The significant impacts an EU recovery fund would have

The announcement dropped like a bomb in European capitals, most of which were still under strict lockdowns. In a joint press conference, German Chancellor Angela Merkel and French President Emmanuel Macron proposed an EU recovery fund that would offer €500bn ($569.2bn) in grants as an economic lifeline to pandemic-stricken members of the union. Authorities on recent EU history hailed this as a Hamiltonian moment, a reference to Alexander Hamilton, the visionary who spearheaded the federalisation of states’ debt in the US.


The proposal stopped short of mentioning eurobonds, a financial instrument collectively guaranteed by EU member states that has become a bone of contention in the bloc’s response to the novel coronavirus. And yet, it was instantly recognised as a bold step towards bringing the union closer to what was hitherto unthinkable: joint debt issuance, a typical feature of fiscal unions. Wolfango Piccoli, co-president of political risk advisory at Teneo, a US management consulting firm, told World Finance: “The French-German [proposal] broke two fundamental taboos: it opened the possibility for European governments to engage for the first time in massive joint borrowing, and sanctioned significant fiscal transfers between its member states.”


Beware the frugal four
Just 10 days after Macron and Merkel let the cat out of the bag, the European Commission announced its own plan. It was even more generous, offering an extra €250bn ($284.5bn) in loans on top of the €500bn grants proposed in the French-German plan. The funds will be raised via EU-issued bonds and financed through a series of new taxes and levies. These include staples of the EU repertoire, such as taxes on large corporations and tech powerhouses, as well as measures reflecting Brussels’ Green Deal, including taxes on carbon and plastic. The €750bn ($853.6bn) recovery fund, aptly called Next Generation EU, incorporates the essence of the French-German proposal and also adds ideas from countries that are less enthusiastic about shared debt. Michael Hüther, a German economist and director of the German Economic Institute, told World Finance: “The commission’s proposal clearly bears the signature of the German and French Governments, as it includes a high level of transfer. The question is, however, whether this high level is necessary to help the affected states in the current situation.”

The timing and innovative set-up of the EU recovery fund has boosted the hopes of Europhiles that something bigger is in the works

The proposal comes with various conditions that make it less ambitious than what its main beneficiaries were hoping for – grants will not be used to finance existing debt, for example. Its timing and innovative set-up, however, has boosted the hopes of Europhiles that something bigger is in the works. Bonds will be issued in the name of the EU, while the commission will oversee fund allocation. For over-indebted countries with volatile sovereign credit ratings, this will be a boon, as the bonds will have the coveted AAA rating that puts them into the ‘safe asset’ category. But Hüther believes the impact on the EU’s coffers remains a concern: “The repayments will place a heavy burden on the EU budget for many years, from 2028 onwards. EU taxes proposed by the commission to finance the fund are unlikely to find a majority among member states.”

The commission needs to convince all member states that its plan is the best way to move forward. Persuading Austria, Denmark, the Netherlands and Sweden – a bloc that has been named ‘the frugal four’ for its aversion to shared debt – will take a lot of effort and possibly some concessions. A few days before the commission announced its proposal, the frugal four presented a different recovery policy, offering loans rather than grants and emphasising the temporary character of any intervention. However, the commission’s plan is expected to get the green light in one form or another, given that it bears the stamp of the Franco-German engine that traditionally spearheads reform in the EU. Piccoli said: “The negotiation will be a tough one, but given that Germany is the biggest contributor, it will go a long way to convince some of the reluctant countries.”


EU turn
France has always been a champion of debt mutualisation, driven by its precarious economic position – the country’s public debt is approaching the 100 percent debt-to-GDP threshold (see Fig 1). Macron is also a staunch Europhile with bold ideas for the future of the bloc. Until recently, though, Germany was the unofficial leader of the frugal group: several economists, including former Greek finance minister Yanis Varoufakis, floated the idea of issuing eurobonds during the sovereign debt crisis, only for it to be rejected by the German Government. This is why Merkel’s sudden embrace of the idea has come as a surprise.


Some point to fierce pressure from Ursula von der Leyen, who was the longest-serving member of Merkel’s cabinet before becoming president of the European Commission, as a possible explanation. The fact Germany will take over the European Council presidency in July and lead negotiations on the EU’s 2021-27 budget might also have played a role. Others point to more pragmatic reasons, such as concerns over Italy’s soaring debt, which currently sits above €2.4trn ($2.73trn), several times more than that of Greece. Adding further debt to tackle the consequences of the lockdown would make Italy’s recovery more difficult.

Some cracks in the opposition to eurobonds emerged in March, when a group of influential German economists published an article via several European media outlets, calling for the issuance of €1trn ($1.14trn) in crisis bonds. Hüther, who was among the authors, told World Finance: “The union is sending a strong signal of European solidarity in a situation where the cost of borrowing at the European level is very low.” The German public had started to warm to the idea at the peak of the COVID-19 pandemic, with the local press stressing the importance of European solidarity during a global healthcare crisis.

Some fear that the wounds to European solidarity will take a long time to heal

As Jonathan Hackenbroich, a policy fellow for economic statecraft at the Berlin branch of the European Council on Foreign Relations, explained to World Finance: “The German economy is dependent on exports [see Fig 2] and a liberal trade order. With that being more difficult internationally, the government knows that a strong EU market becomes more important, and Germany can’t just focus on exports to third countries.” He added that developments on the other side of the Atlantic might have influenced the German Government’s decision: “Germans and [other] Europeans can’t make their own economic decisions in some instances anymore because of US economic nationalism. The dollar, which Europeans used to view almost as a public good, is getting weaponised. That’s partly why the German Government recognises how important it is to have a strong European market.”



Merkel’s political calculations may have played a role, too. The German chancellor is expected to step down next year, giving her leeway to make difficult decisions without taking the political cost into account. Hackenbroich believes the successful management of the healthcare crisis in Germany has led to a renaissance of ‘Merkelism’: “The reason why [Merkel] can dare to make concessions is that she is highly popular. Her party is leading the polls by a wide margin because she [has] handled the crisis really well so far. German people are happy that their leader is Merkel and not someone like [UK Prime Minister] Boris Johnson or [Brazilian President Jair] Bolsonaro.”



Pulled in different directions
The ambitious French-German proposal couldn’t have come at a more crucial time for European unity, which is being challenged by two parallel crises: the pandemic, and the heated debate over how to respond to the economic tsunami caused by strict lockdowns. Old grievances, thought to be dormant since the worst days of the Greek debt crisis, have come back to the fore. The push for debt mutualisation was led by Spain and Italy – the two countries that took the biggest hit during the early stages of the pandemic – and has been backed by Portugal, France, Ireland and Greece.

Joint debt issuance may be seen as a pattern to be followed in the future, but it is a prospect that will likely be met with fierce resistance

Frugal member states from the North were having none of it, though, as they were wary of moral hazards that could delay reforms in Southern Europe. In a Eurogroup meeting via videoconference in late March, the Dutch finance minister Wopke Hoekstra sparked uproar when he demanded that Brussels investigate why some countries were not prepared for a financial crisis just a few years after the previous one. Not one for mincing his words, Hoekstra categorically rejected eurobonds as an irrelevance. To southern ears, this was nothing more than hubris while the virus claimed the lives of thousands of people daily. Dropping all pretence of diplomatic courtesy, the Portuguese Prime Minister António Costa dismissed Hoekstra’s remarks as “senseless” and reminiscent of the eurozone’s recent woes: “No one has any more time to hear Dutch finance ministers as we heard in 2008, 2009, 2010 and so forth.”

Costa’s remarks reflect the deep frustration that can be found in Southern Europe over what was deemed to be unwarranted virtue signalling from the frugal North during an unprecedented healthcare crisis. Member states’ political leanings also contributed to the acrimony, with the left-wing governments in Portugal, Spain and Italy protesting that a decade of austerity had left them with little leeway to support their economies while generous bailout packages were needed for companies and employees. Passions ran high, with Italian politicians going as far as accusing the Netherlands of being a tax haven.

One of the lasting impacts of the COVID-19 pandemic may be the transfer of more power to Brussels

The tension exposed the new internal dynamics within the EU. The UK’s departure has created a gap in the balance of power between France, which usually sides with southern members, and Germany, previously the leader of the frugal North. Onno de Beaufort Wijnholds, a Dutch economist who previously served as executive director of the IMF, has suggested that Germany may have welcomed the eagerness of the Netherlands to take up the mantle of fiscal probity: “It may well be that Germany prodded its neighbour to lead the opposition, thus having the initial Italian wrath directed at the Netherlands. The Netherlands – like Germany and some other northerners, but this time [in a] more outspoken [manner] – does not wish to participate in a transfer union without some conditionality. Without it, we might see Italy becoming a ‘super Greece’.”

Some fear that the wounds to European solidarity will take a long time to heal, with Euroscepticism rising in Spain and Italy, which have hitherto been deemed as bastions of the EU. In the eyes of Lorenzo Codogno, former chief economist at the Treasury Department of the Italian Ministry of Economy and Finance, the euro has become an anathema for many Italians. As he explained to World Finance: “The root of the problem is that Italy is the only country in the eurozone that still has real GDP per capita slightly below the level [it had] when the single currency was launched in 1999. It is not the euro’s fault, but it is too easy to make a connection between the two phenomena.”



En garde, Madame Lagarde
Italian sentiment towards the EU was further bruised in March, when European Central Bank (ECB) President Christine Lagarde remarked that “the ECB is not here to close spreads”, referring to differences in eurozone members’ borrowing costs. The timing couldn’t have been more unfortunate, as Italy was facing the peak of the COVID-19 pandemic. The country’s bond yields were already reaching levels reminiscent of the sovereign debt crisis and Lagarde’s comment sent them even higher. Many compared her insouciance with the conduct of her predecessor, Mario Draghi, who, at the peak of the Greek crisis, said the ECB would do “whatever it takes to preserve the euro” – a statement that boosted market confidence in the eurozone.
Piet Haines Christiansen, Chief Strategist (ECB and Fixed Income) at Danske Bank, told World Finance: “[Lagarde] got off [to] a rough start with that comment. In retrospect, it was right, but it is not something that markets wanted to hear.”

Christiansen went on to argue that the ECB seems to have adopted an approach close to the ‘Greenspan put’ principle that reigned supreme in the 1990s, ensuring that spreads stay under control without actively intervening to close them.

The furore over Lagarde’s comment cast the ECB into the centre of the debate over the future direction of the eurozone. Since the sovereign debt crisis, the bank has been propping up the continent’s financial system through quantitative easing and bond-buying programmes, vastly expanding its balance sheet.

The same approach was followed in March when the bank launched a new €750bn ($853.6bn) pandemic emergency purchase programme (PEPP) that aimed to support pandemic-hit countries and companies, while its public sector purchase programme (PSPP) kept serving as a backstop for sovereign debt. A key goal for the bank is to prevent a ‘doom loop’ of rising sovereign credit risk that drags down banks in the weakest members of the eurozone. Christiansen said: “The ECB can continue the PSPP and PEPP programmes for as long as it takes. We should never underestimate what they can do. They set the rules of the game.”

Even before the pandemic, critics were pointing to the limits of this approach. Many economists have warned that monetary stimulus has artificially inflated asset prices and hit savers through negative interest rates while supporting indebted southern member states. Others have stressed the need for fiscal stimulus driven by governments. This now seems inevitable: as the EU builds up its defences through the commission’s recovery plan, the ECB is expected to take a less active role. Hackenbroich said: “Merkel has been clear that governments should shoulder some of the burden of the ECB. There will be more of a balance, but the ECB will remain key to eurozone policies.”


The first step
Time is pressing for speedy solutions as the economic consequences of the pandemic become clearer (see Fig 3). The ECB has warned that the eurozone’s economy will shrink by eight to 12 percent in 2020. Merkel, meanwhile, has said consultations with national parliaments and the European Parliament should be concluded in the autumn. Some expect that a typical ‘Eurofudge’ deal will be made at the last minute. Wijnholds told World Finance: “A compromise will most probably be reached, leaving both parties somewhat unhappy with a result that they can sell to their home base.”



Merkel and Macron have recognised that their plan was a temporary response to the pandemic, with more robust action needed in the future. Joint debt issuance may be seen as a pattern to be followed in the future, but it is a prospect that will likely be met with fierce resistance. Hüther said: “The proposals should not lead to structural changes in the EU financial architecture or repeated borrowing at the European level. The fund entails the risk, however, that in future crises the commission will very quickly press for further EU borrowing.”

The COVID-19 pandemic has reasserted the importance of the nation-state. Borders were re-established between Germany and France, even if temporarily. One of the lasting impacts of the pandemic, however, may be the transfer of more power to Brussels.

The fact that Germany insisted on tying recovery policies with the bloc’s long-term objectives, such as the EU’s Green Deal and digital transformation, points to a deeper commitment to the European project. Some see an idiosyncratic fiscal union rising from the embers of post-pandemic Europe, with the next step being a common budget for the eurozone – a pet project of the French president. As Hackenbroich explained, Europhiles may only have to play the waiting game: “[A] fiscal union is too far-fetched yet, although [the French-German proposal] is a step towards it. More taboos will have to be broken for that.”

Beirut blast exposes depth of Lebanon’s economic turmoil

Lebanon is one of the oldest countries in the world. Once upon a time, during the 3rd millennium BCE, it was the centre of culture and trade, serving as a gateway between the Eastern Mediterranean and the Middle East.

Times have changed. Today, Lebanon is known around the world for its shattered economy and destroyed capital. On 4 August 2020, Beirut was torn apart by an explosion so large that shockwaves were felt over 200 kilometres away on the island of Cyrpus. At least 135 people were killed in the blast and 5,000 injured.

The port where the explosion took place was one of the biggest in the Eastern Mediterranean. As such, the blast wiped out a trade hub vital to the import-dependent country. Marwan Abboud, Beirut’s governor, has said that collective economic losses could mount to $15bn.

But the blast was not the first of Lebanon’s troubles. Even before the explosion hit Lebanon, its economy was in dire straits. Its public debt-to-gross domestic product was the third highest in the world. Blackouts were rife, businesses were closing and almost a third of the population was living below the poverty line. The Lebanese government estimates that, by the end of the year, this could rise to 60 percent of the population. This is what happens when a country endures years of corruption, negligence and economic mismanagement.


The tipping point
Over the last few decades, Lebanon has seen its fair share of economic instability. But this current crisis is perhaps its worst in modern history. “Lebanon has been through several economic crises including hyperinflation and banking failures,” said Hicham Safieddine, Lecturer in the History of the Modern Middle East at King’s College London. “But this is the first time these have happened simultaneously, with the entire banking sector – rather than a few banks – experiencing stoppage of payment. It is also the first time this had happened when there is a public debt crisis, a persistent balance of payments deficit and a global economic slump.”

To understand how the situation got so bad, we need to go back to the early 1990s, when Lebanon had just emerged from a fifteen-year-long civil war. Under the pretext of post-war reconstruction, the state began a programme of heavy borrowing. But while it was accruing more and more debt, the country was failing to rebuild itself. “Much of the debt was spent on unproductive investment or wasted through corruption,” said Safieddine.

As funds depleted, the state turned to a financial engineering operation that many economists have compared to a Ponzi scheme. The central bank began using fresh borrowing to repay its debt and maintain the Lebanese pound’s exchange rate with the US dollar. “The state was borrowing from or via the central bank at exorbitant interest rates, the central bank was borrowing from the local banks, who were lending the money of their depositors, who in turn were lured in by high interest rates,” said Safieddine. High interest rates of up to 15 percent kept this unsustainable cycle going for years. But running out of cash was inevitable.

This finally happened in September 2019, when up to $100bn was wiped from the banks’ coffers. As a result, the exchange rated spiked. A currency crisis was triggered in which the Lebanese pound lose 80 percent of its value. Anti-government demonstrated broke out on 17 October, as the government proposed taxes on tobacco, petrol and services like WhatsApp.

Because the country is so dependent on imports, the devaluation of the pound has had a devastating impact on consumers, who saw food prices rise by 190 percent in May, according to official figures. Lebanese people have taken to Facebook to barter old personal belonging in exchange for diapers and food.

Lebanon needs aid, but securing this is not so easy. Since March, when it defaulted on its foreign debt for the first time, Lebanon has so far struggled to convince the International Monetary Fund (IMF) to provide it with the loan it desperately needs to revamp the economy. To get the loan, the IMF has said, the country must tackle corruption. But this would require no less than a full-scale overhauling of Lebanon’s entrenched patronage system.


A corrupt political elite
According to Fawaz Gerges, Professor of Middle Eastern Politics at the London School of Economics, the origins of the current crisis can be traced back more than three decades. “It’s the result of a free-wheeling neoliberal system with little oversight and checks and balances, systemic corruption by the sectarian-dominated establishment and massive economic mismanagement,” he told World Finance. “The convergence of these three structural factors has brought the Lebanese economy to the ground.”

The first of these factors – Lebanon’s freewheeling neoliberal system – began with Lebanese banker, writer and politician Michel Chiha, whose political ideas, Safieddine explains, had a huge influence on the country during the early years of independence in the 1940s.

“He managed to incorporate his laissez-faire ideology into state bureaucracy and public discourse. Over time, the mercantile-financial class benefiting from this ideology continued to peddle laissez-faire as the secret to the country’s success,” said Safieddine. “After the civil war, a new wave of neoliberal policies introduced by late Prime Minister Rafic Hariri revived laissez-faire ideology to justify conservative monetary and fiscal policies, and the banking sector became a major ally, reinforcing the tropes of laissez-faire through media campaigns.”

Many claim this neoliberal experiment has bred huge inequality in the country. As a result of these policies, many of the country’s social services, like electricity and education, have been privatised while others, such as healthcare, have faced relentless budget cuts. Citizens have been with little to no social protection.

The other problem is corruption. The same political elite that ruled Beirut after the end of the civil war in 1990 is still in power today. Many of them are former warlords from that conflict. Meanwhile, Hezbollah, an Iran-backed militant group, continues to hold enormous power in the country. It’s no surprise that, on Transparency International’s 2019 Corruption Perceptions Index, Lebanon ranks 137th out of 180 countries.

“In Lebanon, and in the Middle East and North Africa in general, you cannot separate the economic from the political. There is an organic link between the two,” said Gerges. “Today’s Lebanon suffers from deep and horizontal fissures among the ruling elite, a rift that is exacerbated by a fierce geostrategic rivalry between Iran and Saudi Arabia. Since the outbreak of the Syrian war in 2011, the Iran-Saudi clash has played on Lebanese streets with a vengeance, with a heavy price, including almost two million Syrian refugees and drying up of most Gulf aid that used to sustain the economy.”


Breaking the cycle
The explosion has inflicted so much damage on the economy and the collective psychology of the Lebanese people that it’s tempting to believe this moment could be a turning point in the country’s history. In the aftermath of the blast, thousands of people took to the streets to call for a regime change. Amid the outpouring of public fury, Lebanon’s government resigned. But while these resignations would seem to suggest that a meaningful political restructuring could be on the horizon, this is unlikely to be true.

“Historically, ruptures and wars serve as a catalyst for transformative change. These earth-shattering developments trigger soul-searching and a willingness to change the rules of the game. Not so in the case of Lebanon, I fear,” said Gerges. “The sectarian-dominated elites will fight to preserve their entrenched interests. It is a life-and-death matter for the ruling elites. The warlords have constructed a perfect structure to consolidate their power.”

In his resignation speech, Prime Minister Hassan Diab blamed resistance by the political elite for his lack of reforms. He said corruption in Lebanon was “bigger than the state” itself, and “a very thick and thorny wall separates us from change; a wall fortified by a class that is resorting to all dirty methods in order to resist and preserve its gains”. With such a broken political system, it’s unclear how the country can achieve the monetary and fiscal reform and legal reform it desperately needs to revive the economy.

As far as Gerges is concerned, civil unrest is the only means by which Lebanon could change for the better. “The people of Lebanon are the most powerful driver that can turn the table on the ruling elites,” he said, “and force them to institute real change. This requires a prolonged social struggle and mobilisation of the people along non-sectarian lines. Change in Lebanon is a marathon, not a sprint.”

Resilience is a value that the Lebanese people have long prided themselves on. In an Opinion piece for the New York Times, Lebanese writer and translator Lina Mounzer argues that this resilience is little more than a myth: “now it has become clear that there is nothing truly resilient about Lebanon except its politicians and ancient warlords, who refuse to step down, even after their profiteering has bankrupted the country and its people”. In the long-term, it’s not resilience that the Lebanese people need in order to overcome this, but resistance.

Navigating bonus culture in the finance sector

When COVID-19 swept across Spain this spring, the country’s second-largest lender, Banco Bilbao Vizcaya Argentaria (BBVA), did not waste time proving its social responsibility credentials. The bank announced on March 30 that its executives would forgo their bonuses for 2020, worth an estimated €50m ($56.26m). “The international pandemic caused by the coronavirus is an unprecedented health crisis,” a BBVA spokesperson told World Finance. “In the context of the measures taken by governments and monetary authorities to mitigate the impact of the pandemic on the world economy, financial institutions have a fundamental, and even exemplary, role in this crisis.”

This role has not always been a priority for banks, which were largely blamed for the economic shock of the 2008 financial crisis. Since then, they have gone to great lengths to convince governments and the public that they have cleaned up their act. Regulation has also contributed to a more responsible banking sector, with the Basel III framework establishing bonus caps and high capital requirements as barriers to unbridled risk-taking. “A major effort has been made to improve ethical standards in the financial sector since the 2008 [crisis],” said William Blair, a professor of financial law and ethics at Queen Mary University of London. “It is important that this work is not lost as we come out of the pandemic.”


Paying respect
Of all businesses hit by the COVID-19 outbreak, banks have been the most anxious to show that they have learned their lessons from the global financial crisis. Bonuses have long been a point of contention in this conversation. As an incentive for high-flying bankers, bonus culture has become integral to the world of finance. However, the coronavirus outbreak has pushed some banks to kick their old habits. Like BBVA, many institutions have announced they will voluntarily skip such payouts this year. Alison Rose, CEO of NatWest, will forgo her bonus and has pledged to donate a quarter of her £2.2m ($2.76m) salary to a charity addressing the impact of the pandemic. Managers at Barclays, HSBC and several other UK banks have made similar pledges, while Citigroup has announced it will offer a $1,000 special compensation award to eligible employees in the US making less than $60,000 a year.

Reputational concerns have partly influenced decision-making at these institutions. BBVA’s spokesperson described the move to scrap bonuses as “a gesture of responsibility towards society, our clients, our shareholders, and all our employees”. For those that shunned this option, transparency will be key. “Businesses will, rightly, need to defend their decisions and will be at risk of damaging their reputations if they cannot defend them as being reasonable and appropriate,” Ian Peters, Director of the Institute of Business Ethics, told World Finance.

For banks that have received state support, either through furlough schemes for their workers or loans and credit guarantees, waiving bonuses and dividends was an essential move. Charles Calomiris, a professor of financial institutions at Columbia Business School, explained: “If the government is investing in a firm to buttress it in the public interest, that company generally should not be permitted to pay common stock dividends while it is receiving financial support, as this weakens the company’s financial position and dilutes the benefits of assistance and places taxpayers at greater risk.”


The blame game
Regulators must carefully consider how they tackle the issue of bonuses. Outright bans may find favour with the public, but they harm competitiveness and raise questions of fairness. Stephen Arbogast, a professor of the practice of finance at the University of North Carolina Kenan-Flagler Business School, said: “During the [2008 financial crisis], management of the banks was culpable for the crisis, so there was legitimate anger towards their leadership. This is not a crisis caused by malfeasance or negligence, so there is a big difference.” Critics have also contested the legitimacy of such measures, given that lockdowns were imposed by governments, leaving banks in many countries with no other option than to shut their doors.

Further, many financial services firms pay executives relatively low salaries supplemented by hefty bonuses, often in stock, to tie up performance with pay. Banning bonuses may make it difficult for institutions to attract international talent. “The purposes of the state and the owners of the firm are aligned when bonuses are used to keep managers during a difficult period,” Arbogast said. “They are looking at their personal survival, and often in a situation like this they want to escape a sinking ship or someone shows up with a better offer.”

Regulatory responses to the pandemic have varied around the world. In late March, the Bank of England banned lenders from handing out cash bonuses and dividend payouts. The announcement was met with dissatisfaction from many institutions. HSBC was forced to withhold dividend payments for the first time since the Second World War, a decision that saw the company questioning whether it should relocate to Hong Kong, where it makes a large portion of its profits. However, the virus’ outbreak coincided with the end of the financial year, when bonuses and dividends are traditionally paid, meaning many British banks had already handed out their bonuses by the time the ban was imposed.

Of all businesses hit by the COVID-19 outbreak, banks have been the most anxious to show that they have learned their lessons from the global financial crisis

In Europe, where the bonus culture is less pronounced, the EU followed an even stricter approach that applied to all sectors. The bloc’s competition unit loosened state aid criteria to allow governments to support vulnerable firms while banning senior management at these businesses from receiving dividends and bonuses. Mergers and acquisitions were also capped at 10 percent.

Some countries went one step further, with France banning companies that received state aid from paying dividends to shareholders, following requests from the country’s powerful trade unions. In the banking sector, the European Central Bank (ECB) ordered eurozone banks to scrap dividends until October 1, a measure that could free up €30bn ($33.76bn) for lending to pandemic-hit borrowers. On the other side of the Atlantic, the US Government placed strict restrictions on share buybacks, dividends and executive compensation for companies making use of government support programmes. However, no such restrictions were placed on banks, nor were they included in the Federal Reserve’s $500bn corporate bond-buying programme.


Above board
The pandemic has also reignited the debate over whether governments should take equity and board seats at bailed-out institutions. While US President Donald Trump has endorsed the idea, Arbogast argues that this approach must be executed thoughtfully, given the nature of the current downturn: “If the government is strapped for resources and is looking to give aid in the most capital-efficient way, there is a case to be made for taking equity. However, there is no case for participating in the management. The institutions involved are not at fault for this economic turndown and no clean-up is required.”

Share buybacks are an equally contentious issue. Critics allege that the practice is commonly used to artificially drive up share prices, diverting cash from other activities. The ECB has ordered eurozone lenders to refrain from share buybacks this year, while Trump has expressed interest in barring companies that received state aid from the practice. In an act of pre-emptive self-defence, some of the biggest US banks, including JPMorgan Chase and Bank of America, have frozen buyback programmes until the end of the second quarter of the year. “If you voluntarily take state aid and you keep doing share buybacks, you are basically flowing this money through to your shareholders,” Arbogast said. “I think there is a serious problem with that.”

The decline in banking’s bonus culture could be one of the lasting side effects of the pandemic. With remote work becoming an increasingly attractive option for bankers, a better work-life balance may erode the importance of financial bonuses. Automation may also contribute to this culture shift by limiting the role of risk-takers at financial institutions, and thus their entitlement to hefty bonuses. According to BBVA’s spokesperson, internal surveys conducted by the bank showed that most of its employees “valued very positively the possibility of having more flexible work opportunities, combining remote and face-to-face work”. They continued: “This crisis has accelerated the trend towards new forms of work. [Our] employees have already singled out this option as one of the most valued benefits.”

Japanese Prime Minister Shinzo Abe to resign

The Japanese Prime Minister Shinzo Abe announced on 28 August that he will be resigning due to worsening health. Japan’s longest-serving premier, Abe spent his tenure trying to boost Japan’s international standing, increase defence spending and pull the economy out of stagnation through his economic policy known as ‘Abenomics’.

Abe has suffered with ulcerative colitis, an inflammatory bowel disease, since he was a teenager. However, two recent hospital visits prompted speculation that his condition had worsened.

“I cannot be prime minister if I cannot make the best decisions for the people. I have decided to step down from my post,” the Prime Minister said in a news conference. “It is gut-wrenching to have to leave my job before accomplishing my goals.”

His resignation will trigger a search for a new leader within the ruling Liberal Democratic Party. With the coronavirus pushing the economy deeper into recession, it is likely that whoever wins the leadership race will retain Abe’s “Abenomics” stimulus strategy. The reform programme, which Abe introduced after coming to power in 2012, focuses on deploying the “three arrows” – large-scale monetary easing, fiscal spending and structural reforms – to revive the economy, which for years has been plagued by low productivity and a rapidly ageing population.

So far, however, the reforms have had limited success. Although the stimulus programme brought some short-term benefits including a tourism boom and increasing job availability, Abe has struggled to boost investment into the country. What’s more, the pandemic effectively wiped out these benefits; Japan’s economy shrank at the fastest pace on record between April and June this year.

Despite failing to achieve some of his main goals, Abe will be remembered for bringing a period of stability to Japan. As well as implementing aggressive stimulus policies, Abe strengthened ties with the US and bolstered Japan’s defences during his eight-year term.

The steps taken to improve healthcare supply chains

At the start of the year, predictions for the global economy were largely optimistic, albeit modestly so. Then SARS-CoV-2 began to spread across the globe – suddenly, international travel was off-limits, businesses were shuttered and millions were confined to their homes. The impact that the novel coronavirus has had on manufacturing has been profound, too.

COVID-19 initially crippled supply chains in China, demonstrating the folly of an overreliance on one market. As the threat persists, Puerto Rico’s substantial pharmaceutical presence offers a viable alternative to both life sciences manufacturers and US lawmakers seeking to enhance domestic production.

As a US territory that is home to 12 of the world’s top 20 grossing pharmaceutical companies, Puerto Rico is emerging as an alternative for drugmakers seeking to serve the Americas. With the world ramping up its efforts to tackle COVID-19, the importance of keeping pharmaceutical supply chains running smoothly will only grow.


Building a base
The US, which has registered the world’s highest number of COVID-19-related deaths, is beginning to prioritise national stockpiles and central inventories for personal protective equipment. Healthcare supply chains have struggled to manage the spikes in demand that have emerged in the wake of the virus’ spread. Having long served as a pharmaceutical manufacturing centre and producer of medical devices, Puerto Rico is ready to support the healthcare sector during these difficult times.

Healthcare supply chains have struggled to manage the spikes in demand that have emerged in the wake of COVID-19

Many US politicians have spoken about the need to adopt 1970s-era tax incentives that eliminate federal taxes for profits generated in US territories. As a result, Invest Puerto Rico – the island’s public-private economic development partnership – has planned an aggressive recruitment campaign for life sciences companies in 2020 to further boost the island’s strengths in this field.

In 2018, for example, five of the world’s 10 top-selling drugs (Humira, Eliquis, Opdivo, Enbrel and Xarelto) were manufactured in Puerto Rico. Similarly, eight of the 15 best-selling biopharmaceutical products internationally are made on the island. Moving on to 2019, our pharmaceutical exports were valued at over $44bn, with as much as $30.9bn going to the US market. Last year, nine of our top 10 international commodity exports were pharmaceutical or medical device products. This sector makes up 30 percent of the island’s GDP, 50 percent of its total manufacturing capacity and 30 percent of manufacturing jobs.

Due to our highly talented workforce and network of top universities and bio-centred technical schools, we have been able to rapidly increase our capacity. Despite the disruption caused by COVID-19, we remain confident that our local and national efforts to consolidate pharmaceutical production will be a game-changer as we tackle the threat posed by the coronavirus and future black swan events.


Peace of mind

Boosting production and attracting new manufacturers within the medical and pharmaceutical space remains a national focus. We are committed to reaffirming the island’s position as an essential manufacturing hub in the US. Improvements that will upgrade our existing infrastructure in order to facilitate higher output levels are, therefore, already underway.

Following recent natural disasters – hundreds of earthquakes and their aftershocks hit the island in the early weeks of the year – Puerto Rico has received billions of dollars in support. Disaster recovery investments have been bolstered by stimulus packages that should safeguard the island’s economy, including a $787m plan to help mitigate the effects of COVID-19.

Even with this financial support in place, increasing the production of Puerto Rico’s pharmaceutical sector will provide further peace of mind to US citizens who may be concerned about accessing essential medications. Being able to source vital products from a US territory limits the impact of any future supply chain disruption or demand spikes.

Puerto Rico, like the US mainland, will overcome the COVID-19 pandemic and its many economic challenges, emerging stronger than it was before – we have resilience built into our DNA. Our small businesses, which are well versed in the process of rebuilding following numerous natural disasters, have shown time and again that they are robust in the face of a crisis.

We may already be the US’ pharmaceutical powerhouse, but we are ready to leverage our assets to make the country even safer and more secure from global disruptions like COVID-19. We are committed to making sure that every American can access the highest quality and most cost-effective drugs available. The US should not have to rely on imported goods from foreign territories to care for its residents – not when Puerto Rico has the capacity to meet this need.

The important lessons that China need to learn quick

There is a stereotype about Chinese students that has taken root in the West. It says that they are industrious, hard-working and, most significantly, smart. It’s one of the reasons China is expected to dominate the hi-tech industries of the future, like artificial intelligence, biotech and interplanetary travel. But this stereotype masks a more complicated picture of educational attainment in the country.

Unsurprisingly, the most populous country in the world is one of huge contrasts. While China’s major cities are certainly full of successful businesses and high-ranking universities, a look at its rural areas paints a very different picture. China remains one of the most unequal countries in the world – a fact that is masked by its economic rise. According to the 2020 Hurun Global Rich List, China now has more billionaires than the US, but only 63.7 percent of China’s rural population has regular access to reliable sanitation facilities. If you count migrant workers living in cities, as much as 99 percent of the country’s impoverished population either comes from or still lives in rural areas.

These statistics should not only shock the Chinese Government from a human point of view, but they should serve as an economic warning as well. If China is to continue its spectacular economic ascent, it will need to focus on its human capital. The levels of education in the country must be improved if China is to transition from a manufacturing-based economy to a highly skilled, service-based one. For that to happen, it will need the help of all of its citizens, not just those living in cities.


Room for improvement
No one could accuse China of not taking education seriously. The country’s school system, which requires pupils to complete nine years of attendance – six at primary school and three at a secondary institution – is the largest state-run education system in the world. President Xi Jinping has long understood that China will not be able to compete with the developed world economically or technologically without building on its recent educational improvements. “The competition for comprehensive national strength is essentially a competition for talent,” Xi explained at a Beijing symposium in 2016. “We need to accelerate development of a globally competitive talent system, bring together the best available talent, and put it to use.”

The levels of education in the country must be improved if China is to transition from a manufacturing-based economy to a highly skilled, service-based one

Families in China appear keen to support the country’s efforts to strengthen its human capital. Annual per capita expenditure on educational, cultural and recreational services among urban private households rose from CNY 669.58 ($94.47) in 1990 to CNY 2,974.1 ($419.60) in 2018. Aside from the bragging rights that come with having high-achieving offspring, the connection between a strong education sector and economic performance is well established.

A 2003 study conducted by Philip Stevens and Martin Weale for the National Institute of Economic and Social Research found a clear correlation between the strength of a country’s education sector and its economic power, with a one percent increase in primary school enrolment leading to a GDP boost of 0.35 percent. Even a country that enrols 100 percent of its children at school would be foolish to rest on its laurels; school performance can always be improved, and a constant refreshing of curricula is necessary.

In China, it’s evident that educational and economic developments have reinforced one another. Since the era of Deng Xiaoping, who led the People’s Republic of China at the end of the 20th century, education has taken on an increasingly important role. “Economic construction, social development, and scientific and technological progress all depend on the intellectual development of the Chinese nation, an increased number of trained personnel, and further growth of education based on economic development,” read the guidelines for China’s Seventh Five-Year Plan. “During the period of the plan, we must attach as much importance to education as we do to economic development and orientating our work to the needs of modernisation, the world and the future, [and] strive to bring about a new situation in education.”

In contrast to the Cultural Revolution of 1966-76, when members of the intelligentsia were the subject of suspicion, Deng’s era and the decades that followed have witnessed significant improvements in educational attainment. For example, since 1982, the country’s adult literacy rate has skyrocketed from 65.5 percent to 96.8 percent (see Fig 1).



But education is not just beneficial on a personal level; it is vital if individuals are to both contribute to and benefit from societal advancements. It is no surprise, then, that China’s economic rise has coincided with its educational one.


A broken system
Improvements to the education system in China have not been implemented uniformly. Urbanisation has occurred at a rapid rate in the country – in 1978, just 17.92 percent of the population lived in urban areas, but by 2018, this figure had risen to 59.58 percent. And while this trend has helped to transform some of China’s cities into centres of innovation and corporate success, it has left many rural areas neglected.

Because of its failure to ensure that rural and urban areas keep pace with one another educationally, China, on the whole, remains behind its peers in terms of development. In 2015, the high school attainment rate for middle-income countries, of which China counts itself, was 36 percent, far below the average of 78 percent seen in high-income countries. China’s figure, however, is just 30 percent, behind some less-well-off states like Indonesia.

While there has been a substantial improvement in school attendance in rural areas, concerns remain about the quality of education being received outside the country’s urban conurbations. Most of the expansion can be attributed to the growth of vocational education and training schools, but the quality of schooling appears mixed at best.

Some of the problems facing China’s young people in rural areas cannot be pinned on the formal education system, however. Rates of developmental delay among infants and toddlers were found to be high in China’s rural areas, and social-emotional delays were similarly troubling. A recent study using the Bayley Scales of Infant and Toddler Development found that 58 percent of infants and toddlers in China showed delayed social-emotional skills. Language delays, anaemia, poor vision and other health problems were also observed.


Aside from educational failings, rural China remains beset by poverty, poor infrastructure and a lack of social support outside of the family unit. As of the end of 2017, the incidence of poverty in 167,000 villages exceeded 20 percent, several times higher than the national poverty rate of 3.1 percent. In fact, by some metrics, the plight of China’s rural citizens is getting worse: in 2019, rural per capita income actually fell if migrant workers were removed from the data.

“Easing poverty has always been one of the Chinese Communist Party’s priorities, as high and unsustainable levels of poverty could threaten social stability and therefore undermine the legitimacy of China’s single party,” Ricard Torné, Head of Economic Research at forecasting firm FocusEconomics, told Forbes in 2018. “Boosting government-subsidised homes for rural dwellers, promoting economic activity outside urban areas and increasing loans to low-income people will top [Xi’s] agenda on poverty reduction.”

Cultural issues are also holding the country back. China operates a domicile registration system, known as the hukou system, that determines the social services that any family can access in their town, village or city of residence. The two types of hukou – rural and urban – exacerbate China’s education divide. Holders of rural hukou, although they may have moved to the city (perhaps travelling with their family in search of better employment opportunities), will face difficulties accessing education in their new surroundings.

For example, only around 30 percent of migrant children living in Shenzhen and Beijing attend state schools; the rest are sent to private institutions or returned to their original place of hukou registration. These hurdles remain prevalent all the way up the education pyramid: between 2009 and 2014, 97 percent of China’s poorest counties sent no students to Beijing’s Tsinghua University, widely regarded as the country’s premier educational institution.


Putting in the work
It must be said that the Chinese Government has not sat idly by and watched while its cities accelerate away from its rural areas. According to the country’s Ministry of Education, 83 percent of rural households achieved some form of high school attainment in 2015, an increase of 40 percent compared with 2005.

The Notice of the State Council on Deepening the Reform of Funds for Rural Compulsory Education was issued at the end of 2005, comprising a new compulsory education system for rural areas. It made it mandatory for local and national governments to share educational expenses on rural compulsory education, and committed to increasing investment incrementally. Other policies, like the 2010 Transformation Plan for Underdeveloped Rural Compulsory Education Schools and the Plan for Improving the Nutrition of Rural Students Receiving Compulsory Education have also helped improve the situation in many rural areas.

Charitable organisations, such as the Rural Education Action Programme (REAP), are also stepping in to patch up governmental failures. REAP found that Beijing’s National Teacher Training Programme, an initiative that has been running since 2010, has had no impact on teacher performance. As such, REAP is now looking at new approaches for teacher training in rural areas: for example, it has partnered with the University of Chicago and school districts in China to develop a more effective incentive programme to boost outcomes.

Overall, it appears that China does recognise its educational development in rural areas is not good enough. Since 2006, around 335,000 college graduates have been placed in rural schools in Central and Western China. Computers have been purchased and investment has increased. But there remains much catching up to do if both urban and rural children are to have access to equal opportunities.


Rural school in Guangxi and Gansu, China


Locked down and shut out
If the situation for China’s rural children was difficult before the spread of COVID-19, it has since become a lot worse. The pandemic has thrown the country’s education divide into stark relief. When Beijing shut schools in late January to slow the spread of the disease, wealthy families living in China’s gleaming cities coped well enough. In small towns and villages, where online infrastructure is lacking, many children simply had to go without schooling altogether. In Guangxi, one of the country’s poorer provinces, some secondary schools had to abandon online classes after many pupils were unable to log in.
As recently as 2018, between 56 and 80 million Chinese citizens said they did not have access to an internet connection or online-enabled device. Many families have just one smartphone between them, which means making it available for online lessons is not always practical. Although the official line from the Chinese Government is that 98 percent of the villages classified as ‘extremely poor’ have broadband coverage, research conducted by the China Development Foundation puts the figure at just 44 percent.

It must be noted that some institutions are coping with these new pressures. Zhejiang University, located in the province of the same name, was able to offer more than 5,000 of its courses online by early March. The university also offered training sessions for its 3,670 faculty members to ensure that staff had the digital skills required to enable remote learning. Additional funding has been allocated to some of the most disadvantaged students.

However, many of the most pressing education issues related to COVID-19 concern school-age children, not university students. A study conducted by the International Food Policy Research Institute found that 79 percent of those living in villages reported a negative impact on local children’s education. Economic effects have also become evident: REAP found that 31 percent of families reported that having children at home during the lockdown meant they could no longer go to work.

There has been lots of talk about creating a ‘new normal’ in the post-COVID-19 world. For China’s rural areas, this must involve renewed investment in technological infrastructure to ensure that, should a similar disruption occur in the future, the country’s educational divide does not widen further.


Techy teachers
Technology has long been viewed as a way of improving education. With the spread of COVID-19, it has suddenly become an essential tool for keeping students and teachers connected. Here is a selection of China’s pioneers in educational technology.

Widely regarded as the largest online education platform in China, 17zuoye, which translates to ‘homework together’ in English, serves more than 120,000 schools in the country. Founded in 2011, the company provides a bespoke learning strategy for each student by using big data and artificial intelligence. The firm has attracted significant investor interest
and had some success in terms of monetisation, using intelligent supplementary textbooks and livestream tutoring.

Pairing tutors from the US and Canada with Chinese students between the ages of four and 15 looking to improve their English, VIPKid has achieved huge success since it was founded in 2013. Despite some concerns last year over rising costs, the company has still managed to achieve a valuation in excess of $4bn. Starting as a desktop program, VIPKid now also boasts a mobile app that enables students to access upcoming tutoring schedules and view teacher feedback.

Founded in Shenzhen in 2013, Makeblock aims to achieve the deep integration of technology and education by using hardware, software, content solutions and robotics. Already, the company has sold its products – including educational resources, like the company’s do-it-yourself robotics kits – to more than eight million users across 140 countries. Makeblock’s reputation has grown so rapidly that it is already viewed as a worldwide leader in STEAM (science, technology, education, arts and mathematics) solutions.


Held back a year
If China is to continue its economic development, it will need to do more than simply point in the direction of its multinational companies – the likes of Alibaba, Tencent and Huawei. It will need to address the issues affecting those that live far from the bright lights of Beijing and Shanghai. Stanford economist Scott Rozelle has found that for countries to make the transition from middle to upper-income status, at least 75 percent of its working-age population needs to have completed high school – a statistic China is yet to achieve.


Students return to school amid COVID-19


The image of the Chinese whizz-kid acing maths and science is good for the Communist Party’s image, but it’s not entirely accurate. In 2015, when results from the Programme for International Student Assessment tests were extended to include students from outside Shanghai, China’s rankings fell significantly. More money will need to be injected into rural education and the hukou system may have to be abandoned if Beijing wants to clear the way for more of its citizens to make the transition to urban life. Culturally, the Communist Party will also have to make some compromises. Lessons in ideological conformity may help maintain discipline in a one-party state, but indoctrination can lead to rigidity of thought. Xi’s beliefs, now enshrined in the state’s constitution, may be important, but they are not as important as science and maths for the country’s continued economic development.

In addition to China’s focus on economic success, Xi believes he can eradicate poverty in the country by the end of this year. On top of this, by 2049, the aim is for China to be the world’s top international education destination. It will take a country-wide effort to achieve any of these goals. China has always held lofty ambitions, but in its villages and towns, it is in serious danger of falling short of them.

Cooking on gas: why is the IMF bullish on Qatar?

What do Norway, the Republic of the Congo, Micronesia, Nauru, Macau, the Marshall Islands and Qatar all have in common? They are the only countries expected to run a budget surplus in 2020, according to the IMF. It’s perhaps not surprising that so many isolated island states made the list, as their small populations, coupled with the large aid packages they receive, usually lead to an excess of funds. Norway and the Republic of the Congo, on the other hand, can rely on oil reserves to prop up government coffers, while Macau’s gaming sector is already back up and running after it was disrupted by the spread of SARS-CoV-2 in March.

Still, it’s fair to say the IMF’s predictions have been met with a degree of scepticism, not least when it comes to Qatar. While the IMF forecasts Qatar will run a surplus of 5.2 percent of its GDP this year, S&P Global Ratings expects the country to post an average deficit of around five percent between 2020 and 2023. The pandemic that briefly shuttered Macau’s casinos will have long-term economic ramifications for all markets, particularly in terms of dampening demand. If global economic activity does fall, it seems reasonable to assume that Qatar’s revenue from natural gas will also be hit.

But there are reasons why the IMF may be right in its bullish assessment of Qatar. The Gulf state managed to achieve an average annual GDP growth rate of 5.72 percent between 2009 and 2019 (see Fig 1), even as fossil fuel prices displayed trademark volatility. What’s more, the national government, led by Emir Sheikh Tamim bin Hamad Al Thani, has made a coordinated effort of late to reduce the country’s reliance on gas and oil, promising to deliver a period of more reliable and sustainable growth.




Saving for a rainy day
Before the outbreak of SARS-CoV-2, Qatar’s economic position was relatively strong compared with other hydrocarbon-exporting countries. This was despite an ongoing deflationary phase accompanied by a fall in GDP and a decline in its trade surplus. It is worth noting, however, that both remain positive. The country’s credit rating is also stable, its recent bond issuance was oversubscribed and it continues to support its hard currency peg with the US dollar while expanding its money supply.

In terms of exports, Qatar remains committed to expanding its liquefied natural gas (LNG) operation – both locally and internationally – having recently acquired interests in Mexico and Côte d’Ivoire, while development drilling is underway at its offshore North Field gas field. LNG storage facilities were in the process of major expansion before the pandemic, and will prove useful even if demand patterns differ in the post-pandemic world. The kingdom’s transport, logistics and tourism sectors continue to grow, served by the Hamad International Airport and Doha Port.

“Qatar’s relatively high per capita GDP masks the fact that its largest exports are classified by the Observatory of Economic Complexity as of low and moderate complexity,” Dr Greg Bremner, a senior lecturer in economics at AFG College with the University of Aberdeen in Doha, told World Finance. “However, there are prospects for new uses of chemicals and solar energy research and exploitation, although much of this will require a more entrepreneurial culture than currently exists. There will be intermediate diversification steps that Qatar can take while the growth of additional human capital gains enough traction to drive further entrepreneurialism. Meanwhile, Qatar’s commitment to the provision of higher education continues.”

Qatar differs from many countries in that most of its population consists of expatriate labour. Consequently, the salaries of those workers and the accompanying financial services they necessitate underpin its banks. However, KPMG recently reported that Qatar’s Islamic banks stand well above the minimum ratio of capital to risk-weighted assets under the Basel III framework, allowing them to increase exposures or absorb any potential future losses.

In economic policy terms, the Qatar Central Bank’s deposit, lending and repo rates, although low, have room for downward movement if necessary (unlike those in many other countries), and there is considerable fiscal headroom into which policy can move when required. Financial services are the largest component of the Qatar Stock Exchange (QSE) and could be vulnerable if expatriate labour left. With a market capitalisation of $160.05bn, though, the QSE is ranked 57th out of the 144 stock markets tracked by market analysts.

Qatar, unlike many exhaustible natural resource exporters, is cognisant of the fact that budgeting for intergenerational fairness in spending needs to be observed. Countries use adjusted net savings to facilitate this type of budgeting so that future generations, who come after the natural resource is depleted, receive a permanent income from that resource. According to Bremner, Qatar saved almost 30 percent of its gross national income under this heading in 2018; since 2010, its adjusted net saving has remained much higher than most countries in the region. To put this into context, savings of this type in the MENA region were 14 percent and, in the countries classified as ‘high income’, just nine percent.


Stumbling block
As well as being intrinsically linked to the price of oil and gas, the economic fortunes of Qatar are intertwined with the geopolitical situation in the Middle East. In 2017, the country found itself at the centre of a diplomatic storm after Saudi Arabia, the UAE, Bahrain, Egypt and several other nations in the region severed diplomatic and economic ties over allegations that Qatar had supported Islamist terrorist groups. The impact of the blockade was immediate: at the time, Qatar imported around 40 percent of its food through its land border with Saudi Arabia. After this was closed, empty supermarket shelves became a common sight until supplies from Turkey and Iran could be transported by air or sea. The domestic stock market lost 10 percent of its value in the first four weeks of the crisis.

The blockade came into effect after Qatar refused to agree to a list of 13 demands made by several other Arab states, including the cessation of all contact with the political opposition in Saudi Arabia, the UAE, Egypt and Bahrain, shutting down the domestic news outlet Al Jazeera, and aligning itself with the other Gulf and Arab countries militarily, politically, socially and economically.

“Beginning in April, Qatar was subjected to a carefully orchestrated and unprecedented smear campaign aimed at misrepresenting our policies on key issues affecting the region,” Qatar’s foreign minister, Mohammed bin Abdulrahman Al Thani, told reporters in 2017. He later added that agreeing to the 13 demands was tantamount to “surrender[ing] our sovereignty”.

Qatar reacted quickly to mitigate the impacts of the blockade, sourcing imports from new markets and ploughing ahead with long-term infrastructure projects

In response to the blockade, Qatari citizens have rallied around their emir, with murals depicting the ruler found adorning numerous buildings in the state. Emir Al Thani reacted to the blockade in a more measured fashion, addressing the 72nd Session of the UN General Assembly in New York: “I stand before you while my country and my people are subjected to a continuing and unjust blockade imposed since June 5, [2017,] by the neighbouring countries. The blockade involves all aspects of life, including severing family ties. Qatar is currently successfully managing its livelihood, economy, development plans and its outreach to the outside world thanks to [the] sea and air routes that are not under the control of these countries.”

Qatar reacted quickly to mitigate the impacts of the blockade, sourcing imports from new markets, redirecting money from the state’s sovereign wealth fund to protect essential sectors and ploughing ahead with long-term infrastructure projects. So far, the strategy appears to be working.


The Ras Laffan LNG port, Qatar
The Ras Laffan LNG port, Qatar


Going it alone
Although the blockade continues, Qatar has proven itself to be remarkably adept at managing the economic impacts. While growth was initially curtailed, falling to 1.58 percent in 2017 (down from 2.1 percent in 2016), it was soon on the rise again, hitting 2.2 percent the following year. Qatar certainly owes gratitude to countries like Turkey and Iran, which helped to establish new trade links with the kingdom. However, the national government is also due some credit for its handling of the crisis.

One of the important decisions taken in Doha to mitigate the effects of the blockade has been to support a culture of economic self-sufficiency. Before the embargo, Qatar imported the majority of its milk from Saudi Arabia; today, it produces sufficient dairy products to satisfy the local populace, with enough left over to export to other markets, including Afghanistan, Yemen and Oman. Following the blockade, Qatar quickly went about importing top breeds of dairy cows and installing them in specially designed air-conditioned farms in the desert. One such farm, Baladna, can hold 24,000 cattle. The domestic output of other agricultural produce, including poultry and fresh vegetables, has also grown markedly. “We are seeing a shift in Qatar economics and the entire region,” Yousuf Al-Jaida, CEO of the Qatar Financial Centre, told CNBC in 2018.

The response to the blockade has also involved forging economic ties with new markets. In April 2018, Qatar Petroleum signed a deal with Vietnam to supply the country with LNG and naphtha for the next 15 years. Later that same year, regular LNG shipments began making their way to Bangladesh. If the blockade was meant to leave Qatar economically isolated, it has not worked.

Another reason why it is difficult to hold Qatar to ransom is its sheer wealth. The kingdom lays claim to having one of the highest GDP per capita in the world, a consequence of having huge supplies of natural gas and a small population. The kingdom also enjoyed a stroke of luck in terms of the timing of the embargo: just a few months after the likes of Saudi Arabia and Egypt cut ties, Qatar was ready to officially open its new $7.4bn maritime port. Hamad Port is capable of handling 7.8 million tonnes of product annually, which has greatly increased the country’s import capacity. Previously, many goods had to first be exported to a nearby port in a neighbouring country, before then being re-exported on smaller vessels to Qatari ports.

Qatar has made a coordinated effort to reduce its reliance on gas and oil, promising to deliver a period of more reliable and sustainable growth

“This magnificent construction will be remembered in history as a sign of gratitude from this dignified nation to [Emir Al Thani] and HH the Father Emir Sheikh Hamad bin Khalifa Al Thani,” Qatari Minister of Transport and Communications Jassim Saif Ahmed Al Sulaiti said at the port’s inauguration. “This giant gateway carries HH the Father Emir’s name, which, in our memory and world memory, will be synonymous with the maker of miracles in this land. This would not have been achieved without the guiding directives and unlimited encouragement from HH the Emir and the active support from HE the Prime Minister and Minister of Interior [Al Thani]. Such great support has had a great impact in energising our drive and increasing the momentum for more work and dedication.”

The port, along with several other economic developments that had long been in the pipeline, helped the country to withstand the blockade without suffering significant economic damage, and may have even improved Qatar’s long-term prospects. As well as forcing the kingdom to speed up plans for self-sufficiency, it has shown international investors that its economy is more robust than many first thought.


Qatar’s Khalifa International Stadium is renovated ahead of the 2022 FIFA World Cup
Qatar’s Khalifa International Stadium is renovated ahead of the 2022 FIFA World Cup


Mixing things up
Qatar’s decision to ramp up domestic agriculture and other parts of the economy may have been precipitated by the blockade, but it is something that probably would have occurred sooner or later anyway. Like many of its fellow Gulf countries, Qatar has been working hard to diversify its economy for some time, being well aware that revenues from hydrocarbon production may not be reliable in the long term.

“Infrastructure spending continues apace in Qatar,” Bremner said. “Its position in the [World Bank’s] Human Capital Index is higher (60 out of 157) than the average for its region and continues to improve, while changes in its business environment earned it a spot in the top 20 global business environment improvers, according to the World Bank Group’s Doing Business 2020 report. Qatar ranks 77th on this year’s ease of doing business rankings, [up] from 83rd in 2019. Continued improvements in the ease of doing business in Qatar will drive entrepreneurship, which, in turn, will drive the transition towards a more diverse economy.”

Further, it is important to appreciate the significant return on investment generated by the Qatar Investment Authority (QIA), which also facilitates economic diversification. Last year, the QIA indicated that it would begin looking at investment opportunities in the technology, healthcare and industrial sectors. Such an approach will help transition the economy further away from oil and gas.

It is also worth considering that the potential damage caused by a fall in LNG prices will always remain a function of both a country’s breakeven price and its balance sheet. On both fronts, Qatar stands on relatively solid ground: according to Forbes, the country has a breakeven price of $55, which is relatively low, its balance sheet is strong and its government and banks are set to cushion the impact of LNG price falls. Even the most diversified economies are starting to endure large-scale economic damage, regardless of the source of their core income.

So, while Qatar is openly committed to diversifying its economy, the necessity is perhaps not as great as it is in other states where fossil fuels make up a significant proportion of the national income. There are only around 330,000 Qatari nationals, with the majority of the population made up of expatriates. The national government can easily afford to employ the vast majority of them within the public sector, using gas revenues to prop up the economy if it wants to.


Crisis management
Despite the long-term economic planning undertaken by Emir Al Thani, recent events have come as a shock to Qatar, as they have to all markets. The COVID-19 pandemic has rocked the global economy; markets that were tentatively hopeful of budgetary expansion have been pushed suddenly into recession. Qatar will still post a surplus this year – according to the IMF, anyway – but this does not mean that the country will emerge on the other side of the pandemic completely unscathed.

“How Qatar manages the threat posed by the coronavirus goes back to the country’s economic starting position before the pandemic,” Bremner explained to World Finance. “All affected countries are in the same storm, but not necessarily in the same boat. With its relatively strong economic position going into the pandemic, Qatar should emerge better than many countries.”

Emir Sheikh Tamim bin Hamad Al Thani
Emir Sheikh Tamim bin Hamad Al Thani

With economies buffeted by the coronavirus crisis, the oil market (which has a significant bearing on gas prices) has suffered greatly. A fall in demand, combined with a price spat between Russia and Saudi Arabia, saw oil’s value plummet in March. The global LNG industry is likewise expected to suffer its first seasonal contraction in demand since 2012, according to energy consultancy Wood Mackenzie. When, and if, this demand will pick up is difficult to determine at this point.

“It might be sagacious to consider the shape of economic recovery from COVID-19 especially from the point of view that countries… will gradually restore demand for LNG – ‘gradually’ being the operative word,” Bremner added. “Thus the shape of each recovery will be different and Qatar’s ability to manage different and multiple new demand patterns, especially those in its most prominent customers (South Korea, India, Japan and China), will determine the degree of threat to Qatar’s economy. There is little doubt about Qatar’s ability to manage the demand for LNG exports as pandemic-stricken economies emerge from lockdown.”

The effectiveness of monetary, fiscal and pandemic-related economic interventions in LNG-importing countries will be crucial, but this is outside Qatar’s control. Insofar as Qatar can insulate itself from the threat posed by COVID-19, the country has done so, including building new quarantine facilities and developing the infrastructure for remote learning and working. This means that Qatar faces the crisis from a position of relative economic strength.

In a recent pre-pandemic survey of Qatar, the IMF concluded that the country is “well placed to contain adverse macrofinancial implications of downside risks, reflecting substantial buffers and prudent policies”. As the COVID-19 pandemic continues to retard economies to varying degrees, there is no economic reason to assume that the country will struggle more than any other.

That isn’t to say Qatar doesn’t face unique challenges. The country has a difficult decision to make over whether to reduce its output of LNG while prices remain diminished or to engage in a battle for market share – one that may prove lucrative in the post-pandemic world. Australia would certainly be keen to take Qatar’s place as the world’s top LNG exporter, a title that the Gulf state would be loath to relinquish. There are also non-economic matters to attend to. In May, there were disputed reports of a coup taking place against the emir, and it remains to be seen whether it is possible for the embargo – in place for the best part of three years now – to be resolved.

Concerns surrounding COVID-19 and political disputes will also need to be resolved against the backdrop of the FIFA World Cup, which is currently set to come to Qatar in 2022. After reports of slave labour being used in the construction of some stadia and worries over fan behaviour in a conservative Islamic country, the eyes of the world will be watching – and judging – how Qatar deals with such a prestigious event.

Before the kingdom starts putting the final preparations in place for the tournament, however, it first needs to ensure its economy can withstand the turbulence that 2020 is set to throw at it. Reduced demand for natural gas will affect the country’s finances, even if the kingdom’s efforts to diversify the economy continue to go well. If the IMF’s positive prediction regarding Qatar’s economy is to come true this year, complacency is simply not an option.


National Vision 2030
In 2008, Qatar launched National Vision 2030 (QNV 2030), an ambitious development plan to transform the country into an advanced society by focusing on four central pillars:


Human development
Acutely aware that Qatar’s natural resources are finite, the national government wants the country to play a greater role in the knowledge-based economy of the future. To do so, it will need to significantly develop its talent base.

Improvements to education and healthcare are among the key ambitions of QNV 2030. Regarding the former, Qatar has earmarked QAR 22.1bn ($6.07bn) for the education sector this year, representing 10.5 percent of total government expenditure. School expansion and skill enrichment, particularly among Qataris, is viewed as essential.

A significant international role in intellectual activity and scientific research is also desired.


Social development
Among several important goals that form part of Qatar’s broader push for social development is the kingdom’s aims to reinforce strong family units and develop effective public institutions. To achieve this, organisations like the Doha International Family Institute (DIFI) have gained increased prominence.

Important research into areas such as adolescent wellbeing and the country’s work-life balance has been included in numerous reports published by the DIFI over the past few years. Empowering women is another core aim, and should build on the country’s previous successes: Qatar has the highest labour participation rate among women in the broader Arab region.


Economic development
One of the main factors that led to the launch of QNV 2030 was Qatar’s overreliance on its hydrocarbon resources for economic stability. As the world gradually moves towards greener resources, this vital revenue stream will diminish. As such, economic diversification is being prioritised, with the national government looking to encourage private enterprise and entrepreneurialism.

Founded in 2014, the Qatar Business Incubation Centre is supporting this aim by providing the largest mixed-use incubator facility in the MENA region. Infrastructure projects, such as the construction of the Doha Metro, and tourism gains – international arrivals have increased significantly over the past few years – point the way to the country’s new economic future.


Environmental development
Qatar, like many developing countries, is faced with a dilemma: by pursuing development, it risks damaging the natural environment. A delicate balancing act will therefore be required. This will involve the creation of a comprehensive urban development plan that takes sustainability into account to lessen any negative environmental effects.

To achieve this, Qatar has decided to align its Second National Development Strategy, which began in 2018 and will run until 2022, with the goals of the UN’s Sustainable Development Agenda. The kingdom has committed to preserving biodiversity, reducing waste and supporting international efforts to mitigate climate change.

A strong leader in unsure times

The Nigerian economy – the biggest in Africa – has experienced its fair share of ups and downs. Although the country has made efforts to move away from its oil dependency, the sector nevertheless remains an important part of its economy and continues to represent more than 90 percent of foreign exchange earnings. As a result, price volatility in the oil market is typically associated with pressure on exchange rates and foreign exchange illiquidity.

Given that oil prices have remained low since a clash between Russia and Saudi Arabia erupted in March, Nigeria may be facing some tough months ahead. That, combined with the economic turmoil caused by the COVID-19 pandemic, will certainly create economic challenges. If the country is to enjoy a bright future, it will need a strong banking sector to lead the way. Under the tutelage of Managing Director Banjo Adegbohungbe, industry leader Coronation Merchant Bank (CMB) is ready to guide the country through its recovery.

Adegbohungbe’s career has spanned many aspects of banking. He has remained in the industry for 27 years, working in various roles, including operations, IT, product management and relationship management. His extensive experience will certainly prove useful as 2020 continues to create unique challenges for businesses. Adegbohungbe spoke to World Finance about his career so far and his ambitions for the future of CMB.


Could you talk about your background and career so far?
I am fortunate that several of my roles have given me the opportunity to create value and do things that hadn’t been done before. This continued over the years until I joined CMB as executive director and chief operating officer. The bank was in the first phase of its strategic trajectory at the time, meaning there were many opportunities for me to add value, especially in the areas of revenue enhancement, cost reduction, process efficiency and cultural improvement. I took advantage of these challenges and was later given additional responsibilities as deputy managing director. I have been fortunate to be recognised as having created value in these roles.


What is it about the banking industry that inspires you?
To be frank, I didn’t choose banking – banking chose me. I studied engineering at university, but by the time I left college there were limited opportunities in Nigeria and the most lucrative jobs were either in banking or the oil and gas sector. These were the dream jobs for young graduates and so, in some ways, the script was already written for me. I joined an international bank in my final year at university, and the rest is history. If you ask me what has motivated me to continue in banking over the years, I think it all comes down to being able to create value in whatever I do.

CMB has always operated at a much higher level than our peers, and I don’t expect that to change under my watch

I have been fortunate with my superiors and the organisations that I have worked for because they have given me the chance to create things that hadn’t been done before in those institutions. These opportunities have accelerated my career progression over the years, and I have been disciplined enough to continue on that trajectory, which has led me to where I am now.


What does it mean to you to have been appointed as managing director of CMB?
It is an honour to lead the bank at this point in its history. In this new role, I see a similar pattern to previous ones; I have been given another opportunity to create value and to do things that hadn’t been done before, both within the bank and the industry more widely. I am blessed with a very strong team. Together, we will take advantage of these opportunities.


What plans do you intend to introduce at CMB in the future?
If you look at the bank’s history, you will see that we have had an aggressive growth trajectory that has allowed us to become leaders of the merchant banking space in Nigeria. This was my predecessor’s main achievement, but this is not really where CMB’s ambitions lie. Our aim is to become a leading bank in Nigeria in our chosen areas of business focus, which are trade finance, treasury and investment banking. I will lead the bank on this trajectory.

Some may say our goals are audacious, but I ask them to look again at CMB’s history. We have always operated at a much higher level than our peers, and I don’t expect that to change under my watch. I’m looking forward to reaching new heights in this second phase of our evolution.


How has the COVID-19 pandemic impacted the bank, and how has CMB adapted to these challenges?
All industries and businesses across the world have been hit by the pandemic, and CMB is no different. We are part of the global environment and, like other corporate organisations, we have experienced the impact of lockdowns, supply chain disruption, slower economic activity and so on. As a bank, we have also witnessed the impact of COVID-19 indirectly, through our clients.

The manner in which we engage with our clients and employees has been impacted directly. I can confidently say that we have adapted swiftly to make the required changes by leveraging our information technology and strong risk management framework. We have continued to meet the needs of our clients and other stakeholders without disruptions. In addition, COVID-19 has allowed us to review our workforce model and become more efficient and competitive.


Are there any particular sectors of the Nigerian economy where you see exciting growth opportunities?
The telecommunications sector is growing significantly, and this will only be enhanced by the increased demand for virtual meetings and remote working. Agriculture is another sector that has grown consistently over the last several years. To a smaller extent, healthcare also offers a number of new opportunities.


How important is sustainability to CMB?
Sustainability is very important to us. We all have to do our bit in contributing to improving the environment. This is evident in our policies and activities, which include lending, recycling and energy consumption, among others.


What digital products and services has the bank launched recently?
Our digital strategy is focused on serving our customers seamlessly and, at the same time, functioning in a much more efficient, technology-led manner internally. The COVID-19 crisis has forced us to test our operating strategy, and we have proved that we are able to adapt to the new normal without causing any disruption to our business processes. Today, over 80 percent of our employees are working remotely, and customers are able to transact with us electronically at their convenience. We will continue to invest in expanding our digital footprint, enhancing our growth in the process.

An off-the-wall solution to climate change

Climate change is a huge problem, and it will require an equally large solution – multiple solutions, in fact. In Africa, one such idea involves planting a wall of trees, 8,000km long and 15km wide, which, once complete, will be the largest living structure on the planet – three times the size of the Great Barrier Reef. Africa’s Great Green Wall (GGW) was launched in 2007 by the African Union, with the first trees planted in Senegal the following year. The wall will stretch across the entire width of the continent, traversing more than 20 countries at a cost of $8bn.

The financial outlay of the GGW is likely to be worth the effort. For the last 100 years, the Sahara Desert has been expanding by more than 7,600sq km every year, making it around 10 percent larger today than it was in 1920. Climate change and the increased risk of drought that it brings seems to be exacerbating the situation. It is hoped that the GGW can arrest the Sahara’s advance, but it should do more than simply act as a barrier to desertification. By 2030, it should sequester 250 million tonnes of carbon from the atmosphere, restore 100 million hectares of degraded land and create 10 million jobs in rural Africa.

Achieving these ambitious goals will require a huge international undertaking. Communities will need to cooperate to plant the necessary vegetation, which must be protected against animals, bush fires and human deforestation. Technological input will be necessary to ensure that such a large area of land is able to support tree growth without having any irrigation in place. Lastly, a huge amount of financial support will be required from governments and supranational organisations alike.


A grain of hope

More than a decade since the first sapling went in the ground, the GGW is about 15 percent complete. Since 2007, the project has shifted somewhat in terms of its methodology, encompassing regreening techniques that were already being employed on a small scale by indigenous farmers, rather than the overly simplistic idea of planting a huge line of trees on the edge of the Sahara. Even with much work still to be done, the GGW has achieved some impressive results.

Key examples of progress include the restoration of 15 million hectares of land in Ethiopia, along with improvements to land tenure security. In Senegal, 11.4 million trees have been planted and 25,000 hectares of land restored, while in Niger the restoration of land has led to the production of 500,000 tonnes of grain every year, enough to feed 2.5 million people. Other African states have experienced similar benefits.

“The GGW of the Sahara is also on the front line in the battle against climate change,” Tim Christophersen, an ecosystems expert for the UN Environment Programme (UNEP), told World Finance. “It is contributing to the fight by boosting local community access to renewable energy for basic household needs, as well as communal and production needs, and aiding citizen mobilisation through a GGW public awareness campaign that promotes a rousing call to ‘grow a new world wonder’.”

As well as its local impacts, this flagship initiative promises global benefits. By serving as a carbon sink, the GGW will help with the international fight against rising temperatures. Meanwhile, by bringing stability to the Sahara region, it may help prevent socio-political upheaval from overflowing into neighbouring regions. This is part of the reason why the project has received support from a host of international donors. In addition to pan-African organisations, the World Bank, EU and UN are all partners. Governments from Ireland and Turkey, among others, have also pledged financial support.

“The UN Food and Agriculture Organisation [FAO] supports the initiative through its Action Against Desertification (AAD) programme,” said Moctar Sacande, International Project Coordinator at the FAO. “The AAD is working on the ground on large-scale agro-sylvo-pastoral land restoration with farmers and village communities, planting trees and useful species to increase vegetation cover and reverse land degradation. Of course, there are many, many other strategies often used locally, but this is very efficient in reversing the negative trends and improving landscape productivity.”

But with much of the wall still to be built, more support will be required. Desertification is a serious issue – one that does not only affect the Sahara and its surroundings. The successes of the GGW are to be welcomed, but they must be built upon.


Money grows on trees
Although much of the GGW’s focus is on the natural world, the project has economic aims too. Thus far, many of the jobs created for rural communities have been temporary or seasonal roles associated with restoration actions, such as village technicians, seed collectors or nursery workers. However, the direct economic benefits of land restoration have started trickling down to the wider community.

“An example to illustrate the impact that the GGW has had on employment in the region concerns the herbaceous fodder species planted in Burkina Faso and Niger, which produced an average of 1,200kg of biomass per hectare just one year after planting,” Sacande told World Finance. “This generated an income of $40 per hectare, equivalent to half the monthly minimum wage in the country. Hence, the 15,000 hectares under restoration thus far in Burkina Faso could potentially yield up to $600,000 per year to local farmers.”

Far more than just a line of trees, the GGW supports horticultural skills and income for local people. In Senegal, gardens that form part of the wall can provide work for hundreds of labourers who sell their proceeds to grant themselves some financial security. In this way, donations to the GGW are not handouts: they point the way towards self-sufficiency.

“What’s more, it is estimated that land restoration with indigenous trees will sequester 7.15 tonnes of CO2 equivalent per hectare per year in the Sahel,” Sacande said. “This will soon provide some carbon bonds for those communities.” Carbon or green bonds are rapidly growing in popularity (see Fig 1), so much so that last year, Moody’s had to revise its prediction for the market up from $200bn to $250bn. Such a trend bodes well for the GGW and those who have begun to rely on it for their livelihood.


A united front
As well as being a huge financial undertaking, the GGW is a substantial logistical one. More than 20 countries are involved in the project, and they must all coordinate their actions if the wall is to fulfil its ambitious targets. Countries in the Sahel are used to working in isolation to tackle the problem of land degradation, desertification and food insecurity. This is partly why heads of states within the African Union decided to create the GGW initiative: to deliver a pan-African solution to a pan-African problem. The roots of international collaboration may not run as deep across the continent as they do elsewhere (although recent efforts to create the African Continental Free Trade Area show this is improving), but they will prove essential in tackling the Sahara’s advance.

“The GGW is bringing African countries together, creating unity through a harmonised strategy and a common vision, [and] making sure there is cooperation among activities whether they are in Senegal, Niger or Burkina Faso,” Christophersen said. “Representatives from governments (national, sub-national, local), civil society and donor agencies are part of the GGW’s steering committee, which meets on an annual basis to discuss progress in implementation and evaluates the achievements on the ground.”

Scientists are not united on the exact cause of increasing desertification in the Sahel and remain divided on the best ways of putting a stop to it

The GGW is, therefore, not just an environmental and economic asset, but also a political one. Already, it has garnered the support of a host of pan-African organisations, including the Southern African Development Community. The initiative’s ability to foster unity across the Sahel should not be underestimated.

“Concrete examples of transboundary solidarity exist across the Sahel, with communities exchanging seed species, local knowledge and [carrying out] exchange field visits to learn from each other,” Sacande said. “National forest seed institutions complement each other when seed shortages occur – between Burkina Faso, Mali and Niger, Mali and Senegal, or Niger and Nigeria.”


Desertification cares not for national borders. As such, the GGW employs an integrated landscape approach that works with residents to help them thwart soil degradation. It’s an approach that should deliver local and global benefits in the years to come.



The sands of time
But despite its impact, the GGW has not been an unmitigated success. Scientists are not united on the exact cause of increasing desertification in the Sahel, and so remain divided on the best ways of putting a stop to it. Some have argued that tree planting is inefficient, with a previous effort in Nigeria resulting in 80 percent of saplings dying within two months of being planted.

Sacande says that such challenges are understandable given the scale and complexity of the initiative. “To improve the success rate, the FAO’s AAD took five years to come up with a science-based approach that combined plant knowledge and social involvement,” he said. “This has allowed for the planting of more resilient species, involving mechanised land preparation to capture maximum rainfall – which expands soil moisture to levels necessary for seedling survival and growth for at least two months after rains stop. This road-tested approach can now be scaled up.”

Despite the setbacks, those involved with the GGW remain optimistic that it can achieve its aims by 2030. As the famines and other humanitarian crises exacerbated by land degradation continue to blight the Sahel, the impetus behind the GGW will grow. Hopefully, in the years to come, the GGW will continue to deliver improvements in terms of land restoration, sustainable agricultural practices, the provision of clean energy, and the development of small and medium-sized rural enterprises.

“The UN Decade on Ecosystem Restoration 2021-30, implemented by UNEP and the FAO, is set to consider the [GGW] as a global priority area for restoration,” Christophersen explained. “UNEP is aiming to strengthen and focus its role in supporting the Sahel region and specifically the [GGW] of the Sahara and the Sahel, in collaboration with governments, other UN agencies and donors such as the Global Environment Facility and the Green Climate Fund.”

There is also a need to channel more private investment into the restoration of landscapes in the Sahel, as public funding alone will be insufficient. The UN Decade will support the GGW in attracting further private investment into the region, and the campaign to build a new world wonder will help spread the GGW’s vital message. It should find a receptive audience.

In China, too, there are efforts to build a green wall to prevent the advance of the Gobi Desert. According to the UN, land degradation costs the global economy $15trn every year. There will be further challenges to address, but Africa’s GGW simply has to succeed – the world cannot afford for it to fail.

Top 5 countries with the most open economies

“What protection teaches us, is to do to ourselves in time of peace what enemies seek to do to us in time of war.” In his 1886 book Protection or Free Trade, Henry George discussed the ills of tariffs. Protectionism, he argued, harms domestic markets, keeping prices high and wages low. He would have been alarmed, then, by current global trends.

For most of the past 20 years, there has been an international movement towards trade liberalisation. But more recently, anti-globalisation sentiment has been spreading among nations. Bilateral tariffs on trade between the US and China have risen and other countries are adopting increasingly protectionist rhetoric. The pandemic has only added momentum to the deglobalisation trend, with the World Trade Organisation predicting that world trade will decline between 13 percent and 32 percent in 2020.

This could be bad news for economic prosperity. Although free trade has not created economic success for all – and, indeed, some economists argue that free trade directly exploits developing countries – many studies have shown a direct correlation between trade openness and the reduction of poverty within a country. Open trade can widely increase the availability of goods for low-income households and spur job creation.

Even if the cross-border exchange of goods and services is declining, economies’ ability to trade – both domestically and internationally – has improved. Despite fears of de-globalisation, economic openness is at its highest-ever level, having improved by 8 percent over the last 10 years, according to the Legatum Institute. A number of nations have consistently shown themselves to be top of the list in this regard.


Singapore is considered one of the easiest countries in the world in which to do business and its economy is frequently ranked as one of the most open in the world. Its commitment to free market policies has helped the country pull in large amounts of foreign investment, rapidly accelerating economic growth. When Singapore became independent in 1965, it was a poor, isolated country with no industrial tradition. Just seven years later, after it lowered taxes and reduced corruption, one quarter of manufacturing firms in the country were either foreign-owned or joint-venture companies. In March of this year, Singapore was one of seven countries that issued a joint statement saying they would remain committed to maintaining open supply chains during the pandemic.


Hong Kong
The “one country, two systems” framework under which Hong Kong is governed allows the city certain freedoms not enjoyed in mainland China. The territory facilitates a pro-business environment, has an independent judiciary described as “world class” in a Bank of East Asia economic analysis, and is the world’s top market for initial public offerings. Its free market policies have made Hong Kong a global business and financial powerhouse.

However, China’s erosion of freedoms in Hong Kong could compromise that status. In May, US President Donald Trump said he would consider taking steps to revoke the city’s favoured trade status in the US, after China announced it would impose a national security law in the region.


The Netherlands owes much of its economic prosperity to international trade. Its favourable geographic position and well-connected seaports such as Rotterdam and Amsterdam have helped it become the logistical hub of Europe.

Because of this, the country has held a strong international orientation for much of its history. For example, when the Cold War ended, the Netherlands sought to establish economic ties with the emerging markets in Eastern Europe that were now opening up to free-market capitalism. Today, many firms in the country are multinational and there are no regulatory restrictions on foreign direct investment. According to Nordea Trade, it is one of the largest recipients of foreign direct investment in the world.


New Zealand
Roughly 30 years ago, New Zealand’s economy was one of the most regulated in the OECD. Now, it’s one of the least regulated and most market-orientated. In 2018, the World Bank ranked New Zealand first in the world in terms of doing business and for transparency.

This transformation came as a result of trade liberalisation during the 1980s, which saw export subsidies and import barriers lifted and controls on interest rates, wages and prices removed. Given how small New Zealand’s internal market is – the country has a population of just 4.8 million – international trade is crucial for its economic success. Today, exports account for around 30 percent of New Zealand’s GDP, according to the World Bank.


As anti-globalisation sentiment has spread around the world, Finland has remained committed to maintaining an open economy. At 20 percent, Finland’s corporate tax rate is among the lowest in the EU, and the country regularly tops international surveys for economic competitiveness and transparency.

Globalisation has helped Finland grow from a very poor country in the early 1900s, to a rich nation often recognised for its high quality of life. International trade accounts for about one third of its GDP. Although 60 percent of that trade is conducted with the EU, it also has strong economies ties to the US, with two-way trade in goods and services between the nations amounting to over $12bn in 2018.

Hacking away at the system

To the outside world, Kim Hyon Woo was a developer working for Chosun Expo Joint Venture, a China-based company that supplies freelancing software development and gambling-related products. But in reality, Kim didn’t exist. The person who controlled his email accounts – a man named Park Jin Hyok – was born and educated in North Korea.

Chosun Expo was also not what it seemed. As a matter of fact, it was a front company for Lab 110, a top-secret arm of the Democratic People’s Republic of Korea’s (DPRK’s) military intelligence agency. When Chosun Expo wasn’t carrying out normal business operations, it was facilitating some of the world’s highest-profile cyberattacks, including the Sony Pictures hack of 2014 and the WannaCry ransomware attack of 2017, the latter of which affected more than 200,000 systems across 150 countries and crippled hospitals in the UK, ultimately costing the National Health Service £92m ($117.3m).

It’s estimated that the value of attempted cyber heists conducted by Park and his co-conspirators between 2015 and 2018 amounted to $1bn. Eventually, connections to Kim’s email addresses revealed Park to the FBI. “The scope and damage of the computer intrusions perpetrated and caused by the subjects of this investigation, including Park, is virtually unparalleled,” Nathan P Shields, a special agent with the FBI, concluded at Park’s trial.

The WannaCry hack was one of the costliest cyberattacks in history, but represented just one of the numerous incidents that alerted the international community to the growing sophistication of North Korea’s hackers. Now, recent reports indicate that cyberattacks have become more than a form of warfare for North Korea: they are also a key source of income for Kim Jong-un’s brutal regime.


A money-spinner
According to a report presented to the UN Security Council Sanctions Committee on North Korea, the authoritarian state generated approximately $2bn from cyberattacks between 2016 and 2019 – a significant amount, considering the country’s GDP was worth an estimated $18bn in 2019 (see Fig 1). These funds were subsequently funnelled into the DPRK’s military.
“The US Government has released reports affirming that the funds are being spent on weapons of mass destruction and ballistic missiles programmes,” Kathryn Waldron, a fellow at the R Street Institute who focuses on cybersecurity, told World Finance. “Experts have also speculated that some of the funds may go to supporting the Kim family’s opulent lifestyle, as well as other government programmes.”

North Korea has a long history of bringing capital into the country via illicit means. Since the 1970s, the country has engaged in the manufacturing, selling and trafficking of drugs such as methamphetamine – not to mention the production of counterfeit currency. According to the Congressional Research Service, a dollar-counterfeiting operation made North Korea about $15m per year at its peak.

Many academics hold that these operations have long been a core revenue stream for the state, with Robert Collins, Bruce Bechtol and Paul Rexton Kan calling the regime’s practices a form of “criminal sovereignty” in their book of the same name. Cybercrime is the latest of these moneymaking endeavours, and the UN’s report suggests it could become the most financially lucrative so far.

But this was not always the case: not long ago, analysts scoffed at North Korea’s cyber capabilities. Its distributed denial-of-service (DDoS) attacks in 2009 only temporarily shut down South Korean websites and ultimately did little damage. Attacks like this were ideologically motivated and primarily intended as acts of cyber warfare. It’s only in recent years that the nation has begun harnessing its cyber capabilities with the specific intention of generating funds.

“Right now, most of their attention seems to be on using the full range of what is possible in cyberspace to generate as much foreign currency as possible,” Jenny Jun, a PhD student in the Department of Political Science at Columbia University, told World Finance. In September 2018, cybersecurity research firm FireEye uncovered the existence of a specific unit in North Korea’s cybercrime group – Lazarus Group – that seemed to be dedicated specifically to financial crime. This same group was behind the Bangladesh Bank cyber heist of 2016, which saw at least $81m stolen by North Korean actors. In the same attack, North Korea came within a hair’s breadth of stealing $1bn from the US Federal Reserve – the only reason it didn’t succeed was that the bank spotted a spelling mistake in one of the transactions.

Today, there are myriad ways that North Korea uses its cyber operations to generate revenue beyond attacks on financial institutions. “[North Korean] cyber activity includes everything from stealing from cryptocurrency exchanges, fraudulent SWIFT transactions [and] ransomware [to] blackmail with exfiltrated data, ‘cryptojacking’ and hackers for hire,” Jun explained. As North Korea’s cyber heists have become more sophisticated and costly, the international community has raised its threat level and response, especially the US (see Fig 2). In April, the US Government announced it was offering $5m for information on hackers – an unusual step for the nation and a sign that the cyberthreat posed by North Korea is now widely recognised on the international stage.

“North Korean hackers pose a serious threat to the global financial system,” Waldron said. “We’ve seen North Korean hackers engaged in a wide variety of malicious cyber activity within the global financial system, including holding data for ransom, stealing cryptocurrency and even using malware to make fraudulent ATM withdrawals.”


Dodging sanctions
North Korea’s cyber prowess may seem improbable for one of the poorest and most cut-off countries in the world, where only the elite have access to the internet, but analysts believe it has finessed a formula for recruiting young cyber prodigies. “It is believed that students showing potential are selected at a young age, around middle school, to enter into a special training programme,” Jun explained.

Cyberattacks have become more than a form of warfare for North Korea: they are also a key source of income

The state then funnels them into one of two universities: either Pyongyang’s Kim Il-sung University or Kim Chaek University of Technology. After this, they are sent abroad to Russia or China to strengthen their knowledge of hacking. Broadband is generally cheaper and faster in these countries, which helps North Korea overcome the problem of limited internet access.
North Korea’s hacking elite are well compensated for their training. In addition to receiving food subsidies and a generous stipend for overseas deployments, hackers and their families get the privilege of living in the capital, Pyongyang. Although cybercrime may seem an unlikely mode of operating for the isolated nation, in other respects, it presents itself as the ideal income generator: for one, it’s low-cost. Further, with North Korea far from being fully integrated into the global internet infrastructure, the country is surprisingly invulnerable to retaliation. Cybercrime also softens the economic blow of North Korea’s exclusion from the global financial system: without sufficient income from trade, illicit cyber activities become a vital stream of wealth for the state and enable North Korea to evade international sanctions.

The state has faced multilateral sanctions from the UN ever since 2006, when North Korea carried out its first nuclear test. Initially, these sanctions focused mainly on weapons-related goods, but gradually they were expanded to include luxury goods to target the elite. For the first decade, sanctions were thought to have little impact on North Korea. But since 2016, US President Donald Trump has championed a “maximum pressure” campaign that places caps on energy imports, bans exports of minerals and textiles, and prohibits the granting of new permits for overseas North Korean workers. Although it’s difficult to measure the exact impact of these sanctions, given how limited North Korea’s economic data is, the Bank of Korea in Seoul estimates that the state’s annual GDP fell by 3.5 percent in 2017 as a result.

North Korea has always sought to dodge sanctions using its smuggling networks. In 2017, the DPRK earned about $200m from banned exports of coal and arms, according to a secret report by independent UN observers. The UN also claimed that it was thanks to a covert shipping network that North Korea avoided gasoline and diesel fuel shortages in 2019. More recently, North Korea has used cryptocurrency to fund these illicit trade networks.



By any means necessary
The use of virtual tokens like bitcoin makes the movement of money and goods across borders much harder to detect. “Cryptocurrencies enable North Korea to carry out illicit [activities], primarily because [these coins], by nature, are used outside of the formal financial system,” Kayla Izenman, a research analyst at the Royal United Services Institute’s Centre for Financial Crime and Security Studies, told World Finance. “This means that North Korea avoids interacting with financial institutions, [which] are quite advanced in tracking illicit activities, and instead either bypasses centralised intermediaries (such as cryptocurrency exchanges) entirely or uses ones with low or no compliance processes in place.”

In March 2019, a UN panel estimated that North Korea had amassed $670m in virtual and fiat currency – largely by stealing it. Although North Korea denies such activities, it is widely thought to have successfully targeted Asian cryptocurrency exchanges at least five times from January 2017 to September 2018, with losses from these exchanges estimated at $571m.

Izenman believes North Korea’s success in hacking these exchanges indicates a need for more robust security measures: “Despite progress in international cryptocurrency industry regulation and even proactive compliance measures adopted by some exchanges in advance of required regulation in their jurisdictions, some exchanges still do not require much, if any, information on their customers. North Korea has been known to use these exchanges and sometimes even use fake IDs to bypass lax customer due diligence procedures.”

The state’s success in attacking these institutions and exchanges is also a testament to its growing sophistication as a hacking power. “In little over a decade, North Korea has significantly increased its cyber operations capacity [and] diversified its targets, [while] its tools, techniques and procedures have become more sophisticated,” Jun said. “Back in 2009, when North Korea was just beginning to operate in this space, they were doing relatively simple DDoS attacks against foreign websites… By 2014, North Korean advanced persistent threat groups had demonstrated that they have the organisational and technical capacity to compromise and gain admin privileges on a network such as Sony, maintain a persistent presence, demonstrate some creative ways to conduct socially engineered phishing and, finally, understand how to use cyber capabilities to have the most damaging effect on a target.”

However, Jun pointed out that North Korean cyberattacks are still far from flawlessly executed: “Details behind the WannaCry ransomware [attack] also show that they are sometimes sloppy too if the real goal has been indeed to generate revenue and not for disruptive reasons.” For example, the malware used only four hardcoded bitcoin addresses, making it easier for the security community and law enforcement to track any attempt to anonymously cash out WannaCry profits. What’s more, despite the huge amount of damage it inflicted on transport and healthcare systems, the ransomware only made the hackers around $55,000.

But weaknesses in North Korea’s hacking strategy are not necessarily cause for celebration: for every cyberattack that isn’t perfectly executed, one can assume the next will be an improvement.



A global threat
As North Korean cyber capabilities have grown in sophistication, countries have become more aware of the havoc they could potentially wreak. In an advisory released in April 2020, US officials said that North Korea’s cyber activity poses “a significant threat to the integrity and stability of the international financial system”.

For every cyberattack that isn’t perfectly executed by North Korea, one can assume the next will be an improvement

“I think there’s been a distinct shift in [the] global understanding of North Korea’s cyber power, probably following the Sony hack in 2014 and really increasing in awareness after WannaCry in 2017,” Izenman said. “I’ve found states are generally aware of North Korea’s hacking prowess, but perhaps less aware of the way in which this directly connects to their proliferation financing model. And if they do understand the connection between cyber and financing the regime, they often focus on bank or ATM hacks and don’t realise how much North Korea is gaining in cryptocurrency.”

Some analysts have argued that North Korea’s exclusion from the financial system motivates it to create economic chaos for the rest of the world, but Jun disagrees with this view: “Although I think North Korea has considerable intent and capacity to target financial institutions for monetary gain, I don’t think it is necessarily in their interest to paralyse the global financial system for destructive purposes. They don’t want to kill the chicken that continues to lay eggs.”

Although it may not be North Korea’s intention to deliberately undermine the financial system, this could be an indirect consequence of its more devastating attacks. If the state succeeded in attacking a major financial institution, for example, it could undermine its ability to lend, potentially triggering a financial crisis.

“Events like the Bangladesh Bank heist show that fraudulent SWIFT transactions can be made – which other criminal groups such as Carbanak have also been doing – and more news about such vulnerabilities that can be exploited can lower consumer confidence,” Jun explained. “There is also a broader policy question concerning regulation and oversight over international cryptocurrency transactions.”

North Korea’s exclusion from the financial system motivates it to create economic chaos for the rest of the world

Waldron, meanwhile, warns that the threat from North Korean hackers may be greater now than ever before: “With the global economy reeling from the economic impact of COVID-19, governments, businesses and financial institutions are uniquely vulnerable to the financial costs of a successful cyberattack. And COVID-19 has presented hackers with new cybersecurity vulnerabilities to exploit.

“In many countries, a greater number of government and business employees are working from home. This presents North Korean hackers with particularly vulnerable targets, as many of these employees may not be well versed in cybersecurity. North Korean hackers have also used COVID-19-related material as a trap for unsuspecting victims, such as when they emailed South Korean government officials documents detailing COVID-19 response plans laced with malware.”

Although the international community is now largely in agreement that North Korean cyber activity poses a serious threat, it remains unclear what it should do about it. Sanctions would have little effect – so far, North Korea’s economic isolation has only exacerbated its need for illicit income. “If North Korea secures a steady stream of foreign cash that can be funnelled back into its nuclear and missile programme… the sanctions regime [is neither] effectively going to slow this process nor act as a punishment mechanism to persuade North Korea to denuclearise,” Jun said. “This may alter bargaining dynamics at the negotiation table.”

Negotiation is particularly difficult when the perpetrator refuses to own up to their crimes. When the US issued its warning on the North Korean cyberthreat in April, North Korea feigned ignorance. “We want to make it clear that our country has nothing to do with the so-called ‘cyberthreat’ that the US is talking about,” North Korea’s Foreign Ministry said in a statement. Similarly, when Park was charged, North Korea not only denied his crimes but also called him a “non-existent entity”.

As long as its cyber programme remains financially lucrative, the North Korean state has no reason to admit to its actions. For now, the international community is left with little option but to simply stay vigilant and invest in defences against this growing threat.

A baptism of fire for the new managing director of the IMF

Kristalina Georgieva was only six months into her role as head of the IMF when the coronavirus pandemic struck. With economies around the world grinding to a halt, many countries found themselves in desperate need of financial aid from the lender of last resort. Since the start of the crisis, the IMF has expanded two emergency loan programmes, and more than 100 countries have applied for support.

Georgieva has warned that the world is headed for a recession even worse than that of the Great Depression, and believes the gravity of the situation demands a no-holds-barred economic response. “Do as much as you can,” she told member states on April 27. “Then do a little bit more.” As well as urging member states to spend whatever was needed to fight the virus, she has eased access to the lender’s emergency $1trn fund and promised that lending programmes were being approved at record speed.

Although the challenge ahead is daunting, her supporters believe she is the perfect person for the job. Georgieva has long been a voice for emerging economies, which, in the current crisis, will be hit especially hard by falling oil prices, capital outflows, the collapse in tourism and decline in demand for exports. “I am worried about countries that, even before this crisis, were in a weaker position,” she said in April. “The same way the virus hits more severely those [who] have preconditions [or] weaker immune systems, the [economic] crisis hits weaker countries much more severely.”


Champion of emerging economies
It is no surprise that Georgieva has such an affinity for the world’s poorer nations: born in Sofia, Bulgaria, she is the only IMF leader ever to herald from an emerging economy. Growing up behind the Iron Curtain, Georgieva quickly learned the pain of financial hardship.

Although she came from a prestigious family – her great-grandfather, Ivan Karshovski, played a key role in building the new Bulgarian state following independence from the Ottoman Empire – Georgieva’s youth was far from easy. When her father became seriously ill, she and her family found themselves struggling to make ends meet. The fear of becoming a burden drove her to pursue academic success and taught her the resilience that she’s been applauded for throughout her career. “The tougher life is, the more you smile,” she told the Financial Times in 2017. “Panic? Would it help? No – it drove me to mature much faster.”

Georgieva has always believed that she would be best placed to help Bulgaria by working in an international role, so when Bulgarian Prime Minister Boyko Borisov invited her to become the Commissioner for International Cooperation, Humanitarian Aid and Crisis Response at the European Parliament in 2010, it was an easy decision. “I agreed to become a commissioner because the situation wasn’t good for Bulgaria and there was a possibility of our reputation being hurt,” she said at the time.

Kristalina Georgieva and European Commission President Ursula von der Leyen
Kristalina Georgieva and European Commission President, Ursula von der Leyen

During her time in the role, Georgieva managed one of the world’s largest humanitarian aid budgets and established herself as an advocate for the growing number of crisis-affected people around the world. She then served as the European Commission Vice President for Budget and Human Resources, a role that saw her heavily involved in efforts to tackle the euro area debt crisis. Georgieva didn’t lose sight of her care for marginalised communities, though; in 2015, she tripled the funding available to the refugee crisis in Europe. She was also the driving force of improvements to the commission’s gender representation, helping it achieve its target of filling 40 percent of management roles with women by 2019. “If we don’t have targets, it will take 100 years for women to reach men in salary terms, in terms of their ability to contribute to society,” she told CNBC in 2018. “No community, no society can survive unless we tap into the talents of everybody.”

Georgieva was praised for keeping a cool head during heated debates – in particular, her steady handling of the EU’s incredibly divisive budget impressed her peers. She has demonstrated a capacity to stand her ground while managing politically fraught situations, leading her to become the undisputed candidate for the IMF leadership in 2019, having been the only nominee for the role.


Impressive experience
Georgieva’s international career didn’t start at the European Commission. Prior to that, she spent 17 years building a career at the World Bank. Having been recruited as an environmental economist in 1993, she steadily climbed the ranks of the elite international organisation, taking on a number of directorial positions. She returned to the World Bank in January 2017, when she was appointed CEO of the institution. The move from the European Commission back to the World Bank came just months after her unsuccessful bid to become the UN’s secretary-general.

Although Georgieva insisted that her move was not influenced by the internal politics of the commission, those around her claimed she had repeatedly butted heads with Chief of Staff Martin Selmayr. Politico reported at the time that Georgieva saw Selmayr as a “poisonous” influence who failed to consult others on important decisions.

Georgieva and World Bank President David Malpass
Georgieva and World Bank President, David Malpass

Not long after her appointment as CEO, Georgieva set her sights on the World Bank’s bureaucracy. She cut the frequency of regular meetings by half, significantly reduced the length of project documents and shortened the comment process. “What is happening in the world is that change is more profound and it comes faster,” she told Devex in 2017. “We need institutions to be agile and adaptable to change.” In her role, she was also tasked with helping the bank move away from traditional lending models and focus instead on enticing private investors, while also fostering a more results-driven culture.

During Georgieva’s tenure as CEO of the World Bank, her skills as a negotiator shone through. She successfully secured a $13bn capital increase with the Trump administration that put the World Bank’s financial capacity at a record high.

For a four-month period in 2019, she also served as interim president of the bank, during which time she oversaw the lender’s day-to-day operations. In this position, Georgieva once again proved herself to put the needs of poorer countries first. She defended the World Bank’s use of targeted programmes to reduce poverty against critics who argued that universal benefit programmes were more effective. “We are shifting towards the lower-income countries and also towards the countries that are on the frontline of this fight against extreme poverty,” she told the BBC in 2019. “We target those who need it the most.”


Critical conditions
Low and middle-income countries with poor access to financial markets are also those most at risk during the coronavirus crisis. So far, the loans approved by the IMF include $5bn for Ukraine, $491.5m for Uganda and $396m for Jordan. Georgieva has urged wealthier nations to do their part and contribute to the fund’s concessional lending facilities. In April, Japan – the largest contributor to these facilities – made a $100m contribution to the IMF’s Catastrophe Containment and Relief Trust. Georgieva has since called on other members to do the same. “By working together, we can overcome the global challenge facing us and help restore growth and prosperity,” she said.

Georgieva has demonstrated a capacity to stand her ground while managing politically fraught situations

Georgieva has also encouraged countries to place their emergency funds in green investments. She has suggested that governments consider taxing carbon to raise revenue for their recovery and incentivise the private sector to cut emissions. “We are about to deploy enormous, gigantic fiscal stimulus and we can do it in a way that we tackle both crises at the same time,” she said. “If our world is to come out of this crisis more resilient, we must do everything in our power to make it a green recovery.”

Despite her efforts, Georgieva has found herself having to defend her strategy to protect the world’s poorest economies in the aftermath of COVID-19. Some think the IMF’s attempts to help these countries don’t go far enough. In May, more than 300 lawmakers from around the world urged the IMF to cancel poor countries’ debt, rather than simply suspending it, to free funds up to fight the virus.

These lawmakers also encouraged the IMF to create trillions of dollars of new special drawing rights (SDR), the currency of the IMF. An SDR allocation can be compared to a central bank printing new money. So far, the proposal has been opposed by the US, which voiced concerns that the funds created through an SDR allocation would mainly benefit countries like China, and not the low-income countries they were intended for. This is because new reserves are allocated according to members’ shares in the IMF. Although the institution’s lending capacity has quadrupled since 2008, its power can still be easily limited by the US, its largest shareholder. Georgieva must win US support if she is to support the most vulnerable economies with an SDR allocation.

The coronavirus crisis puts the IMF in a uniquely difficult position. In a crisis, the IMF is an important safety net for all struggling economies – but the current crisis is unlike others. Ordinarily, when the IMF lends to a country, it insists the nation tightens its spending to ensure the loan isn’t wasted and the IMF can be repaid. But now, Georgieva is urging countries to spend whatever is necessary. While such measures are essential to limiting the virus’ impact, lending with no strings attached could erode the quality of the IMF’s loan portfolio. David Lubin, Head of Emerging Markets Economics at Citigroup, wrote in the Financial Times: “The IMF and its shareholders face a huge problem. It either lends more money on easy terms without the ‘collateral’ of conditionality, at the expense of undermining its own balance sheet; or it remains, in systemic terms, on the sidelines of this crisis.”

The sheer scale of the economic fallout of coronavirus will push the IMF’s ability to lend to the limit. While ensuring the lender can come to the aid of struggling nations, Georgieva also needs to keep one eye on the post-pandemic future. If all goes to plan, wealthier nations will come to the rescue of poorer ones, and emergency loans could help fuel a global green recovery. This is certainly a tall order – however, Georgieva’s track record shows she is more than capable of meeting that challenge head-on.



Curriculum Vitae

Born: 1953 | Education: The University of National and World Economy

Kristalina Georgieva began her 17-year-long first stint at the World Bank when she was recruited as an environmental economist. She climbed her way up to director of the environment department in 2000.

In 2008, Georgieva was appointed as vice president and corporate secretary of the World Bank. She played a critical role in the bank’s governance reforms in the wake of the 2008 international financial crisis.

Georgieva joined the European Commission, where she managed one of the world’s largest humanitarian aid budgets and led the creation of the EU’s Civil Protection Mechanism, strengthening cooperation between member states.

Incoming European Commission President Jean-Claude Juncker appointed Georgieva as vice president for budget and human resources, making her the most senior technocrat in the commission and placing her in charge of 33,000 staff.

The World Bank announced Georgieva as its first CEO. She played a key role in broad reforms, which involved securing a $13bn paid-in capital increase – the largest funding increase in the bank’s history.

In September 2019, having been the sole nominee for the role, Georgieva was named managing director of the IMF, succeeding Christine Lagarde. She is the first person from an emerging economy to take up the position.

The ascent of behavioural economics

The roots of behavioural economics go back to the 1950s, when economist and cognitive psychologist Herbert Simon began to look at ways to merge those two fields. Mainstream neoclassical theory had long been based on the idea that humans behave like highly rational automata, bent only on optimising their own utility. However, as Simon noted in 1977, although the “classical theory of omniscient rationality is strikingly simple and beautiful”, the reality was that people had neither the energy nor the resources to optimise their choices. Instead, people aimed to make reasonable decisions by limiting their choices to a small set of alternatives, and by “satisficing” – i.e. choosing an option that is good enough as opposed to optimal.

Simons’ ideas were out of step with trends at the time and, as he described, “there was a vigorous reaction that sought to defend classical theory from behaviouralism on methodological grounds” because it didn’t fit with the increased mathematisation of economics.

That problem was partly addressed by the psychologists Daniel Kahneman and Amos Tversky. Their 1974 paper Judgement Under Uncertainty: Heuristics and Biases provided examples of psychological experiments where classical utility theory broke down. Their 1979 follow-up, Prospect Theory: An Analysis of Decision Under Risk, went beyond this by providing a mathematical model of decision-making that accounted for biases such as loss aversion or uncertainty avoidance.

However, it was the financial crisis of 2008 that brought behavioural economics into the mainstream. One reason was that, at least for non-economists, the financial crisis didn’t gel with the idea that humans always behave as rational utility-optimisers. Behavioural approaches provided a welcome alternative. Another reason was that economics was suffering from a crisis of credibility, which made such alternatives especially welcome.

Finally, behavioural approaches seemed to promise politicians a solution to some of their most vexing problems, in the form of behavioural nudges, as championed by economist Richard Thaler and law professor Cass Sunstein.


The architects of choice
Thaler first came across Kahneman and Tversky’s work in 1976. “The paper took me 30 minutes to read from start to finish, but my life had changed forever,” he said. It seemed that Kahneman and Tversky had found a way to put the thrill back into economics.

Thaler’s big idea was that behavioural approaches could be used not just to understand human behaviour, but also to control it by providing behavioural ‘nudges’. He and Sunstein defined a “choice architecture” as the way choices are presented. A nudge was defined as “any aspect of the choice architecture that alters people’s behaviour in a predictable way without forbidding any options or significantly changing their economic incentives”.

Behavioural approaches could be used not just to understand human behaviour, but also to control it by providing behavioural nudges

This theory was enormously attractive to governments, which were trying to bring their economies out of the crisis. Sunstein served in the Office of Information and Regulatory Affairs during Barack Obama’s presidency, while in 2010, then UK Prime Minister David Cameron set up the Behavioural Insights Team, also known as the Nudge Unit, in an effort to incorporate its insights into government policy.

The Nudge Unit has gone on to play an important role in issues from Brexit to the coronavirus crisis. Cameron’s confidence in calling the Brexit referendum was in part based on the assumption that the populace would choose to remain in the EU due to factors like loss aversion and the status quo bias. Thaler explained at the time: “I am not a prognosticator, but I would bet on them staying. And I think that there is a tendency, when push comes to shove, to stick with the status quo.”

Behavioural economists, including psychologist David Halpern, who heads the Nudge Unit, also took a lead advisory role in addressing the coronavirus. As Bloomberg put it in March: “A little-known team of advisors specialising in behavioural psychology is helping to steer the prime minister’s response to the health crisis, shunning headline measures like travel restrictions and quarantines to focus on a more banal task: finding ways to persuade people to wash their hands.”


More than a nudge
As behavioural economics has become more influential, it has also come under increasing criticism. Some say it reduces human behaviour to simplistic equations and that supposedly irrational biases such as risk aversion actually make sense when dealing with something like infectious disease (it turns out that viruses don’t respond well to nudging).

Another criticism is that, as marketing professor Philip Kotler claims, the field boils down to “another word for marketing”. It is true that many of its key concepts can be found in marketing manuals from the last century. For example, in his 1923 book Crystallising Public Opinion, the public relations expert Edward Bernays said that “the group and herd are the basic mechanisms of public change”, and argued that psychology could be used to manipulate the masses.

The biggest problem, though, is that it is increasingly obvious that the global economy is faced with major structural challenges such as inequality, financial instability, climate change and the risk of future pandemics, which require more than a nudge to address them.

So, does behavioural economics have a future, or will it go the way of countless other economic fads? Perhaps I am biased (as cognitive scientists point out, we all are), but my bet is that it is a transitional stage between mainstream economics and something more radical. After all, economics needs more than a nudge as well.