60,000

Value per kg of rhino horn

20 years

Until remaining rhinos become extinct at current poaching levels

40

Rhino horns stolen from South African tourism organisations in 2014

$14.6m

Net worth of the 40 stolen rhino horns

Convincing conservationists
Cathy Dean, the International Director of UK-based charity Save the Rhino, is adamant that the proposed solution will do more harm than good. For her, the fundamental problem with the synthetic products produced by Pembient – which include a skin cream marketed to wealthy women in Vietnam and a beer manufactured in China – is that it will drive up demand for wild horn.

“These are entirely new uses of rhino horn that will reach an entirely new audience”, she said. “We all know that Vietnamese and Chinese societies are now very aspirational. The real fear is that users will eventually graduate to wanting the real thing and that a wider demographic of people are being reached by these synthetic products.” In recent years, a large driver of demand for rhino horn has been the creation of new uses that have nothing to do with traditional Chinese medicine, which have been dreamed up and marketed by international criminal syndicates.

In Vietnam, which represents a burgeoning market for illegal rhino horn, it is viewed as a hangover cure and has been promoted as an effective treatment for cancer. But as rhino horns are entirely composed of Keratin (a protein found in hair and finger nails), such claims are fictitious. “Frankly, I struggle to see the difference between new uses touted by criminal gangs in order to create a wider market and drive up the price and those peddled by synthetic rhino horn manufacturers’”, added Dean.

If conservationists think that Pembient’s plan is to drive down demand then they are mistaken, because as the Seattle-based start-up’s CEO, Matthew Markus, explained: “I don’t really care about demand one-way or the other – I care about price. I care about animals and I don’t want them killed for products”, he said. “We are trying to prevent the farming of wildlife.” It might seem strange, but he is also concerned about protecting Vietnamese and Chinese cultural practices too, including those centred around the consumption of rhino horn.

One issue he has with traditional conservation organisations is that they set out to destroy these traditional practices, which in his opinion are what define cultures and make people unique. “Whether it is stopping rhino horn, ivory, shark-fin soup, bear bile or dog meat, I think you need to find a way to not set it up as a zero sum game, so that both sides are happy with the solution offered”, said Markus. “We kill 25 million animals per day in the US and nobody really holds us accountable for that. There are no NGOs from India showing up on our shores saying that the government needs to stop selling cheeseburgers.”

Market disruption
If Pembient plans to use its product to drive down market value of rhino horn, then it is important that it has an effective strategy for doing so. Arguably the easiest approach is to flood the market, drowning it with an excess amount of inventory for sale, leading to a rapid decline in price for the product. Such a plan is a little too simplistic for Markus and his team, who have instead chosen to attack the market from three different angles.

At the top end of the market, the company wants to create a legitimate brand. Pembient wants to sell a luxury product that will have true labelling, so people will know it came from a lab. It hopes that its synthetic rhino horn will be used in a number of products, particularly high-end ones, such as beauty creams, liquors, beers, and even durable goods including jewellery.

“We hope that it will find its ways into products where water buffalo horn is used as a substitute to real rhino horn, which is inferior to our product”, said Markus. “We hope to change rhino horn from being a fetishised product to being a sort of ‘mass-tiche’ goods that is available to the masses and, therefore, diminish some of the allure surrounding the rhino horn among these higher end consumers, while making a profit at the same time.”

From a middle market perspective, the US-based biotech company is fully aware that from time to time its product will be stolen or simply bought and re-labelled, perhaps even marketed as wild horn. Such activity will help to introduce a level of uncertainty into the market, making consumers of the commodity question whether or not they are actually buying wild or synthetic horn.

“Individuals in the middle of the supply chain are more motivated by profit than anything else, so our product can be seen as a universal cutting agent”, asserted Pembient’s CEO. “In the drug trade, you can think of a cutting agent as something that is less valuable and less efficacious as the drug being cut. In our case, we are the same as the cutting agent and we cost a lot less.

“So anyone using our product as a cutting agent will use it more and more in order to boost their profit margin until they wonder why they are even bothering with the real thing anymore.” At the lower end of the market, Pembient is hoping to inject a level of quality uncertainty into the market, so that people begin to question whether wild or synthetic horn is being traded in the black market. Markus and his team hope that over time all these different angles of attack will lead to the collapse of the black market and with it an end to poaching.

“We are also looking at staging intervention on the ground in South Africa from the supply side”, explained Markus. “This may be as simple as leaving [synthetic 3D-printed] horns in the field, so that poachers may stumble across them and pick them up and sell them instead of actually hunting the animal.” Considering that Pembient doesn’t care about demand and is solely focused on driving down the market value for wild horn in order to put an end to poaching, not only is its business model important, so too are pricing policies.

Building synthetic rhino horn in the lab is neither simple nor cheap, however, compared to the real thing it is. Wild horn on the black market can cost anywhere between $30,000 and $100,000 per kg.

That is why Pembient is targeting a wholesale price in the region of $7,000 per kg (about an eighth of the black market value), which it believe will allow them to drive down the wild horn’s market value while simultaneously making enough profit to keep the company afloat. “Ideally, we would like to be an ingredients company and sell this product as an ingredient to other producers to include in their end product”, noted Markus.

Answering critics
One of the major issues raised by conservationists regarding the sale of synthetic rhino horn has centred on its similarities to the real thing, which it says will create a number of legal challenges, especially when it comes to the import and export of the product. But when Markus was asked about the state of the company’s relationship with Chinese and Vietnamese authorities, he explained that things were running rather smoothly.

“That has actually been pretty easy”, he chuckled. “We had exported stuff to China for various tests. Most of this is based around documentation. We are the first people to categorise the contents of a horn, so the laws around wildlife traffic are very different to say drugs in as much as the composition of matter is less important than providence.”

The news may upset conservationists like Dean from Save the Rhino, who had hoped that the product would face some real obstacles, as in her opinion, “any company [that] starts manufacturing and marketing synthetic rhino horn does so to the detriment of the conservation movement”.

Such criticisms are welcomed by Markus, as the company relies on a critical eye in order to build for the future and acknowledges that the product will continually need to be refined over time in order to fulfil its goals. “We are always going to try and get better and better and get closer to being bio identical to real rhino horn”, he said. “One of our interim goals is basically to make it cost more to test our product than the real thing is currently worth.

“The idea is to make it impossible for an end consumer or a distributor or anybody else in the chain to be able to determine the quality of the good vis-à-vis wild horn.” The quicker the team can refine the process and create a product that is truly indistinguishable from the genuine article the better, as there is a concern that as genetic testing kits become cheaper more people will have the ability to verify products quickly and cheaply. Markus even envisages a world where one day consumers will have an app that is capable of telling them if they have real rhino horn or not.

“There are a lot of fakes in the market right now, but these are inferior fakes, so when technology is widely available to help in the identification process, I believe the fakes will be eliminated at an even faster clip”, he explained. “We think there is a need for someone to step in and fill that gap, because when there are no more fakes in the market, the demand for wild horn will be that much greater.”

Luckily, the team have already developed a number of prototypes, but are holding back on taking the product to market for the time being, pushing the launch of their product back to 2016.

When asked about the delay, Markus explained that the company had been in contact with a number of academics and economists who were eager to measure the impact of their synthetic product on the market, along with how effective it is at reducing incidents of poaching. The data is particularly important to Pembient, not just from a market research perspective, but also because the company believes that many conservation efforts in the past have failed to collect adequate levels of data or carry out secondary analysis.

“A lot of the time, it seems to be anecdotal evidence or good intentions are put forward as being the primary driver for some of these conservation behaviours, especially if you look at the crushing or burning of ivory”, said Markus. “I’ve asked several people within the conservation community why this is done and if there is any research that shows the impact of this practice on the end consumer or market price, but they can’t point to any reasons why it is done other than for tradition or because it sends a strong message.”

However, conservationists have been very successfully in driving down demand for wild horn in the past and continue to make progress.

“Nobody expects to snap their fingers and have the issue resolved overnight”, said Dean. “If it were a simple problem, believe me it would have been solved. It is complex. It is difficult. It does need a range of measures working in tandem.” For now at least, only time will tell if the proliferation of synthetic horn into the market will make the impact that Markus is hoping to achieve. It is also a shame that greater collaboration between Pembient and traditional conservationist organisations appears unworkable at this stage.

But considering that there is polarising opinion over how best to reduce demand for wild horn globally, with legalisation of the wild horn trade in South Africa likely to come up when The Convention on International Trade in Endangered Species of Wild Fauna and Flora convenes in 2016, it is unlikely that a consensus will be reached about the manufacturing of synthetic products any time soon either. But no matter what side of the synthetic fence individuals find themselves on, everyone must acknowledge that such an innovative attempt at a solution is worthy of praise.

Luis Espínola: Technology will be main driver for Dominican Republic banking

Posted on by World Finance

Banking in the Dominican Republic is a burgeoning and diverse sector – with technological innovation leading changes in the industry, and new financial inclusion initiatives driving growth. Banco Popular’s Luis Espínola talks about the latest trends in the Dominican Republic’s retail and corporate banking sectors.

World Finance: Banking in the Dominican Republic is a burgeoning and diverse sector – with technological innovation leading changes in the industry. 

With me now to speak about how the private equity sector is developing is Luis Espínola, executive vice-president of international business and private banking at Banco Popular Dominicano.

Well Luis, the banking landscape in the Dominican Republic has changed remarkably over the last decade. How does it stand today and how does BPD fit into this?

Luis Espínola: We had a bank crisis in 2003, one bank was liquidated and two more had to be sold since we had a small economy at the time, you know. That had a spill over – if you will – in the economy.

Soon after that, our country recovered extremely well. Our numbers within the Central American and Caribbean region are extraordinary, we are one of the strongest and fast growing economy of the region and Banco Popular plays a major role into that.

We cater to the needs of all banking segments: retail, middle market, corporate, tourism – you name it – we are there. And we’ll continue to strive to have a better understanding of the needs of our customers going forward and to provide those products and services accordingly.

World Finance: Of course technology is drastically impacting banking practices worldwide – how are you responding to this?

Luis Espínola: On all our online banking services to all our retail and private middle market and corporate customers, we offer what we feel is state of the art online banking, as well as new and fast technology at the point of sales: chip-based point of sales now, that can maintain the international standards that our customers are requiring.

Technology is going to be the main driver for the banking system, and for Banco Popular to be able to deliver – going forward – the products and services in a more efficient way. And to that extent we also offer new mobile services, in which we can reach our customers at the cellphone point of sale. And that way, they can do through their cellphones different transactions including: transfers, online payments – real-time online payments. So they can have a small branch at their fingertips.

World Finance: And in terms of cash management – how much importance is placed on this for the economy and what is your approach?

Luis Espínola: Extremely important, for our corporate and middle market customers – and why not – the small businesses; you know, this is important. So we are now providing products and services towards cash management among others.

There are remote cash deposits where customers handle their cash and deposit their cash in a more cost-effective channel with Banco Popular, which saves them roughly 60 percent of transportation cost that they currently incur. 

World Finance: In terms of financial inclusion now and how well covered is the Dominican Republic?

Luis Espínola: We are very excited in the financial inclusion side because there are a lot of initiatives towards continuing to expand financial inclusion.

We have been establishing a new service provider channel, which is the sub-agent bank network, which in our country permits us to partner with all the different town and provinces in the country: pharmacies, supermarkets, and any retail store. We partner with them, they are able to provide our different products and services, and thus they receive not only current but potential customers.

So we are very excited going forward of the penetration. And hopefully, we will be able to increase an important rate of financial inclusion within Banco Popular Dominicano.

World Finance: And how do you target the younger generation demographic?

Luis Espínola: We have different services and products that we provide to our youth, especially with different credit cards and through cards in general. We offer different accounts that cater to their needs. We are very active in Twitter, in Facebook, in Instagram, any social media; you name it, we are there. Trying to not only deliver our message on our products and services but also to try to understand and have our ears to the ground to what, our customers, especially the youth, are looking for.

World Finance: Finally, let’s look at your approach to the corporate sector and what trends are you seeing in this area?

Luis Espínola: As our economy has been opening up through the last few decades, so have our customers been in more contact, and they are now accustomed to other international standards. We have specialised business managers, we work together closely with our corporate customers, we understand their strategic plans. We understand their vision – going forward – and we ensure our capabilities as a banco, as a bank, as a leader bank, as a group within that strategy, to grow together with our customers.

The end of standard work

Posted on by Ashton Wenborn

In 1983, the American economist and Nobel laureate Wassily Leontief made what was then a startling prediction that machines, he said, are likely to replace human labour much in the same way that the tractor replaced the horse.

Today, with some 200 million people worldwide out of work – 30 million more than in 2008 – Leontief’s words no longer seem as outlandish as they once did. Indeed, there can be little doubt that technology is in the process of completely transforming the global labour market.

To be sure, predictions like Leontief’s leave many economists sceptical, and for good reason. Historically, increases in productivity have rarely destroyed jobs. Each time that machines yielded gains in efficiency (including when tractors took over from horses), old jobs disappeared, but new jobs were created.

Uber and other digital platforms are redefining the interaction among consumers, workers,
and employers

Furthermore, economists are number crunchers, and recent data shows a slowdown – rather than an acceleration – in productivity gains. When it comes to the actual number of jobs available, there are reasons to question the doomsayers’ dire predictions. Yet there are also reasons to think that the nature of work is changing.

To begin with, as noted by the MIT economist David Autor, advances in the automation of labour transform some jobs more than others. Workers carrying out routine tasks like data processing are increasingly likely to be replaced by machines; but those pursuing more creative endeavours are more likely to experience increases in productivity. Meanwhile, workers providing in-person services might not see their jobs change much at all. In other words, robots might put an accountant out of work, boost a surgeon’s productivity, and leave a hairdresser’s job unaltered.

Man against machine
The resulting upheavals in the structure of the workforce can be at least as important as the actual number of jobs that are affected. Economists call the most likely outcome of this phenomenon ‘the polarisation of employment’. Automation creates service jobs at the bottom end of the wage scale and raises the quantity and profitability of jobs at its top end. But the middle of the labour market becomes hollowed out.

This type of polarisation has been going on in the US for decades, and it is taking place in Europe too – with important consequences for society. Since the end of World War II, the middle class has provided the backbone of democracy, civil engagement, and stability; those who did not belong to the middle class could realistically aspire to join it, or even believe that they were part of it, when that was not the case. As changes in the job market break down the middle class, a new era of class rivalry could be unleashed (if it has not been already).

In addition to the changes being wrought by automation, the job market is being transformed by digital platforms like Uber that facilitate exchanges between consumers and individual suppliers of services. A customer calling an Uber driver is purchasing not one service, but two: one from the company (the connection to a driver whose quality is assured through customer ratings) and the other from the driver (transport from one location to another).

Uber and other digital platforms are redefining the interaction among consumers, workers, and employers. They are also making the celebrated firm of the industrial age – an essential institution, which allowed for specialisation and saved on transactions costs – redundant.

Human capitalisation
Unlike at a firm, Uber’s relationship with its drivers does not rely on a traditional employment contract. Instead, the company’s software acts as a mediator between the driver and the consumer, in exchange for a fee. This seemingly small change could have far-reaching consequences. Rather than being regulated by a contract, the value of labour is being subjected to the same market forces buffeting any other commodity, as services vary in price depending on supply and demand. Labour becomes marked to market.

Other, less disruptive changes, such as the rise of human capital, could also be mentioned. An increasing number of young graduates shun seemingly attractive jobs in major companies, preferring to earn much less working for start-ups or creative industries. While this can be explained partly by the appeal of the corresponding lifestyle, it may also be a way to increase their overall lifetime income.

Instead of renting their set of skills and competences for a pre-set price, these young graduates prefer to maximise the lifetime income stream they may derive from their human capital. Again, such behaviour undermines the employment contract as a basic social institution and makes a number of its associated features, such as annual income taxation, suboptimal.

Whatever we think of the new arrangements, we are unlikely to be able to stop them. Some might be tempted to resist – witness the recent clashes between taxi and Uber drivers in Paris and the lawsuits against the company in many countries. Uber’s arrangement may be fraudulent according to the existing legal framework, but that framework will eventually change. The transformative impacts of technology will ultimately make themselves felt.

Rather than try to stop the unstoppable, we should think about how to put this new reality at the service of our values and welfare. In addition to rethinking institutions and practices predicated on traditional employment contracts – such as social security contributions – we will need to begin to invent new institutions that harness this technology-driven transformation for our collective benefit. The backbone of tomorrow’s societies, after all, will be built not by robots or digital platforms, but by their citizens.

Jean Pisani-Ferry is an economist and public policy expert

© Project Syndicate 2015