Bank capital is back in the financial headlines. In late July, US banking regulators, led by the Federal Reserve, announced plans to finalise the so-called Basel 3 reforms (which banks like to call Basel 4, owing to their significant impact). The aim, according to a joint agency proposal, is “to improve the strength and resilience of the banking system” by modifying large capital requirements to better reflect underlying risks, and by applying more transparent and consistent requirements.
The announced proposals are tougher than many expected. They will cover more banks – including some that had benefited from Trump-era concessions – and they will require banks to include unrealised losses from securities in their capital ratios (among other changes). Overall, US regulators expect the most complex banks to increase their capital by 16 percent.
US banking supervisors, led by Fed Vice Chair Michael Barr, clearly have been emboldened by the spate of bank failures that started with the collapse of Silicon Valley Bank this past spring. But though the political mood has changed after that embarrassing episode, there is still fierce opposition to the new regulations. Recently, David Solomon, the CEO of Goldman Sachs, warned that the “new capital rules have gone too far, they will hurt economic growth without materially enhancing safety and soundness.” Likewise, JPMorgan Chase CEO Jamie Dimon believes they will increase the cost of credit, potentially making banks uninvestable.
One can find even more blood-curdling forecasts on the Bank Policy Institute’s ‘Stop Basel Endgame’ website, which warns of “real consequences for families and small businesses across the country.” Clearly, the proposed rule changes have become a political battle. Nor is this solely an American issue. The Bank of England has also issued rather tough proposals – though British banks have eschewed high-flown rhetoric in responding. When American bankers say, ‘these proposals will end human life as we know it,’ English bankers merely admit to being a little concerned.
The debate will play out differently in different places over the next few months. In a recent working paper, Good Supervision: Lessons from the Field, the International Monetary Fund points out that capital ratios are currently higher in European banks than in American ones. That may partially explain why the European Union’s Basel 3 implementation plans do not envisage increases on the scale proposed in the US.
But more to the point, the IMF authors conclude that the recent bank failures do not have their roots in capital weakness. As the Swiss National Bank noted during the collapse of Credit Suisse, “meeting capital requirements is necessary but not sufficient to ensure market confidence.” The salient problem was that investors lacked confidence in the bank’s business model, and that depositors were withdrawing funds at a rapid rate. A lack of liquidity, rather than a capital shortage, was the straw that broke that camel’s back.
Similarly, US authorities’ reports on this year’s bank failures concluded that risky business strategies, compounded by weak liquidity and inadequate risk management, lay at the heart of the problem. But though supervisors had identified many of these problems, they “didn’t insist or require the banks to respond more prudently while there was time to do so,” the IMF authors explain.
Supervising the supervisors
Taking banking supervisors’ recent reviews as their starting point, the IMF authors draw broader lessons from the post-financial-crisis reforms and their differential implementation across jurisdictions. Notably, an absolute shortage of capital does not feature prominently among the weaknesses they identify, though they do argue that some countries use the Basel minimum requirements as a ‘one size fits all’ rule, thus failing to account for differential risks. There has been little use of the ‘Pillar 2’ process, whereby regulators can require additional capital if they determine that risk management is weak.
The IMF authors see far bigger problems in the lack of skilled staff in many places, and in the pressure regulators feel to make politically expedient, rather than prudent, decisions. For example, some supervisors pay little attention to corporate governance and business models, partly because they lack the tools and authority to do so. But supervisors also have failed to help themselves by under-allocating resources for oversight of small firms, and by following poor internal decision-making processes. The IMF’s overall conclusion is that regulation, in the sense of capital or liquidity rules, “is rarely, if ever, enough.” Far more pertinent is the quality of supervision, and of the supervisors themselves.
It is an important message, and one that central banks and bank regulators around the world should take to heart as the debate over capital requirements heats up again. Experience shows that marginal increases in capital ratios, or a touch of inflation in risk-weighted-asset calculations, may have far less impact than low-cost programmes to upgrade supervision. We need a cultural shift to embolden supervisors to act on their concerns. Earlier interventions, using tools and powers supervisors already have, could have helped avert some of this year’s unfortunate bank failures.
Coffee prices have soared in recent years, owing to unfavourable weather conditions and supply shortages in major producing countries like Brazil, India, and Vietnam. But even if consumers are paying more for their daily cup, coffee farmers are seeing little of the gain, because they lack sufficient bargaining power.
Since the 1950s, coffee has been among the world’s most-traded commodities – at one point, it ranked second, behind only oil – and many governments regard it as a strategic good. But not all coffee trade is created equal.
Countries in the Global South export low-value-added unprocessed coffee – raw beans and dried and seedless coffee – with Brazil, Colombia, Vietnam, Indonesia, and Ethiopia controlling a combined market share of about 70 percent. Countries in the Global North dominate exports of higher value-added processed coffee – such as roasted beans and instant coffee – with Switzerland, Germany, Italy, France, and the Netherlands accounting for 70 percent of the market. Moreover, the coffee sector is dominated by just three developed-country firms – Nestlé, Starbucks, and JDE Peet – which together account for 77.7 percent of the total revenues of the sector’s 10 biggest players.
Prices of processed coffee dwarf those of unprocessed coffee: $14.30 per kilogram on average versus just $2.40. In fact, coffee producers in the Global South claim a small and declining share of the market’s value. Whereas in 1992, producer-country exports captured one-third of the value of the coffee market, by 2002, they captured less than 10 percent. Coffee farmers themselves get one percent or less of the final retail price of a cup of coffee, and about six percent of the price charged for a package of coffee sold to consumers in the Global North.
One for the bean counters
The obvious solution would be for coffee producers in the Global South to develop processing capabilities, in order to increase their exports’ value-added. But there are formidable barriers to progress on this front, beginning with the high tariffs developed countries impose on processed-coffee imports – 7.5 to nine percent in the European Union, 10–15 percent in the United States, and 20 percent in Japan. Unprocessed coffee is not subject to tariffs.
The coffee sector is dominated by just three developed-country firms – Nestlé, Starbucks, and JDE Peet
While developing economies also impose tariffs, they tend to be more symmetric across processed and unprocessed coffee. In Brazil, for example, both types of imports are subject to a 10 percent tariff. So, while developed-country-led multilateral banks and research organisations advise developing countries to increase their exports’ value-added, developed countries’ trade policies are discouraging them from doing so.
With developed-country governments apparently unwilling to change their tariff regimes, developing-country governments must rely on financial incentives to counteract them. For example, they can subsidise processed-coffee exports, and impose export tariffs on unprocessed coffee. Malaysia did something similar with palm oil: after the UK imposed high tariffs on processed palm-oil imports, Malaysia lowered taxes on processed palm oil and introduced an export tax on crude palm-oil exports.
Would-be exporters of processed coffee in the Global South also face non-tariff or technical barriers, such as sanitary and phytosanitary rules. These are, of course, entirely justifiable. Overcoming them will require the Southern exporters to invest in building technological capabilities and developing planting and processing approaches that meet international safety, environmental, and social standards.
Exporters in the Global South could even go so far as to produce and export branded coffees that are sold directly to consumers in the North. Branding and marketing is, after all, the highest value-added segment. The problem is that entry barriers in consumer markets are very high, and it takes considerable resources – and a significant risk appetite – to build up a new brand.
One way firms could circumvent some of these barriers would be to acquire existing brands. This is another lesson from Malaysia, which executed a hostile takeover of British palm oil firms in the London Stock Exchange. In fact, this kind of international acquisition has served as a useful catch-up strategy for a number of latecomers, not least China.
Collaborating for coffee control
Producers in the Global South have another option: they can create an OPEC-style coffee ‘cartel,’ which would have far more bargaining power on prices and tariffs vis-à-vis the Global North. While this solution may appear radical, it is feasible, given that the Global South’s top ten coffee producers command nearly 90 percent of the market. It is also justifiable, as the supply-side oligopoly that a cartel represents would be intended specifically to confront an existing demand-side (roaster) oligopoly.
First, however, the coffee sector in the Global South would have to be consolidated, with small firms being combined through mergers and acquisitions. The new large companies could work together with public research institutions to upgrade the quality of the coffee being exported and to change the value distribution. For example, the Federación Nacional de Cafeteros de Colombia could work with the Colombian freeze-dried coffee producer Buencafe. The Malaysian Palm Oil Board could serve as a model here.
Of course, asymmetries in the global coffee market could be addressed in multilateral fora, such as the United Nations or the G20. But as long as developed countries actively impede their developing-country counterparts’ ability to make money from the coffee they produce, Southern producers have little choice but to take matters into their own hands. Tariffs and subsidies, hostile take-overs, and even the formation of a coffee cartel should all be on the table.
In Al-Ula is ancient Hegra, once a prominent trading centre of the Nabateans and now home to a set of 111 tombs intricately carved into the imposing sandstone rock faces lying at the base of the basalt plateau. Rising out of the desert over a thousand kilometres away is Riyadh, Saudi Arabia’s capital and main financial hub. Pre-1938, before oil was first struck in the country, the kingdom was a largely nomadic nation relying on tourism for its income. Its oil and natural gas revenues have turned it into a hugely wealthy country, with a 2017 Forbes profile stating that “its petroleum sector accounts for roughly 87 percent of budget revenues, 42 percent of GDP, and 90 percent of export earnings.”
Its transformation in a relatively short space of time now means that Saudi Arabia has the largest number of millionaires in MENA according to Credit Suisse’s 2022 global wealth report. The stratospheric rise of a nation has come with several consequences. The first and perhaps most important is that there is a huge gap in terms of education, skills and training of Saudi nationals.
Historically the kingdom has relied on foreign workers for skilled and menial labour and the ‘Saudisation’ of the country has been a long-term project going back well over 60 years, with the aim of getting Saudis employed in the private sector. In Madawi Al-Rasheed’s A History of Saudi Arabia, she writes, “A shortage of local candidates for highly skilled jobs together with the reluctance of Saudis to engage in menial work meant that the country remained dependent on Western expertise for specialised industries and Asian labour for construction and other unskilled and menial jobs.”
We don’t need no education
According to McKinsey, the public sector “employs more than two-thirds of all Saudi workers” and these jobs are generally better paid than the private sector. Startlingly, they also don’t seem to involve much work. Civil service minister Khaled Alaraj, speaking at a roundtable in 2015 said: “The amount worked doesn’t even exceed an hour – and that’s based on studies.”
The truth seems to be that the majority of Saudis don’t need to work particularly hard to live well and that is, for many onlookers – especially those in relatively impoverished nations – an enviable position to be in. So what if there is a skills gap? Until now, foreigners have filled that gap and for several decades that arrangement has worked out well for the kingdom (if not always for those it employs).
It seems unrealistic to suggest that in seven years Saudi Arabia will have freed itself from oil dependency entirely
Well, it becomes a problem if the source of the country’s wealth, oil production, suddenly takes a massive, unexpected hit. The pandemic was painful for oil-rich nations. Many will remember the oil industry going into freefall in 2020 as lockdowns came into place and transport effectively ground to a halt. The fallout from this was immediate for the kingdom. In May 2020, Bloomberg reported “a record $27bn monthly drop in the Saudi central bank’s net foreign assets” caused by the oil crash. Saudi Arabia’s finance minister, Mohammed Al-Jadaan, reacted to these events, saying “it’s very important that we take very tough and strong measures, and they might be painful, but they’re necessary.”
Fortunately, the world’s largest oil exporter had sufficient fiscal reserves to weather the Covid storm, and the recovery has been nothing if not stellar, with an IMF report declaring Saudi Arabia “the fastest growing G20 economy in 2022” on the back of oil’s recovery and strong non-oil GDP growth.
Under pressure
There is now another challenge on the horizon that will likely signal the eventual end to the flow of oil and to the flow of wealth that has sustained the steady development of towering desert skyscrapers. And this one might prove a little more difficult to navigate.
The world has woken up to climate change and the global effort needed to counteract it will mean the gradual phasing out of fossil fuels as we transition to more sustainable and green alternatives (see Fig 1).
According to OPEC, Saudi Arabia possesses around 17 percent of the world’s proven petroleum reserves and in a world where these reserves are no longer needed, the kingdom’s current world standing would be severely diminished. How Saudi Arabia manages the transition will determine what happens next. On the face of it, not much has changed. Oil is still running the country.
And that’s a problem. Production in August 2023 was at nine million barrels a day, down from 11 in September 2022, which has driven Brent crude to $95 a barrel. According to a report by the Oxford Institute for Energy Studies, the Saudi economy, “including the non-oil private sector, still relies heavily on government spending that is fueled by oil revenues.” It is something of a paradox. The kingdom needs its oil money to help pay for its net zero pathway. Saudi Arabia’s answer to this wider global shift in energy policy is in its national transformation programme, Vision 2030.
This is split into several different programmes and mega projects aimed at addressing its historical labour issues and to help grow and diversify the Saudi economy, including several green projects. According to the US International Trade Administration “by 2030 Saudi Arabia plans to generate 50 percent of its electricity from renewables and the other half from gas,” and while this is a laudable goal, it seems unrealistic to suggest that in seven years the kingdom will have freed itself from oil dependency entirely.
Only time will tell
But time is the critical factor here. A study by the University of Manchester concluded that high-capacity countries such as Saudi Arabia would need to cut production 43 percent by 2030 and end production by 2039 to remain in line with Paris climate targets.
Saudi Arabia does not need to look far for inspiration. Going back to Hegra, there is plentiful evidence that the Nabateans were a mightily resourceful and innovative people. Dotted around their tombs are the water wells they dug – many of them still in use today. It proves that our histories need not be cautionary tales; they can be monuments to what we leave behind. Civilisations will always rise and fall, but our future prosperity is measured by our actions.
Africa and the International Monetary Fund (IMF) have for years been strange bedfellows. In times of economic bliss, the continent often tends to deal with the IMF at an arm’s length. Yet when the tides turn and economies take severe beatings, a majority of African countries turn up at Washington DC with a bowl in their hands, begging. This offers the opportune moment for the Bretton Woods institution to demand ‘structural reforms.’ For most African governments, there is often no escape route.
Over the past two years, this has been the reality playing out in Africa. With the economies of African countries like Egypt, Kenya, Ghana, Zambia, Tunisia and Nigeria among others ravaged by debts, impacts of Covid-19 and external shocks including the Russia-Ukraine war, the continent has witnessed a forceful return of the IMF. As a tradition, the multi-lender has come bearing a basket of conditions for bailouts and other forms of financing. In effect, this has evoked the memories of the 1980s and early 1990s when structural adjustment programmes (SAPs) left a bitter taste in the mouth of African countries.
“The IMF is a firefighter. When you call the firefighter, you should not expect them to provide any meaningful help with structural problems caused by a fire,” says Ken Opalo, Associate Professor at the Georgetown University Walsh School of Foreign Service. He adds that, largely, the current relationship between African governments and the IMF is fundamentally different compared to the crises of the 1980s and 1990s. However, the common denominator between then and now is that African nations are in desperate need of finances from the IMF’s deep purses owing to prolonged economic crises.
Currently, a majority of African countries are going through a state of economic turmoil. In fact, the IMF reckons in its regional economic report released in October that, for sub-Saharan Africa, 2023 has been a difficult year. Owing to inflation, exchange rate pressures and elevated debt vulnerabilities, gross domestic product (GDP) growth is expected to fall for the second year in a row to 3.3 percent from 4 percent last year. Though a rebound is forecast next year to 4 percent, this is not guaranteed. “A slowdown in reform efforts, a rise in political instability within the region, or external downside risks could undermine growth,” states the IMF in the report.
Putting out fires
The forceful return of the IMF to put out economic fires across Africa has been in the making in recent years. In Egypt, massive borrowing by the President Abdel Fattah el-Sisi regime to fund extravagant mega projects has sunk the country into a debt abyss. External debt, according to the Central Bank of Egypt, currently stands at $157.8bn. Apart from debt, the country is also struggling with foreign exchange shortage at a time when the Russia-Ukraine war has pushed commodities and oil prices through the roof. The effect has been a local currency in a state of paralysis and skyrocketing inflation that hit 39.7 percent in August this year compared to six percent in the same month in 2021. Under the worsening economic realities, Egypt has turned to the IMF for a $3bn bailout.
This time the IMF is paying more attention to safeguarding developmental gains
The economic crisis in Egypt is similar across many other African countries. In Zambia, default on external debts amounting to $17.3bn has forced the country to beg for a $1.3bn IMF bailout. In Ghana, severe economic and financial challenges including defaulting on some of its domestic and international debts saw the country turn to the IMF for a $3bn 36-month financing arrangement. Tunisia, on its part, has negotiated for a $1.9bn bailout, while Kenya secured $1bn under its extended credit facility with the Bretton Woods institution.
Maged Mandour, a political analyst and author of the upcoming book Egypt Under El-Sisi, contends that the economic crisis in Egypt, as in most other African nations, is deep and the IMF offers a remedy, albeit with bitter conditions. “The desperate need for bailouts gives the IMF the edge in pushing for structural reforms,” he states. He adds that in the case of Egypt, the IMF cannot afford to bury its head in the sand akin to 2016 when it approved a $12bn loan but opted to ignore the deep control of the economy by the military. “Conditions on the current loan aim to force the government to demilitarise the economy,” he notes.
The fact that the IMF is determined to push reforms in troubled economies is evident. For countries seeking bailouts and emergency financing, the lender has imposed tough conditions and implementation of austerity measures. This means an end to government subsidies on commodities and fuel, increases in taxes for governments to generate more revenues to meet their debt obligations, privatisation of burdensome state companies, a cut down on unnecessary expenditure, layoffs to reduce the public wage bill, adoption of fully flexible exchange rate regimes and enhancing transparency and accountability, among others.
Safeguarding sectors
According to Opalo, unlike the SAPs of the 1980s and 1990s, the IMF has somehow changed and is today more realistic. Considering that African countries and their political and policy processes are also a lot more mature, the IMF understands that the push for structural reforms should not come at the expense of social sectors. “This time the IMF is paying more attention to safeguarding developmental gains made in education, healthcare and other social sectors,” he notes.
The desperate need for bailouts gives the IMF the edge in pushing for structural reforms
For governments, however, the pain of the conditions is unbearable. In the case of Egypt, for instance, the IMF push for an end to the military’s tight control of the economy, a situation that has suffocated the private sector, is causing discomfort. The government is preparing 32 state companies for privatisation, the majority of which are under the control of the military, and has even signed deals worth $1.9bn, but President El-Sisi knows that his continued hold on power is entangled with keeping the military happy. Though the regime has reluctantly agreed to privatise state entities, it is bluntly refusing to implement the condition of further devaluation of the Egyptian pound, not before presidential elections slated for December.
“Egypt is not ready for a radical departure from the current configuration,” avers Mandour. This, to a large extent, explains why the IMF is withholding disbursements agreed under the $3bn bailout. Disbursements under the 46-month programme that was signed in December 2022 are subject to eight reviews. The first was originally scheduled for March but is yet to happen owing to the fact that the IMF is unhappy with the country’s progress in fulfilling the terms of the agreement.
Unbearable terms
Egypt is not the only African nation that is edgy with the IMF conditions. In Tunisia, President Kais Saied has rejected what he termed as ‘diktats’ for the $1.9bn loan package agreed in October 2022.
Despite reeling in a deep debt hole amounting to $36.2bn, which is 77 percent of GDP, Tunisia wants the IMF to review the conditions of the loan. For the country, abolishing food and energy subsidies and making layoffs to cut the public wage bill are bound to instigate unrest. Notably, Tunisia has been bold in standing up to the IMF owing to its unique location that enabled it to reach a financing pact with the European Union aimed at stemming irregular migrations. The country has already secured $135m under the pact. “Tunisia is basically blackmailing the EU to get funds to stop migrants,” says Mandour.
But not all countries are playing hard ball. Kenya, Nigeria, Zambia, Angola and The Gambia are among countries that are adhering to the IMF conditions. Kenya, for instance, stands out. The East Africa nation has faithfully implemented IMF conditions for its $1bn financing package. These include abolishing food and fuel subsidies, doubling of value added tax on petroleum products from eight percent to 16 percent and embarking on restructuring of troubled state corporations, among others. Some of the reforms, which have earned Kenya rare praise from the IMF, have ignited protests due to skyrocketing costs of living. “We commend you for what you are doing on your fiscal measures. The country is certainly headed in the right direction,” said Kristalina Georgieva, IMF Managing Director during a visit to Kenya in May.
The love-hate relationship between the IMF and African nations has become one of the critical drivers for the clamour for widespread reforms of the global financial architecture. The continent has been vocal on the fact that the international financial system is overwhelmingly based on a creditor-centred model. In essence, the model often locks out African countries from fair, concessional borrowing. In addition, Africa contends that the system restricts access to affordable capital and is also characterised by ‘conditional’ lending. For the continent, reforms would not only open doors for debt relief but will also unleash floodgates of financing. Currently, Africa’s public debt stock stands at a staggering $1.8trn.
“African governments must manage their finances better even as they push for debt relief and more reasonable evaluations from credit rating agencies to lower their cost of borrowing,” notes Opalo. Failure to adopt prudent management of public resources means the cycle of economic crises is bound to continue. For this reason, the IMF will always be on hand with its bitter pill of structural reforms.
Angry Parisians, heaps of uncollected rubbish, clashes with the police. While being a traditional French pastime, demonstrations also carry a symbolic meaning, capturing the zeitgeist of the time. If the May 1968 riots were the product of a bored youth, this spring’s protests over pension reform convey another message that reverberates beyond France: the coming pension crisis. The protests were sparked by the rise of the pension age from 62 to 64, bringing France in line with the European average. The reason, the French government argued, was that the system would collapse if the status quo remained intact.
Anger over the delay of a well-deserved right after decades of toil is rippling across the globe. Pensions are becoming a hot-button issue for governments, not just because they are important for older voters, but also because their allocation is underscored by deeply-held beliefs in social justice and intergenerational solidarity.
Under pressure
Pension systems face a crisis due to a combination of demographic trends, economic conditions and government policies. Populations in developed countries are ageing fast, with rising numbers of retirees putting pressure on pension systems. By 2050, the ratio of pensioners to working-age citizens in the developed world is expected to rise to 1:2 from the current 1:3 (see Fig 1). The pandemic accelerated this trend by pushing older workers to retire. Pension systems in eight of the world’s largest economies will face a staggering shortfall of $400trn by 2050, estimates the World Economic Forum.
Governments have sought to alleviate these pressures, but reforms are at best half-baked solutions and often create new problems. Systems have generally shifted from defined benefit (DB) pension plans, where retirees receive fixed benefits, to defined contribution (DC) plans that tie benefits to contributions. This places responsibility on workers to manage their retirement savings, which increases risks for those lacking financial literacy. Many are not saving enough, creating a vicious cycle that can strain pension system sustainability.
Policymakers hope that pension funds can fill funding gaps through smart investment, but their performance has been marred by market instability. Fifteen years of low interest rates pushed pension funds to turn to risky alternative assets that offer higher returns. Last year, Ontario Teachers’ Pension Plan, one of Canada’s largest funds, was forced to write down the $95m it had invested in FTX, a crypto exchange that went bust. The recent surge in interest rates has improved funding levels, enabling funds to earn hefty returns on bonds. Pension plans controlled by the UK’s Pension Protection Fund reported a surplus of £431bn last spring, compared to a £132bn deficit in 2020. However, higher interest rates have also exposed vulnerabilities in little-known corners of the financial world, such as ‘liability-driven investment,’ a derivative investment strategy used by UK pension funds that sparked a crisis in the government bond market in September 2022.
While policymakers have known for decades that reforms are necessary, progress has been slow. France may be an outlier among its European peers for raising the retirement age too late, but nearly half of OECD members face similar problems; Parisian riots demonstrate why such policies can be politically explosive. The UK government has delayed plans to raise the state pension age, fearing reactions from older voters. Pension reform can also cause generational conflicts, with younger workers fearing that pension systems operate as Ponzi schemes that may collapse before they retire. In the UK, the system’s sustainability is undermined by the ‘triple lock’ rule, which ensures that the state pension increases annually by the highest of price inflation, earnings growth or 2.5 percent; a report by the Institute for Fiscal Studies found that the rule has increased annual pension spending by £11bn. “The UK state pension is relatively poor compared to many other countries, so something needs to be done about that,” says Iain Clacher, an expert on pensions at Leeds University Business School, adding: “Longer-term, much more generous limits on private sector accumulation will have to be the solution. With much noise made about annual and lifetime allowances, this will ultimately cap the pension that accrues, and so the state pension will always be a bigger component of someone’s overall retirement income.”
While policymakers have known for decades that reforms are necessary, progress has been slow
Across the Atlantic, many US pension funds struggle to provide retirement benefits, with state pension debt reaching $1.3trn. Last spring, legislators from Illinois and New Jersey requested a federal bailout of their states’ public pension systems. A 2022 study by the insurance company Milliman found that among the country’s 100 biggest public pension plans, one in four were below the 60 percent funding threshold. Critics point out that pension administrators eagerly spend profits from good years, while making over-optimistic economic assumptions about future returns. Although most public retirement systems are not in immediate danger of insolvency, “many need some notable improvements to ensure they aren’t vulnerable to economic downturns or investment risks,” says Jon Moody, Vice President of Research at the Equable Institute, a US think-tank that studies retirement policies, adding: “If there is a sustainability crisis, it will be related to how costs influence decisions related to future benefit values or government programme cuts.”
Others, like Teresa Ghilarducci, a retirement expert at the New School for Social Research, call for a shift to a government-backed social safety net for pensioners. “There is a US retirement crisis, but no pension crisis. The public employees’ pension funds are not the problem, in fact they are part of the reason the crisis is not worse,” says Ghilarducci. “The crisis is nearly half of middle class workers going into retirement without a pension and only the basic Social Security benefit. Millions more elders will be poor in the next 10 years.”
Risky business
Aiming to raise funding levels, governments push pension funds to adopt riskier investment strategies that could contribute to capital formation and economic development. The UK Chancellor Jeremy Hunt has set out a plan encouraging defined contribution pension plans to invest five percent of their assets in private equity, venture capital and start-ups. The government believes this could boost investment in high-growth companies by £50bn by 2030, while expecting the typical pension to increase by over £1,000 annually. Some experts, however, have raised concerns over transition costs and liquidity. “The types of investments the reforms focus on are by their nature illiquid, whereas DC members can switch their asset allocation just by logging into their provider and changing their fund,” says Clacher.
Critics have also pointed out that the reform fails to push funds to support UK companies. Currently, DC pension funds invest just 0.5 percent of their assets in unlisted UK companies. UK pension and insurance funds reduced their holdings of UK-listed companies to four percent last year from around 50 percent in 2000, while fixed-income holdings grew to 72 percent. If invested in the UK, pension fund assets could increase productivity and wages and eventually generate additional pension contributions, says David Blake, an expert on pensions teaching at City, University of London: “This could have given the UK the highest productivity rates in Europe. Instead, over the last 25 years, pension contributions have been invested in international equities and bonds which have done nothing to improve UK productive investment and productivity. The reforms are an attempt to change this, but they are in danger of being too little too late.” Others point out that investment should be diverted toward firms active in high-growth areas and tackling global challenges, such as climate change. “It’s imperative that the Chancellor allows pension funds to invest only in venture capital (VC) firms that are committed to mitigating the associated risks,” says Thea Messel, co-founder of Unconventional Ventures, a VC firm, adding that investment in start-ups that develop solutions to long-term issues, such as global warming, health and transport, will help pension funds yield steadily high returns over longer periods.
One of the plan’s goals is to build economies of scale by consolidating smaller funds. However, long-term investment has to come from smaller DC schemes, given that private DB schemes are closed to new members and are gradually being offloaded to insurers. “Unless there is a plan to consolidate these schemes, it will be difficult to achieve the scale needed to invest in the big infrastructure investments the government wants to see,” Blake says.
The perils of investing in risky assets became clear in 2021 when the Pennsylvania teachers’ pension fund discovered chronic misreporting of its investment returns, resulting in higher member contributions to fill the gap. The scheme’s funding levels had dropped to just 60 percent due to rising pension benefits and a costly investment programme that included underperforming private equity and high-risk holdings such as loans financing Iraqi oil fields. Another problem is the lack of transparency, as private equity managers often guard their activities as ‘trade secrets.’ In some cases, crucial details are not shared with pension fund officials, many of whom lack financial training, while private equity valuations are often inflated by managers. “The opaqueness around how private equities are valued can contribute to the growth of unfunded liabilities,” says Moody from the Equable Institute, adding: “In cases where they are over-valued, required contribution rates can be set too low, which would result in unfunded liabilities purely because of an error in how the assets are valued.”
Performance is also questionable, despite the hefty fees involved; a 2021 JP Morgan study found that private equity only marginally outperforms stocks. Cases of over-reliance on private equity returns in the US can serve as a cautionary tale for UK pension funds whose previous dalliance with private equity was hampered by similar problems, according to Blake: “Unless the issues of poor transparency, high charges and the difficulties in accessing the true performance of private equity firms are resolved, there is likely to be a repeat of what happened 30 years ago.”
Hailing from Aspromonte, a mountainous region in Southern Italy, Anna Sergi has first-hand experience of the mafia’s devilish appeal. Her latest book Chasing the Mafia is an idiosyncratic travelogue that combines memoir, sociological analysis and investigative journalism. Through anecdotes, personal memories and records of criminal cases, the University of Essex criminologist dissects the inner workings of the most powerful of Italian mafias, the Calabrian ‘ndrangheta, explaining how it spread its tentacles around the world, often with the complicity of banks. From the pristine beaches of Australia to Canada’s snow-covered prairies, Sergi follows the traces of a versatile organisation that is decentralised, globalised and innovative, just like a modern business. Beating it, she explained to World Finance’s Alex Katsomitros, will take a bit more than heavy-handed policing and money thrown at the problem.
What is the ‘ndrangheta?
It started as a brotherhood of so-called ‘honourable men’ that appeared after Italian unification in 1861. Fast forward 100 years and you find an organisation well established in the small villages and cities of southern Calabria, a region suffering from the perception that southern Italy is different. During the ‘Mafia Wars’ in the 1960s and 1970s, the clans needed money, because Calabria was poor. Younger generations started the so-called ‘kidnapping season,’ kidnapping around 160–200 people until the government made it legally difficult to pay ransom. They made a lot of money that was later reinvested, notably in cocaine.
How did they overtake Cosa Nostra?
In the 1970s and 1980s, the Sicilian Cosa Nostra was involved in a bloody war, won by the Corleonesi clan. They were headed by Toto Riina, a psychopath. Sicily was in a state of war, with killings in broad daylight. This was the peak of Cosa Nostra’s power, but also its demise. In 1992, it decided to attack the state, killing judges Falcone and Borsellino and planting bombs in northern Italy. The same year the port of Gioia Tauro was opened where the ‘ndrangheta invested money from kidnappings, moving into the profitable drug trade. The Italian state was going through its own crisis. A corruption scandal erupted that shook the political system. So the state was weak and its few resources were focused on Sicily. Calabria remained in the shadows until 2008 when we had the first ‘ndrangheta report. By then, it had dominated the cocaine trade.
Did its decentralised nature contribute to its success?
Absolutely. Cosa Nostra failed because it centralised everything in the hands of a psychopath. It has a top-down structure where the boss-of-bosses decides everything. The ‘ndrangheta is the opposite. Clans are autonomous. They don’t have to agree on a strategy – that happens only on a need-to-know basis. Coordination structures are not hierarchical, they are about recognising who has more power. Those who do, sometimes come together to solve problems.
Everyone is laundering money through the City, not just Russians.
How do they launder money?
It’s rarely laundered in Calabria, because the authorities are well-versed in discovering that activity. Laundering usually happens in northern Italy or Europe. ‘ndrangheta clans invest in small, cash-intensive businesses like restaurants. Sometimes you see bigger investments through puppet intermediaries that participate in consortia bidding for EU funds.
Is there collusion with banks?
Usually the ‘ndrangheta launders drug money through third-party brokers, other criminal groups that operate as intermediaries: Chinese for Europe and Pakistani or Indonesian for Australia. The second layer of money laundering involves direct engagement with banks; in Europe, Switzerland, the UK, Belgium and any country that allows ‘smurfing’: holding small sums in individual accounts without asking many questions. So European banks are complicit.
When the war in Ukraine started, the City was criticised for laundering Russian money. Is the ‘Italian connection’ big too?
Everyone is laundering money through the City, not just Russians. Why wouldn’t they? It’s easy. There are two types of UK-based financial intermediaries. Individual brokers, usually Italian, who make fake investments or launder money through the legitimate financial system. Alternatively, you have investment in shops or real estate. In one recent case, a clan was laundering money by selling non-existent flats in Calabria to British clients through a London law firm. Usually these deals get discovered when brokers get in trouble for something else.
Have they also started offering their own banking services?
Some clans do, especially clans from the city of Reggio Calabria where they are particularly financially savvy. There is a shift from drugs to more sophisticated activities like banking fraud. They provide fake financial services as loan sharks.
Does the ‘ndrangheta tap into the increasing complexity of the financial system to hide money through its army of financiers, lawyers and accountants?
Absolutely. They have these types of professionals within clans. It’s unbelievable how many lawyers some families have. They have fewer accountants, but sometimes some financial services and tax advisors. They also bribe people, but that’s riskier.
Do governments condone this sort of financial crime?
You can’t control every single transaction. You either have financial efficiency or complete safety. There is a utopia of safety whereby we assume that everything is safe. But in reality there is a threshold of tolerability where certain things are allowed until they become too problematic. In Australia, Italy and Germany, things are getting problematic, because they are expanding into other activities, like manipulation of elections. There is cocaine, but also investment in the legal economy. So what’s the priority? Is it to stop dirty money from entering the financial system? Or catch it after a company has been set up? Usually it’s the second.
Raymond Baker, an authority on financial crime, recently told World Finance that US authorities should try to stop drug money laundering, rather than just trafficking. Would that work with the ‘ndrangheta?
The point of drug trafficking is to make cash. Mafiosi don’t want to live an illegal life. They launder money in ways that evolve into semi-legal activities. Some clans don’t even want to be mafia groups forever. So it should be a priority. But you can’t even stop half of large-scale money laundering. Banks don’t want to do more checks, their clients wouldn’t like it. Do we want more efficient or safer finance? Efficiency always wins.
You mention in the book that the Mafia delegitimises the state’s authority. Does it tap into localism, especially Southern Italian separatism?
Italian mafias have exploited separatist movements, particularly a sentiment that order can only derive from local rather than national authority. But there is no ideology, no will to substitute the state or create an alternative one. They just take advantage of its weaknesses. For Calabrians, the state has many, many faces. It’s not always reliable. Its anti-mafia procedures are often contradictory. The mafia exploits this ambivalence to convince people that they should trust them rather than the state.
So what can governments do? Is economic development the solution?
Economic development alone won’t solve the problem. Mafias are parasites, the more you give them to steal, the more they will steal. What you can do is create economic wealth that translates into social wealth. One problem the mafia faces is recruitment. It’s a matter of alternatives for people. Some NGOs provide alternative paths and that’s disrupting for mafia families. However, employment and education are poor in Calabria. People distrust the government and try to find shortcuts. When those shortcuts become organised, you have mafias. Italy will receive EU funds for post-Covid recovery that could go into ‘levelling up,’ but until we level up education and employment expectations, not much will change. You can’t just send money there and hope that it will solve the problem.
Is the current Italian government doing enough to tackle the problem?
No. Meloni leads a populist far-right movement that is very anti-South. Everything she’s proposing is undermining anti-mafia investigations. They are passing legislation that limits the types of surveillance and financial investigations prosecutors can do. She supports those who believe that there is something wrong with the South, alienating people. Her government makes the mistake that many other politicians made: considering the mafia a cancer that needs to be extirpated, instead of understanding its roots within society. No Italian government has done anything serious against the mafia for at least 15 years.
Will the digitalisation of the economy weaken the ‘ndrangheta?
As Falcone said, the mafia is a human phenomenon that has a beginning and an end. We just don’t know when that end is. Mafias adjust to economic changes. Currently within the ‘ndrangheta there is a tendency to evolve into semi-legal service providers. Today, most ‘ndrangheta families are indistinguishable from other family businesses. What distinguishes organised crime is that it’s not just about profit. It’s about power, control of territory. If you weaken their power, their profit-making capacity will suffer. But I don’t think I will see that in my lifetime.
You are from Calabria. Have you ever felt threatened because of your job?
I have never felt threatened. I have felt being observed, but I know the difference between being observed because of curiosity and as a threat, because my father, a journalist, had received threats. I have felt intimidated in Australia. If you are embedded in the territory, your family is there and you are perceived as a troublemaker, then intimidation will be about people around you and coming from people around you. I don’t think I create problems because I talk about the mafia. They are used to that. I might be perceived as a troublemaker abroad, because I raise public awareness, for example by participating as an expert witness in trials in Australia or Germany. As a Calabrian, I recognise intimidation. But I hope they are too smart to target me.
In today’s world of rapidly evolving consumer preferences, businesses typically rebrand every seven to 10 years, although this isn’t always necessary if your branding is strong. At the beginning of October, we saw British financial institution Nationwide undergo its biggest identity overhaul since 1987.
Not all rebrands will be successful, which is why thorough research, planning and understanding of the brand’s audience is essential. In the past year, one of the most noteworthy business rebrands was Elon Musk’s decision to transform Twitter into X, which was met with a wave of criticism. With the backlash Musk and Twitter faced, it begs the question, what is the best way of going about a rebrand? Why does branding matter?
Good branding helps you stand out from the competition, builds an emotional connection with the target audience and creates a consistent brand experience. The success of a business ultimately depends on the quality of its products or services and the effectiveness of its marketing. However, choosing a great business name helps brands gain the recognition needed to succeed.
Six appeal
Rebranding can be a great way to refresh your brand, reposition yourself in the market, or address negative perceptions. However, it’s important to do it right. If you rebrand at the wrong moment or make changes that don’t align with your audience, you can alienate your customers and damage your brand reputation. Here are six things that businesses looking to rebrand should consider.
Thorough research, planning and understanding of the brand’s audience is essential
Background research: In the initial phase of crafting, or re-crafting, a brand identity, research and understanding are vital. This phase includes all of the research you conduct before generating ideas and includes defining and researching your target audience, your competitors and the market. Lean on resources like Google Search, Product Hunt and the Fortune 500 list for name inspiration, and tools like Google Trends and Trend Hunter for more advanced research into brand names and current trends.
Generating ideas: Finding inspiration can be challenging but there are plenty of useful tools available. Businesses may utilise a business name generator or online tools like dictionaries or thesauruses to generate new name ideas. Explore all possibilities and avoid narrow thinking. It’s okay to have a few name ideas in mind before you start, but don’t get stuck on a single idea early on. This can prevent you from exploring other options that may end up being better matches in the long run. Write everything down and shortlist later on. Explore all possible synonyms and related terms to come up with as many ideas as you can. Remember success will be gauged by how well it relates to your market, not you personally.
Brainstorming a list of names: Compile all your ideas and inspirations in one central place for ease of viewing, then, begin the brainstorm. Guidelines such as aiming for 50 name ideas or suggesting names with no more than five syllables can help you discover more usable names. Avoid special characters and word alternatives, such as replacing words with numbers or using common endings like ‘R’ us. Generic brand names should also be avoided as they can be difficult to recall. Keep your brand name ideas flexible. Consider Amazon; their transition from an online bookstore to the broad retailer they are today would have been impossible had they included the word ‘books’ in their name. Owning a single, generic word, like Apple, is also challenging and requires time to establish, trademark, and secure the domain name. Avoid this option unless you have a large budget for domain acquisitions and marketing.
Auditing ideas: A business name should be evaluated holistically, as even seemingly minor flaws can damage a brand. To effectively gauge a name’s suitability, consider the name’s language and cultural connotations to ensure it won’t be misinterpreted. Say it out loud and get an understanding of what it sounds like. Are there any potential mispronunciations? Finally, is it memorable? This can be one of the most important points for ensuring the name resonates with your target audience and sticks in their minds.
Final ideas: At this stage, you should have a shortlist. There are just a few remaining things to check before you make things official. It’s important to check that there are no legal or trademark conflicts, that there is availability in terms of social media, domain names (both local and international) and mobile app name. It is useful to have some good taglines that will work with your brand name. You should also use this time to compare any positives and negatives from the audit between names.
Feedback: Responses comes from a place of personal preference so it should not form the basis of the ultimate decision, but it often brings up valid points that may have been missed, despite the rigorous methods outlined above. Finally, this stage encourages a well-informed decision that isn’t swayed by personal preferences. This should help you decide on the overall name that best fits your brand going forward.
The journey to net zero is proving a hard one. The fine words and ambitious targets of COP conferences are not easy to turn into reality and the changes in government policy, especially in the UK, are making that journey even tougher for many businesses and their investors. Finance is central to meeting this challenge but the major institutional investors have at times looked uncomfortable as they try to match fine statements about helping the world tackle climate change with coherent and consistent investment strategies.
At the heart of this struggle is the concept of transition finance. The words might appear to carry an obvious meaning – using investment funds to support the transition from a fossil fuel dependent, carbon intensive world to a net zero carbon world. If only it was that easy. Defining transition finance has proved far from simple as there are a host of terms and alternative definitions swirling around the whole area of what is loosely referred to as green finance: sustainable finance, climate finance, green finance, impact investments, socially responsible investing all compete for attention, leading to a lack of clarity and making institutional investors an easy target for climate change campaigners, especially those aggressively targeting the big fossil fuel industries centred on coal, oil and gas.
For some institutions the response has been to focus a proportion of new investment into obviously green projects, such as renewable energy. That still leaves them with the challenge of what to do with their massive investments in fossil fuels: that is where transition finance comes in. It is focused on supporting those businesses in their transition journeys.
Carbon cynics
There is, however, a deep cynicism about how carbon-intensive businesses are using money earmarked to support their transition to a greener world. How do investors know that they are not merely replacing money that would have been earmarked for transition projects and are instead diverting it back into fossil fuel projects using the luxury of the new investment for the transition?
Having a transition plan is a great start, but it’s only half the battle
Peter Bosshard, Global Co-ordinator of the Insure Our Future campaign, sums up the doubts about the enthusiasm of the fossil fuel sector to wholeheartedly embrace the transition to a net zero world: “Looking at the fossil fuel industry over the past few decades I don’t think it is impossible for coal, gas and oil industries to transition but we don’t see the will to do it.” He points to the intense lobbying of US federal and state regulators by the fossil fuel giants as an indication of where their priorities lie: “I think we have to accept that they are not engaged in the transition to green energy.”
There are reasons to be more optimistic, says Russ Bowdrey, Executive Director, Climate Research at MSCI Inc, and he says institutional investors have a crucial part to play in turning pledges into reality: “Having a transition plan is a great start, but it’s only half the battle. For change to manifest itself, the plan needs to be followed through and turned into reality. This is where incentives will be key. Executives and decision makers need to be incentivised to make the transition work,” he said.
Bowdrey continued: “At the same time the picture is more nuanced. Institutional investors and underwriters have a role to play in increasing pressure on corporates to ‘do the right thing’ through aligned incentives. What is becoming clearer is that there is a straightforward risk appetite angle to these too which providers of capital and insurance need to approach with eyes wide open.”
The challenge of bringing clarity to this confused debate is vexing practitioners and academics alike. The Centre for Climate Finance and Investment at the Imperial College Business School has tried to pick a way through, defining green finance as “sources of funding to new capital and operating expenditures that generate measurable progress towards the achievement of a well-recognised environmental goal.” Its analysis of the various terms and definitions led the Business School to offer a succinct definition of transition finance: “Transition finance is capital provided to economic agents to achieve a minimum rate of carbon emissions reduction.” This still leaves open the related questions of what might be an acceptable minimum rate of carbon emissions reduction and how you measure the impact of investment in it.
Things are heating up
The first question is the source of intense debate as the impacts of global warming are felt in dramatically changing weather patterns around the world. The ambitious targets that flowed from an agreement to limit global warming to a 1.5 degrees Celsius increase over pre-industrial norms that 196 countries signed up to at COP21 (Conference of the Parties) in Paris in 2015 are coming under increasing pressure. The debate over what that means in terms of achieving net zero carbon emissions and, crucially by when, rages on and will be played out again at future COP meetings. The most widely accepted target date for achieving net zero emissions to meet the 1.5 degrees Celsius commitment is 2050 and that is largely what financial institutions are focused on. Climate change campaigners are pressing for a more ambitious timetable. While that is a wider debate that will set the parameters for the finance sector, the issue of measurability and providing a practical framework for transition finance has moved centre stage.
The Glasgow Financial Alliance for Net Zero (GFANZ) launched, as its name suggests, in Glasgow for COP26 in 2021, has recently initiated a consultation aimed at giving additional substance to a four-point strategy for transition finance it announced last year. Within an overall objective of developing and scaling of climate solutions, this encouraged investors to support the climate transition by allocating capital to solutions, companies and assets aligned with the 1.5 degrees Celsius pathway, or companies and assets with a serious commitment to transition. It also said they could invest in the timely phasing out of highly polluting assets such as coal mines and coal-dependent energy producers.
Now, GFANZ wants to refine those definitions and support financial institutions to forecast the impact of these strategies on reducing emissions with some practical tools. Mark Carney, former Governor of the Bank of England and now GFANZ Co-Chair and UN Special Envoy on Climate Action and Finance, set out the ambition behind GFANZ’s latest proposals: “To achieve the largest and most rapid reduction in emissions possible, transition finance must be mobilised – urgently and at scale.
Trillions of dollars are required to bring emissions down and private finance will need to play a central role. We need to be able to track impact by measuring the expected decarbonisation contribution of financing. This consultation links decarbonisation contribution methodologies to the GFANZ financing strategies as a proposed approach to measuring the impact of transition finance over time.”
GFANZ is gathering market feedback, with the expectation that it will be able to influence the debate at COP28 and beyond. It is working on a principles-based approach to segment portfolios by the four key elements of its earlier strategy, backed with greater transparency.
To provide further clarity around transition finance, it is also addressing the issue of measurability of the impact of transition finance through a concept called Expected Emissions Reductions (EER), which it says will allow financial institutions to quantify the ‘emissions return’ of their transition finance activities more effectively.
This has not immediately impressed those looking for the finance sector and its regulators to bring greater confidence to measuring the impact of their investments: “There is a fundamental problem with EER approach in that it is based on an unknowable counter-factual baseline, crucially what is business as usual over the coming decades”, says Paddy McCully, Senior Analyst of Energy Transition at California-based Reclaim Finance.
“Of course lots of educated guesses can be made about this but a counter factual is, and always will be, impossible to know. And because of this there will always be a tendency for BAU projections to assume high emissions, so that the financial institutions can show that their interventions will produce a large gap between business as usual and what actually happens, and so generate lots of EERs,” McCully continued.
There is also fresh, if stuttering, pressure coming from the European Commission, which has issued its own proposals on transition finance, including its own definition: the “financing of climate and environmental improvements to transition to a sustainable economy, at a pace that is compatible with the climate and environmental objectives of the EU.” The Commission’s recommendation clarifies how EU firms can voluntarily use the existing regulatory framework as a means for facilitating transition finance but stopped short of recommending any new rules. These will have to wait until after the European Parliament elections in June 2024 and the arrival of a new Commission next November.
Taking the temperature
In the meantime, institutions will be looking to position portfolios in the expectation of some of these new rules becoming reality in the next few years. Many have turned to the bond markets, where an estimated $2trn has been raised since the European Investment Bank issued the first Climate Awareness Bond in 2007, according to Deloitte. Although green bonds are an important funding source for renewable energy projects, they currently represent less than three percent of global bond market issuances. Within that, bonds focused on transition finance are an almost negligible proportion (see Fig 1). This is where the sort of initiatives being driven by GFANZ come in. It acknowledges there is a huge challenge in unlocking the scale of finance required to achieve significant decarbonisation of the real economy – both through funding clean energy and helping existing businesses genuinely committed to the transition.
Creating consistent definitions that are applicable across markets and sectors will help to scale transition finance to ensure real economy decarbonisation, help financial institutions independently identify their risk exposure and the investment opportunity ahead. They can also serve as safeguards to verify that the reduction of emissions in their portfolios corresponds to actual emissions reductions in the real world, rather than being achieved solely through divestment from high-emitting assets. More money, with greater clarity and measurable impact that can win the trust of investors, governments and climate change pressure groups, is what the world will be watching for as institutional investors are pushed more and more into the net zero spotlight with the scrutiny that brings.
Astute observers will have noticed that the Dubai Financial Markets General Index in the UAE is up almost 30 percent in the past 12 months, with volumes rising by nearly a quarter. For comparison, the FTSE 100 has been effectively flat over the same period, the Dow Jones Industrial Average up only 15 percent, the CAC 40 in Paris up less than seven percent, the DE40 Index in Frankfurt also up a mere 15 percent and the JP225 in Tokyo up around 19 percent.
The boom in Dubai is being led by the property sector, where two giant Dubai-based companies, Emaar Properties, owner of the Burj Khalifa, the tallest building in the world, and its subsidiary Emaar Development have seen their shares rise more than 50 percent and more than 70 percent respectively this year. This has spilled over into other sectors such as banking, where Commercial Bank of Dubai, for example, saw its shares up 25 percent year-on-year at one point, and tourism, with shares in Air Arabia, the low-cost airline based in the next-door emirate to Dubai, Sharjah, rising 45 percent from their low a year ago.
The boost to Dubai’s stock market is good news for the current ruler, Sheikh Mohammed Al Maktoum, who also serves as prime minister of the UAE. In January this year he unveiled the ‘D33 Agenda,’ which has the ambition of doubling the emirate’s GDP by 2033, the year that will mark exactly two centuries since the emirate’s foundation.
The aims of the D33 Agenda focus on doubling the volume of Dubai’s foreign trade
The D33 Agenda focuses on growth, foreign investment, and trade, to turn Dubai over the next 10 years into a top-three international tourism and business destination, by creating a globally competitive business environment and reducing business costs. The aims of the D33 Agenda focus on doubling the volume of Dubai’s foreign trade, and turning the emirate into a top five global logistics hub and a top four global financial hub and a top three global destination for business and leisure visitors.
Other initiatives include bringing 65,000 young Emiratis into the labour market in promising sectors, and launching an initiative called ‘Sandbox Dubai,’ which will allow the testing and marketing of new products and technologies, to make Dubai a hub for incubating innovations.
Potential investors in the emirate are being wooed with policies such as zero percent income and corporation tax in Dubai’s free zones, and only five percent value-added tax. The emirate is already the largest recipient of foreign direct investment in the Middle East, and is looking for investors and partners from overseas in nine different sectors, from healthcare and pharmaceuticals to trade and logistics, and from finance to aviation – and even interplanetary exploration.
Outperforming larger rivals
Dubai is effectively promised a dynamic property sector thanks to forecast growth in the emirate’s population of 75 percent by 2040. Historically the Dubai property market has easily outperformed bigger rivals, with real estate assets generating 120 percent returns for investors in rents and capital in the 10 years since the global financial crisis of 2008, against 75 percent returns in London and 63 percent in New York.
At the same time Dubai remains one of the cheapest major cities in the world for the wealthy to make a home: in 2022 $1m would buy 105 square metres of luxury property in the emirate, against just 21 in Hong Kong, 33 in New York, 34 in London and Singapore, 44 in Shanghai, 60 in Tokyo and 70 in Berlin.
The recently passed Foreign Direct Investment Law allows foreign ownership in onshore companies up to 100 percent, depending on the industry. Administrative processes have been simplified to allow certain professional service activities to be established online by investors from nearly 120 countries.
Oxford Economics, which promotes itself as the world’s foremost independent economic advisory firm, predicted in October this year that the UAE economy would grow by 4.4 percent in 2024. The firm said growth was being driven by a number of factors, including government initiatives to support economic diversification. Scott Livermore, chief economist at Oxford Economics Middle East, said he expected continued growth in the property market and a strong recovery in travel and tourism, with Dubai surpassing pre-pandemic visitor levels by the first half of 2023. He said he expected a 40 percent increase in international visitors to the UAE this year, driven by the UAE’s National Tourism Strategy ambition to become a major global tourist destination by 2031.
Amid the fast-paced evolution of technology, banks have managed to stay current with the ongoing innovations in their field. Transitioning from the era of safes and account books to leveraging data and cloud technology, banks have significantly transformed in terms of their capabilities, assets and services provided to their clients.
In light of this progression, Antony Jenkins, CEO of 10x Banking’s comments referring to banks as ‘museums of technology’ back in June were somewhat surprising. For one thing, his statement does not seem to completely capture the full extent of the digital transformation that banks have undergone despite the challenges of regulation and security concerns. Furthermore, modernising legacy financial systems that have been configured for specific use cases often requires more intricate and meticulous effort than a straightforward or cursory implementation.
If we draw comparisons between banks, especially traditional bricks-and-mortar financial establishments and the systems used by Transport for London (TfL), we can find common ground. The infrastructure of TfL, with its Victorian-era tunnels and inherited rolling stock, could be seen as a ‘transportation museum.’
However, TfL has been consistently modernising, incorporating advanced technology such as tap-in / tap-out ticketing, the development of the Elizabeth Line, and the ongoing renewal and replacement of rolling stock – all of which have helped TfL prepare for today’s commuters and travellers. Much like banks, TfL is merging old and new technology, enabling the organisation to adapt and evolve to effectively cater to the changing demands of its contemporary customers.
In the case of banks, especially those with large legacy IT systems, the question of whether all systems need a technology update is equally as complex as updating transport systems. This is due to the banking sector’s frequent changes in products and services, along with the need to comply with constantly evolving regulations. Consequently, enhancing the IT infrastructure in the banking sector is a continuous process, driven by changing needs but perhaps bolstered by a new wave of fintech that can evolve both business and customer experiences.
Nonetheless, the transformation of banks in the past decade or so has demonstrated that traditional IT systems can exist alongside state-of-the-art cloud technology, delivering sturdy and adaptable solutions for digital and mobile banking as well as data analysis.
Ready for an upgrade
Banks aiming to modernise digitally should take a measured approach, focusing on business needs, cost-efficiency, and new revenue opportunities. The primary focus of digital modernisation should be to address the business needs of the bank. This could include improving customer service, streamlining operations or enhancing security measures. While addressing these things is important, so is the fact that updating legacy systems is a costly endeavour. Banks need to ensure that works are necessary and there will be a significant return on investment when integrating new technologies into their systems. Some examples of these returns could be increased savings from more efficient processes or the ability to offer new services that generate additional revenue.
Retiring legacy systems and migrating to more modern platforms, such as the cloud, can provide numerous benefits for businesses. These benefits extend beyond simply upgrading technology; they can also lead to significant improvements in efficiency, cost savings and customer service.
However, the process of assessing and migrating thousands of systems is not a trivial task. Adopting technology for its own sake is rarely advised. It should be carefully considered and may only become strictly necessary when the cost of maintaining legacy systems outweighs the benefits of keeping them. This requires time and resources to understand the impact of outdated technology on business operations. Without this thorough evaluation, businesses risk increasing costs due to potential inefficiencies or compatibility issues that may arise during the migration process.
Moreover, a direct ‘lift-and-shift’ migration to the cloud without re-architecting or optimising the applications can result in missed opportunities. Re-architecting involves modifying the application to better suit the cloud environment, which can lead to major efficiency gains and improved customer service. Similarly, optimisations during the migration process can help businesses take full advantage of cloud-native capabilities, such as scalability and elasticity.
While retiring legacy systems and migrating to the cloud can offer substantial benefits, it’s crucial for businesses to conduct a comprehensive assessment of their existing systems and plan their migration strategy carefully. This will help them avoid potential pitfalls and ensure they fully leverage the advantages of modern cloud technology. Banks can, and will, tap into new innovations and technologies. However, digital transformation in banking needs a well-considered strategy accounting for regulations, business priorities and customer needs.
The metaphor of banks as ‘museums of technology’ tends to downplay the complexity and restrictiveness of legacy systems that banks must navigate daily. Upgrading these systems presents complications that require due consideration to overcome, and which guarantee that the final result will be appreciated.
Around 300 global bankers arrived in Hong Kong in November, from big names including Goldman Sachs, Morgan Stanley, HSBC, Standard Chartered, Citigroup, UBS and JPMorgan Chase, for the second global financial leaders’ investment summit, a two-day conference organised by the Hong Kong Monetary Authority, the city’s de facto central bank. The purpose of the event was to allow bankers from across the globe “to feel the energy, the vibrancy and also see the opportunities here,” according to the HKMA’s chief executive, Eddie Yue.
He said: “There are still misguided perspectives overseas about what happens in Hong Kong. Some of our friends in the US and Europe ask if it is safe to walk in the streets. It is important to bring people together to see Hong Kong so they see the momentum is gradually coming back.”
Hong Kong, like mainland China, may still be facing a challenging business environment post-Covid, but there are still plenty of investment opportunities, analysts are saying. In particular, Hong Kong’s government is making huge efforts to attract ultra-high-net-worth individuals to the city, to set up operations to pursue investment, philanthropy and succession planning. Hong Kong is already home to the second-largest population of billionaires in the world, beaten only by New York. However, John Lee Ka-chiu, the city’s chief executive, has set a target of attracting 200 new family offices to Hong Kong by 2025. One advantage Hong Kong has over rivals is that it does not require family offices to move their overseas assets to the city. According to Paul Knox, managing director, senior wealth adviser at JPMorgan Private Bank Asia, “this makes it very easy for clients to relocate to Hong Kong, leaving their asset holding structure as it is at the moment without needing to readjust it. As such, the level of interest is very significant.”
Ada Ma Man-shan, partner of tax services at EY, speaking at a financial forum in the city in September, said: “We have a very friendly tax regime in Hong Kong, as single family offices in Hong Kong do not need to get a licence, while in Singapore they still need to get approval from the authorities.”
Singapore, Hong Kong’s main rival for attracting ultra-high-net-worth operators, insists family offices must invest at least 10 percent of their assets under management in listed entities or start-ups in Singapore itself. Hong Kong, however, does not require family offices to invest in local markets. In recent times, Hong Kong has seen billionaires from the US, UK, Australia, Canada and the Middle East who want to set up family offices in Hong Kong.
Global attraction
However, if family offices did want to invest in Hong Kong, there are plenty of opportunities. Last year the city set up the Office for Attracting Strategic Enterprises to attract high potential enterprises from around the globe. It is now expecting to get $3.8bn in foreign investment from 30 ‘strategic’ firms, which will create create some 10,000 jobs in the city in fields such as life sciences, biotech, fintech, data sciences and advanced manufacturing, according to Hong Kong’s Financial Secretary, Paul Chan Mo-po.
Hong Kong’s government is making HUgE efforts to attract ultra-high-net-worth individuals to the city
Speaking at the annual forum of the Hong Kong Green Finance Association in October, Chan said: “We have set sights on attracting strategic enterprises, those with cutting edge technologies, to settle here in Hong Kong so we can create a more vibrant ecosystem.”
The city – technically the Hong Kong Special Administrative Region – has a government department, Invest Hong Kong, designed to work with overseas entrepreneurs looking to set up an office. It offers support with business licences, visa applications, trademark registration, and intellectual property and trade regulations, as well as support with the basics of living and working in Hong Kong, such as setting up bank accounts, and arranging housing, healthcare and schooling. Foreign firms can participate in government-financed and subsidised research and development programmes, and the city has no prohibitions on foreign investment in any sector of the economy.
In 2021, the latest year for which figures are available, assets and wealth managed in Hong Kong totalled $4.6bn, almost two thirds of it coming from non-Hong Kong investors. Open-ended fund companies as well as onshore and offshore funds are offered a profits tax exemption to encourage them to come to the city. There are a number of organisations looking to match up potential investors with businesses looking for funds, such as the Angel Investment Network. Business angels overseas can search the Angel Investment Network Hong Kong website to find business opportunities in Hong Kong in a wide range of market sectors.
Stocks, bonds, index funds, and real estate are the traditional instruments that are part and parcel of any good wealth management strategy. However, investments in luxury items such as art, cars, whisky and wine have emerged in recent years as alternative options for astute investors looking to diversify their investment portfolio.
In fact, over the last 10 years, the Knight Frank Luxury Investment Index (KFLII) has outperformed the FTSE 100 every single year, bar one. After all, good art never goes out of style, wine and whisky mature in both age and value, and the right cars can also generate an impressive return on investment.
The luxury cars that appear on everyone’s wish list, such as Ferrari, Porsche and Aston Martin, to name a few, are synonymous with wealth and status and beyond the sometimes flashy, ‘boy-racer’ appeal, they can represent a unique investment opportunity whose value may appreciate substantially over time and become a valuable asset.
Where to start?
The best way for anyone interested in investing in classic or luxury cars is to go to car shows and auctions to see what’s on offer and talk to owners to gain first-hand knowledge of the pros and cons of ownership. It also gives potential investors a chance to decide which cars they actually like, because it is, as Andrew Shirley, Head of Luxury Research at Knight Frank says, “an investment of passion.” Investing in a luxury car is like buying a piece of art; the first question to ask yourself is: ‘Do I like it?’
Investing in a luxury car is like buying a piece of art
Of course, once the field has been narrowed down, it’s important, as with any investment, to do due diligence and investigate the market thoroughly. Reading industry news, talking to experts and researching the numbers, including price trends and historical auction results, will all help investors make a more informed decision. Finally, before writing any cheques, it’s essential to get expert help to assess the vehicle’s condition, maintenance history and, more importantly, its authenticity, to minimise the investment risk.
How risky is it?
No investment comes with a 100 percent guarantee of profit, and while investing in a luxury car provides significantly more enjoyment than buying a run-of-the-mill stock there are still some risks involved, such as fluctuating economic conditions, political instability and changes in technology, all of which can create uncertainties which may affect demand and desirability for certain models.
Historical Automobile Group International (HAGI), an independent investment research house, created the HAGI Top Index in 2008 which tracks the overall market for ‘exceptional historic automobiles’ using similar financial analysis techniques to those used in traditional investments. The August 2023 valuation shows a 7.74 percent decrease in year-to-date price, most probably due to inflation and interest rate rises. Of course, there are always data outliers and the HAGI Lamborghini Index has defied the market and produced a 5.85 percent year-to-date increase.
One of the biggest challenges and ongoing expenses of owning a luxury or classic car is keeping it regularly serviced and maintained to retain its value and ensure optimal performance. Costs tend to be higher because it’s necessary to use specialised parts and skilled labour at marque-specific dealerships, and additional costly expenses can occur if the car obtains any damage, especially if the repairs are not fully covered by insurance.
Another challenge can arise when you come to sell, especially if you are looking to sell quickly. Luxury cars have a high price tag and appeal to a small, niche market, so finding potential, trustworthy buyers who are willing to pay a premium for a high-end vehicle can take time, which limits options and delays the selling process. Making a sale can also involve additional marketing efforts above those needed to sell a ‘normal’ car, a longer sale window, compromising on price and offering significant discounts.
There are so many cars for an investor to choose from, but here are five of the best:
Aston Martin DB5
The connection to James Bond has made the Aston Martin DB5 legendary, and even without being his preferred ride, this car is a landmark British GT. Hand-built in England from 1963 to 1965, the DB5 embodied British refinement with a 4.0L, inline-six cylinder engine and elegant fastback styling from Italian Carrozzeria Touring Superleggera. Around 1,000 DB5s were produced in total in the ’60s, ensuring their exclusivity, with a further 25 models built from 2020 as part of Aston Martin’s Continuation programme. Pristine examples now sell for over £1m at auction. In 2022, Sean Connery’s 1964 DB5 fetched £2.1m, while a No Time to Die DB5 stunt car raised nearly £3m at Christie’s charity auction to celebrate 60 years of the James Bond films.
Ferrari 250 GTO
Not all Ferraris are created equal and if you want to invest in one, the 250 GTO is the one to get your hands on as only 36 were ever produced. Originally designed in the early 1960s for FIA Group 3 GT racing, the 250 GTO’s radical aerodynamic features improved the top speed of its 3.0L V12 engine and overall stability. Its racing pedigree, beautiful aesthetics and rarity make the 250 GTO one of the most expensive cars in the world, with a private sale in 2018 fetching £52m.
Porsche 911 GT1 Strassenversion
To be able to compete in GT racing in the 1990s, manufacturers had to build a total of 25 road cars for homologation purposes. Porsche’s 911 GT1 Strassenversion featured a mid-mounted twin turbo 3.2L flat-6 engine, and with a stripped interior, carbon fibre construction and massive rear wing, it was a barely legal road rocket. Porsche produced 20 cars in 1997, and a further single car in 1998 for new FIA regulations, which instantly made them prized collector’s items, and a recent 2021 price tag for a sale in Japan was £8.5m.
Shelby Cobra
What happens when you stuff a massive Ford V8 into a tiny British roadster? You get the legendary Shelby Cobra, one of the most iconic sports cars of the 1960s. After tuning and modifying AC Bristol roadsters, Carroll Shelby’s Cobras were purpose-built for dominating road courses, like they did in the 1964 World Championship, and defined raw American power with their lightweight roadster design. Around 1,000 original Cobras were built, and thanks to their legendary status, remaining ones easily fetch over £1m at auction.
Jaguar E-Type
Based on Jaguar’s D-Type Le Mans-winning race car, the E-Type debuted to instant acclaim in 1961 and is often called the most beautiful production car ever built. Lauded as a technical marvel, its curved fastback shape, designed by aerospace engineer Malcolm Sayer, instantly made everything else look dated, while a 3.8L six-cylinder engine sent power to the rear wheels helping it reach 150 mph. The Series I cars built from 1961 to 1964 are most coveted by collectors and can cost up to £250,000.
The long-term benefits
The biggest benefit of investing in luxury cars from brands such as Ferrari, Lamborghini and Porsche is their potential to appreciate in value over time, unlike any mid-range car which is generally worth next to nothing in a couple of years once it has 100,000 miles on the clock.
Take the Ferrari Dino 246GT as an example. A savvy investor could have picked one up in 1980 for less than £9,000 (£49,000 adjusted to 2023 value) and achieved an 818 percent return (approximately) by 2018 when the Dino’s price had increased to around £330,000 (£450,000 adjusted).
Limited production runs, special editions or legacy models, especially those with racing heritage or unique designs, are highly coveted because of the finite supply, and car enthusiasts and collectors will always pay a premium for the prestige of owning these pieces of automotive history, especially if the model has low mileage and is well-preserved.
However, if an investor feels they may have missed the boat with certain models, it’s always wise to keep an eye on the newer end of the market. Cars that utilise innovative technology and have groundbreaking concepts and performance can become instant classics and future collectibles, giving investors a chance to get in early.
Another surprising long-term benefit of owning a luxury car is the opportunity to generate an additional revenue stream by renting them out for special occasions, such as weddings, photo and film shoots, and corporate events, which can help offset ongoing maintenance costs.
Luxury cars can appreciate significantly based on scarcity, collectability and enthusiast demand, with ROI often beating stocks. Iconic classics and cutting-edge contemporary supercars tend to become blue chip collectibles and some of the most sought-after cars currently are the Ferrari LaFerrari, Bugatti Chiron and Mercedes-AMG One. Proper care, maintenance and restoration helps protect collectible car investment value because authenticity is paramount. So while you don’t have to be a certified petrol-head to invest in luxury cars, it certainly helps.
It wasn’t that long ago, just 15 years, when few outside China wanted to deal in yuan. It had little weight in the global basket of currencies that are traded daily, so little that it was almost irrelevant. Few countries held yuan as a store of value. And it was mostly used in payments for goods.
But that is starting to change as China embarks on a plan designed to make the yuan – or renminbi – a genuine force in world markets that is designed in the long run to challenge the hegemony of the mighty greenback. Already some foreign currency experts refer to the renminbi as the ‘redback.’
In the latest example of the way China, in a grand plan orchestrated by President Xi Jinping, is pushing its currency into world markets, Argentina paid half of its $2.7bn debt instalment to the International Monetary Fund in yuan rather than in precious US dollars, in August. It did so by tapping a currency swap line, a common arrangement between central banks, that Argentina set up with China 15 years ago. Under a swap line the other party, in this case China, provides the equivalent in yuan of the required amount.
The yuan has a growing role in safeguarding the financial stability of developing economies
A serial defaulter over the years, Argentina is just one year into a new $44bn programme financed by the IMF. The economically beleaguered nation could hardly afford to miss a payment on what is essentially an emergency loan, and China came to the rescue.
It’s the second time that Argentina has dipped into the yuan trough via the swap line to meet its IMF obligations, the last being in June. The swap arrangement is China’s current tactic to deepen the power of its currency. In technical terms it’s an agreement established between two central banks to exchange their currencies to an agreed amount. The pact allows one country’s central bank to obtain foreign currency liquidity from the other central bank, usually to finance bilateral trade and direct investment. In the case of the China-Argentina swap line, it allows Argentine’s central bank to receive yuan from its Chinese equivalent in exchange for an equivalent amount of pesos.
China and Argentina first signed a currency swap agreement in 2009 for 70bn yuan ($10.3bn) and expanded it to 130bn yuan ($19.1bn) in 2018. The arrangement has been a lifesaver for Argentina. In January 2023 the government used it to ward off a foreign exchange crisis. And, furthering the relationship, Argentina will now start paying in yuan for Chinese imports as it runs out of dollar reserves.
Things to come
This latest stepping stone in the internationalisation of the yuan, one of several, has been hailed in China as a precursor of big things to come. Citing experts, the Communist Party-owned China Daily trumpeted in August: “The Chinese renminbi, also known as the yuan, has emerged as a safeguard of global financial stability, shielding an increasing number of developing economies from the spill over effect of drastic adjustments in US monetary policy.”
Weighing in on what is in fact a small deal in terms of the vast forex markets, senior economist Yue Yunxia described the yuan-pesos exchange as “a significant, innovative step in renminbi internationalisation.”
Argentina’s plight was painted as being worsened by the US Federal Reserve’s “aggressive interest rate hikes which intensified the Argentine peso’s depreciation and increased the country’s debt burden.” As such, argued Yunxia, it proved that the yuan has a growing role in safeguarding the financial stability of developing economies as they increasingly opt for the yuan in international settlements and financing. And another economic professor, Wang Jinbin, highlighted the rescue capabilities of the yuan. “It has provided economies suffering from a dollar shortage with an alternative option for trade settlements.”
Up to a point that’s true. Other dollar-short countries such as Brazil and Bolivia also regularly make use of the renminbi in international trade under prearranged swap lines like that of Argentina. And in defiance of international sanctions India recently paid for Russian oil in yuan.
Viewed in context
However, the global data shows that these claims must be taken with a pinch of salt. Even though 2023 has been a good year for the internationalisation of the Chinese currency, its share of global payments is still just 2.77 percent, according to global financial messaging platform SWIFT, while the dollar’s share stands at over 42 percent. As of mid-2023 the yuan trailed well behind the euro, sterling and the yen in global payments.
The yuan trailed well behind the euro, sterling and the yen in global payments
And the greenback shows few or no signs of weakness. As the US Federal Reserve pointed out in a recent paper, the dollar has sailed through recent disruptions such as Covid-19 and US sanctions against Russia that many economists expected would erode its dominance. After carefully reviewing the use of the dollar in its three major global roles – in international reserves, as a currency anchor, and in transactions, the Fed concludes: “We find that the dollar remains the dominant currency and plays an outsized international role as measured by usage in international reserves and other dimensions relative to the US share of global GDP.” In fact, by all these measures the dollar’s international usage is basically unchanged over the past five years and little-changed in 20 years.
Unfortunately for China, its ambitions for the yuan run into the overriding confidence that the world has in the greenback, particularly when measured by its weighting in official forex reserves. In short, as an anchor currency for stormy seas. “The dollar comprised 58 percent of disclosed global official foreign reserves in 2022 and far surpassed all other currencies including the euro (21 percent), Japanese yen (six percent), British pound (five percent), and the Chinese renminbi (three percent),” highlights the Fed.
Put another way, the disruptions of Covid and the war in Ukraine have only served to strengthen confidence in the dollar as an anchor currency.
There’s also a vast amount of paper banknotes held in foreign hands. Indeed the volume has actually increased over the past two decades, both on an absolute basis and as a fraction of banknotes outstanding. By the Fed’s calculations, more than $1trn in banknotes is owned outside the US. That’s about half of all US dollar banknotes on issue, and nobody seems to be in a hurry to cash them in.
Step by step
Typically patient, China has adopted a step-by-step approach to the expansion of the role of the yuan that started in mid-2009. The first move was a new scheme for the settlement of trade claims abroad, primarily through the kind of swap lines used by Argentina. That meant there was a lender of last resort in trade-based renminbi lending.
The establishment of the swap lines has proved crucial. As a 2020 Bank of England paper entitled ‘Jump starting an international currency’ explains, they began to boost usage of the currency. “An upward trend is visible from 2010 onwards with renminbi usage rising from near zero to a peak at around four percent of global payments in 2015. Since then the trend has levelled out and usage is running at just under three percent.”
A big problem for China though is that only those countries that trade heavily with China use the currency the most. Many countries still don’t use it at all. That’s one reason why China is relaxing its strict capital controls. Although it is the largest goods exporter in the world, those controls made it difficult for the currency to be used internationally.
Bit by bit, China is softening its rules. Foreign investors are now allowed to trade in yuan-denominated stocks as well as in bonds via Hong Kong and in exchange-traded funds and interest rate swaps. The last two only became possible in 2022 and 2023.
Simultaneously, notes an analysis by Nikei, “Beijing has signalled it looks to push harder to expand the yuan’s role in cross-border payments.” This is exactly what Argentina is doing in trade transactions.
In late 2023 the yuan looks to be on the rise. In the second quarter of this year it was used in 49 percent of China’s cross-border transactions, topping the dollar for the first time, according to the Nikkei analysis. The main causes are China’s continuing liberalisation of its capital markets and, in what economists call an exogenous trigger, a growing yuan-based trade with Russia that is obviously a direct and disruptive result of the Ukraine war.
This is enough for some to see the yuan becoming the vehicle for eventually undermining the dollar. Citing India’s yuan-based purchase of Russian oil, Radhika Desai, director of the geopolitical economy research group at the University of Manitoba, says it “offers further evidence of the de-dollarisation of the global economy” and a “loss of trust in the crisis-prone US financial system.”
While it will be news to most economists that the US economy is crisis-prone, particularly as it is growing strongly, there are certainly undercurrents in the global financial markets that bear watching.
However, the weight of history is against any upheaval of the dollar. As the Fed points out, the only time in the last 100 years that one currency abruptly lost its dominance was when the dollar replaced sterling in the financial chaos following the First World War, an event formalised in the Bretton Woods Agreement of 1944.
In the last decade, bourbon, America’s native spirit, has witnessed an unprecedented resurgence with bottles such as Pappy Van Winkle achieving cult-like status. And even expressions that were mainstays at the local liquor store just a year ago have all but vanished today. Throughout Kentucky’s bluegrass country, bourbon distilleries have been battling to keep up with this surge in global demand, largely driven by consumer appreciation for the spirit’s rich, unique flavour profile.
Historically, the distilleries’ rite of passage was a waiting game. They lovingly distilled the spirit, encased it in oak barrels, and then paused, letting time and nature work their magic. They’d wait, sometimes for decades, for the bourbon to mature and only then could they monetise this labour of love. This waiting and the resulting impact on distillery cash flow held the reins on a distillery’s ambitions and production volumes.
In an industry where aging is an essential part of the product’s value, producing more to meet demand isn’t as simple as ramping up production. It involves a delicate, years-long process for which there is no substitute. Production today will only offset demand in years to come, and it’s impossible to turn back the hands of time.
Traditionally, distilleries financed their operations through the sale of their matured bourbon. This model, though time-tested, meant they had to wait anywhere from four to 20 years for the bourbon to mature before they could monetise their product. This waiting game hindered distillery expansion to meet burgeoning demand.
A new era
Today, however, a group of finance visionaries is rewriting this narrative. They’re stepping in, offering to shoulder this wait, thereby providing an immediate lifeline of capital for the distilleries. The method is delightfully simple – they buy casks of newly distilled whiskey, which are then left to mature.
For the investors, it’s the opportunity to profit as the whiskey they own matures
This strategy is a game changer, both for the distilleries and the investors. For distilleries, it’s an instant cash injection, enabling them to boost production and meet the global thirst for their bourbon. For the investors, it’s the opportunity to profit as the whiskey they own matures and appreciates in value. Beyond the potential to generate strong returns, bourbon cask investing offers a number of additional benefits to investors.
One of those benefits is the tangible nature of bourbon casks. In a world where portfolios are filled with financial instruments that lack a physical presence, it can be reassuring to own an investment you can touch and even taste, all while it continues to improve with time. And, given that bourbon casks fall under the strict oversight of the federal government due to laws governing spirits production, investors can rest assured that a watchful eye will be kept on the storage facilities in which their investments are held.
Investing in bourbon casks also offers some powerful advantages over their bottled counterparts. The first of which is that the provenance of bourbon casks is guaranteed due to storage being maintained at a federally licensed facility through the entirety of the investment lifecycle. Whereas there have been forgeries identified among rare bourbon bottles sold on the secondary market, it would be nearly impossible for a cask to be misrepresented.
Additionally, prices of bottled bourbon are only impacted by changes in demand due to the fact that after bourbon is placed into glass the aging process stops. Since bourbon only matures while it is contained inside of the cask, investing in barrelled bourbon is the only way to purchase the asset in a manner that capitalises on the aging process of the spirit. The powerful nature of this characteristic stands in stark contrast to other tangible assets which simply remain the same, or even depreciate with age.
Cultural heritage
However, the impact of these investments transcends the financial benefits. Investors, in their pursuit of returns, find themselves guardians of a cherished tradition, custodians of a slice of American cultural heritage. Their capital doesn’t just generate profits; it sustains jobs, bolsters local economies, and ultimately fills glasses worldwide with joy.
Recognising the opportunity of whiskey casks as an asset class, Los Angeles based CaskX have risen to the forefront. The CaskX platform has led the market forward, providing a mechanism that bridges the gap between bourbon distilleries and potential investors, managing everything from procurement to storage, making this investment avenue more accessible than it’s ever been before. As the market matures additional firms will likely follow suit to further advance the industry.
Ultimately, bourbon cask investing is more than a promising financial venture. It’s a story of tradition meeting modern finance, of patience rewarding anticipation, of investors and distilleries coming together to keep the bourbon flowing. As the global palate continues to savour bourbon, these investors can’t help but raise a glass to their flavourful assets, a testament to their foresight and the rich history of bourbon.
When Claudia Goldin won the Nobel Prize in Economics last October, many of her colleagues rejoiced. The prestigious award endows the Harvard University academic with an aura of respectability that few female economists enjoy. At the crossroads of economics, history and gender studies, her work shines a light on the unrecognised value of female labour. “She has brought women to the forefront of economic study, an area that has historically been overlooked,” says Stefania Paredes Fuentes, an economist at Warwick University studying diversity in economics education, adding; “Traditional economic models with representative agents often neglect the role of women in the economy, perpetuating a lack of recognition of gender roles in the labour market.”
One reason why Goldin’s win has been welcomed with enthusiasm is that her accomplishment is so rare. Only three women have ever won the award, all in the 21st century (see Fig 1). Goldin is the first woman to receive the award without sharing it with male colleagues. This reflects the gender gap facing economics, with fewer than one out of four tenured professors in the US being women, compared to 43 percent for other disciplines. “Stereotypical perceptions of economics as a discipline dominated by men from the upper-middle class wearing suits and talking about money persist, which, combined with the scarcity of female role models, deters young women from pursuing economics from the outset,” says Fuentes. Goldin’s recognition, she hopes, could help change that, emphasising that economics is “a discipline centred around studying our society and its people, not just money and banking.”
Rage against the models
As a science, economics has never been more widely read and discussed, occasionally even turning into a pop culture phenomenon. Economists like Thomas Piketty, author of the much-discussed and little-read Capital in the 21st Century, and Yannis Varoufakis, Greece’s former finance minister, are the high-brow equivalents of football superstars, filling amphitheatres with young students hungry for alternatives to runaway capitalism. At the same time, the discipline has never faced more uncertainty and criticism, even from within its own ranks. Following the Brexit referendum, Andy Haldane, then Chief Economist of the Bank of England, acknowledged that the profession faces a crisis, as economists are increasingly blamed for society’s ills, while failing to account for human irrationality. A 2019 YouGov survey for Bristol University found that economists were among the ‘least trusted professionals’ in the UK.
Claudia Goldin, Nobel Prize winner
One reason for the discipline’s unpopularity is its complexity. “Economists have made a point of turning economics into a closed profession with a lot of jargon. People think that economics is beyond their understanding,” says Paola Subacchi, who teaches international economics at Queen Mary University of London. Despite being a social science, economics relies on advanced mathematics to describe a complex phenomenon like the economy. A recent survey of 350 Bachelor’s degrees by the International Student Initiative for Pluralism in Economics, a group including over 100 universities worldwide, found that economics degrees were highly mathematical, with non-mathematical subjects covered by just 2.5 percent of modules, while real-world applications and history were largely ignored. “The way economics is taught in universities does not include half the tools and concepts necessary to understand economic problems. The core of economics teaching is mathematics, statistics, macroeconomics and microeconomics, meaning that there is no pluralism in terms of theories and disciplines,” says Arthur Jatteau, the University of Lille economist who led the project.
Such formalisation is a product of the discipline’s history. Economics started as a branch of philosophy, evolving into a social science in the 19th century. Even then, it was largely free of mathematics. Adam Smith’s The Wealth of Nations includes no equations. Despite its humble beginnings as a ‘moral science,’ the discipline soon adopted mathematical modelling in an effort to wear the impenetrable armour of objectivity that only ‘hard’ sciences like physics can boast of. The turn towards neoclassical approaches, which emphasise supply and demand equilibriums, enabled economists to pass their policy prescriptions as scientific analysis. “Mathiness comes from this pursuit of influence,” says George DeMartino, an economist who teaches at the University of Denver. “It sends a signal to policymakers that they don’t understand what economists do and therefore they must defer to their judgement.” Milton Friedman, the high priest of free markets, famously argued that it did not matter if models made unrealistic assumptions, as long as they accurately forecast the economy’s ups and downs. For many economists, this approach is necessary for the science to maintain its academic rigour.
“Mathematics in economics brings transparency in that it makes assumptions explicit. So the models still work in most cases,” says Jon Danielsson, an economist and co-director of the LSE’s Systemic Risk Centre.
The issue came to the fore recently due to the failure of models to predict the inflation crisis. In an astounding admission, Belgium’s central bank governor Pierre Wunsch acknowledged that the European Central Bank’s models were practically useless. “It was more or less impossible in our models to produce any inflation that would not be temporary,” Wunsch said last year, explaining that they always showed price rises falling under the bank’s two percent target. The issue had broader political repercussions, with central banks taking flak for failing to grapple with the first inflation crisis since the early 1980s. Some economists dismiss these failures as part of the forecasting game. “Inflation forecasting models are notoriously unreliable, but that does not mean other models are unreliable,” says Danielsson, adding; “It’s a complicated problem and anybody trying to solve it would be an economist, whether by training or otherwise.”
For others, however, it’s emblematic of the profession’s shortcomings. “The problem with modelling inflation is that we need to take into account many different components, including some that are not easily quantified, like expectations,” says Subacchi. “We think that people are rational, but human behaviour depends on emotions, which are not easily modelled.” The emphasis on mathematics enhances the profession’s nearly inherent elitism, argues Veronika Dolar, an economist teaching at SUNY Old Westbury. “We push this idea of profit and GDP maximisation to such an extreme that we think everything can be quantified. Sometimes we lose track of the fact that maximising GDP is just a proxy for improving wellbeing,” she says, adding: “This kind of thinking facilitates the self-selection of people who might be excellent academically, but misunderstand the big picture.”
One subfield that questions rational assumptions is behavioural economics, which deploys insights from psychology to explain economic behaviour. Despite its popularity, the field is facing criticism for the controversial data collection and analysis techniques used by many prominent behaviour economists. One of them, the Duke academic Dan Ariely, who has made his name by exploring honesty and its role in economic transactions, has come under fire for using data of dubious credibility in several studies, with other academics being unable to replicate his findings. Another behavioural economist, Francesca Gino, has been put on leave by Harvard University for falsifying results in some of her papers. “In behavioural economics there’s this notion that ‘p-hacking’ {the misuse of data analysis to present non-existing patterns as statistically significant} is not as bad as outright faking or manipulating data. In my mind, presenting what you want to see is data fabrication or manipulation,” says Lakshmi Balachandra, an economist who teaches entrepreneurship at Babson College.
Her own concerns over the methods used by another behavioural economist during her postgraduate studies had been dismissed as irrelevant. One reason for that tacit acceptance of dodgy practices, she argues, is that behavioural economists work with large datasets that can be easily manipulated to produce the desired results, while samples are often selected from specific demographic groups, such as undergraduate students.
An immoral science
While concerns over academic integrity and research reproducibility are not uncommon among other sciences, economics faces a much bigger ethical crisis. One piece missing from its models, argues George DeMartino, author of The Tragic Science: How Economists Cause Harm, is an understanding of the harm that theories can cause, as most economists believe that some collateral damage is the price to be paid for a higher good. The gap separating economists from those who cannot master its advanced mathematics results in a sense of entitlement. “There’s this profound paternalism in the profession that economists know best, and society should defer to our judgement because everybody will be better off,” DeMartino says. “If you take this approach, you find that it’s okay to deceive.” One example is the ‘Shock therapy’ imposed on post-Soviet Russia by a group of Russian and foreign economists, seeking to transform the country into a market economy. The economic argument, DeMartino suggests in his book, was a smoke screen for economists to pursue their agenda. As an antidote to such behaviour, he believes that economics teaching needs to incorporate ethics, notably what he calls ‘moral geometry’: the study of how complex economic policies could affect and potentially harm different groups.
Is economics sexist?
In an era where discrimination against disadvantaged groups is openly discussed, the question of whether economics faces a gender problem is becoming more salient. A 2020 study claimed that inherent biases in the way the discipline is taught make economics students more sexist as they progress with their studies. Some economics textbooks have been criticised for being biased against women, while more than three out of four research papers are written by male economists. Gender disparity starts early on and progresses from A-levels to university, according to Stefania Fuentes from the University of Warwick, who headed a report on the demographics of economics students in the UK. “The lack of female representation can be attributed to the unwelcoming environment women and minorities often encounter in economics,” she says, adding: “This includes documented instances of sexism within economics departments, where women are more likely to experience harassment and face a hostile environment during conferences and presentations. They are also held to higher standards in their academic work: they need to write better academic papers, and are subject to higher standards in general.”
The main problem is not the number of women studying economics, according to Paola Subacchi, but the lack of visible female economists like the Nobel laureate Claudia Goldin. “We need to have more women everywhere in economics, not just women studying women in gender-oriented economics,” she says. For her part, Balachandra from Babson believes that the profession is in for some soul-searching. “We have a white male-dominated network effect. If you’re part of this patriarchal hierarchy, your research is automatically considered better,” she says, adding: “If you’re not from a branded institution like Harvard, MIT or Stanford, your research isn’t considered as good.” Economic policymaking is also dominated by male economists. Currently, only 26 of the 190 IMF member countries have female finance ministers, while just 17 have a woman at the helm of their central bank. Such absence of diversity has broader impacts, says Fuentes: “Diversity among economists is instrumental in policymaking,” she says. “Without diversity, there is a higher risk of groupthink, which hampers thorough analyses of alternatives and consideration of consequences, ultimately hindering the quality of policy outcomes.”
Another reason why economics is becoming an anathema for the public is its sheer power. In the wake of the Great Depression and WWII, a global wave of Keynesian interventionism filled government bureaucracies and international organisations with economists. From an academic discipline, economics transformed itself into a way of governing. When neoclassical economics replaced Keynesianism as the dominant paradigm in the 1970s, a new generation of economists played a central role in market-orientated reforms such as lowering tax rates. This gave rise to what James Kwak, author of Economism: Bad Economics and the Rise of Inequality, calls ‘economism’: an ideology that posed as scientific analysis, aiming to replace post-war planning with unfettered free markets. As the discipline gradually shifted from demand to supply side approaches and monetarism, thinkers like Friedman and politicians like Ronald Reagan imposed a new economic model that emphasised deregulation and a smaller role for the state. “Many prominent economists actively promote the idea that simplistic models should be the basis for policy,” Kwak says, adding: “Economics 101 is taught everywhere in a way that encourages people to remember the simple models and forget all the caveats that come with them.”
Populist backlash
While such ideological commitment has increased the influence of economists, it has also exposed them to harsh critiques. The first shock came in 2008 when the financial crisis gripped the global economy. Mainstream economics was blamed for failing to anticipate the credit crunch and prolonging the subsequent crisis through misguided austerity policies. The backlash was severe. Some attribute the rise of populism worldwide to the failure of economists to grapple with the consequences of their actions. Such disillusionment led to a rejection of economic expertise, a sentiment famously expressed by the British politician Michael Gove in the run-up to the Brexit referendum. Asked about several dire economic forecasts about Brexit, Gove said: “I think the people in this country have had enough of experts, from organisations with acronyms, saying that they know what is best and getting it consistently wrong.” He would later clarify that he was referring to economists. Many other politicians have criticised the influence of economists; Donald Trump was notoriously distrustful of economic experts during his presidency. On the left side of the political spectrum, the rise of inequality is often blamed on economics for providing the vocabulary to defend the status quo, an antipathy some speculate transmuted into a broader distrust of experts, as evidenced by anger against public health officials during the pandemic. “Economics deceived the public about the emergence of market fundamentalism, as if we were all going to prosper,” DeMartino says. “It was never honest with the public about the fact that this experiment would have winners and losers. Those who have been harmed are now getting their revenge.”
One particular target of populism has been central bank independence. Politicians on both sides of the Atlantic have questioned the competence of central bank governors, with their failure to anticipate the inflation crisis rekindling the debate on whether elected politicians should have the final say in monetary policy. “Delegating so much decision-making power to experts is unique,” argues Johan Christensen from Leiden University, a political scientist who studies the role of experts in policymaking. “You don’t see that in other policy areas. What we see now is a rebalancing phase, with growing demands for accountability and more political say over what central banks do.”
The backlash has partly borne fruit, as the pendulum is swinging towards more market regulation. International organisations such as the IMF have acknowledged that markets are embedded in societies, rather than self-regulating institutions. Central bank monetary policy is increasingly influenced by new quantitative models, known as Heterogeneous Agent New Keynesian (HANK) models, which take into account wealth and income distribution. The prevalent sentiment among economists is a need for change, says VeroniKa Dolar from SUNY: “Even mainstream economists trained in neoclassical approaches are arguing that we can’t keep talking about free markets in the current environment, with low taxes and large corporations influencing politics. There is a shift because the world we live in has changed.” Although the neoclassical school is still dominant, its grip is getting looser, according to Christensen. “New insights make their way into policymaking institutions through graduates equipped with a more up-to-date economics education,” he says, adding: “Over time, the perspectives of these institutions change as their staff changes, but there is a lag in the process.”
New paths
Defenders of economic orthodoxy argue that, like other sciences, economics evolves by learning from its mistakes.
Often adopting interdisciplinary approaches, new subfields are refreshing the discipline with a mix of pragmatism and humility, questioning the need for perfect equilibriums in an imperfect world. Borrowing concepts from computer science and cybernetics, complexity economics studies the interaction of economic networks. Evolutionary economics explains economic transformation through the lens of continuous cultural, institutional and technological change.
Contemporary challenges such as the climate crisis are even pushing economists to question some of the profession’s most sacred principles. Perhaps the most controversial among them is ‘Degrowth,’ a school of thought suggesting that undoing economic growth is necessary to hit net zero targets. Its most radical proponents advocate for a deliberate reduction of GDP, a policy that critics argue would lead to authoritarianism and extreme poverty. “Those ideas have been around since the 1960s, but they’re starting to get traction now outside of economics because of the ecological crisis. If the degrowth movement continues to apply pressure and politicians start to adopt it, then the economics profession will start taking it seriously,” says DeMartino, citing Occupy Wall Street as an example of a political movement that changed mainstream economic thinking on inequality.
Technological change is also affecting the profession, with the big data revolution facilitating a shift toward empirical approaches. One example is experimental economics, which relies on empirical research and statistical analysis of controlled experiments and evidence-based randomised control trials to estimate policy impacts. Its most prominent advocates, Abhijit Banerjee and Esther Duflo, who won the 2019 Nobel Prize in Economics, use field experiments to study the causes of economic relationships in the developing world. Critics have raised questions over the scalability of these methods and the credibility of collected data. However, the rise of experimental approaches marks a broader shift, DeMartino says: “Among younger economists there is a move toward empiricism. Rather than deducing policy implications from a blackboard using supply and demand models, there’s a turn to data.”
A precarious future
As a child of the Enlightenment era, economics is characterised by an inherent belief in constant progress, including its own ability to perpetually enhance our understanding of the material world. Such optimism may no longer be topical in an increasingly irrational world where technological progress reigns supreme. The rise of generative AI, threatening to wipe out whole professions, poses new challenges. Economists often appear on top of the list of white-collar professionals expected to be affected by automation. Ironically, the profession’s reliance on advanced mathematics, the tool that gave it the pole position among social sciences, also makes it vulnerable to technological innovation. Tasks such as forecasting and modelling can be easily performed by bots, given the large amount of literature that can be fed to AI tools such as ChatGPT. “Fewer economists will be able to generate much more output by using AI,” DeMartino forecasts.
For the time being, economists still dominate policymaking, even expanding into areas where they had little sway until recently, such as climate policy. One example is the way the UN Sustainable Development Goals are being pursued through policies largely shaped by economists, according to Christensen. However, many think that a challenge of that scale requires more emphasis on urgent action, rather than bean counting. “Until economics recognises its limits in terms of predicting the future, we economists shouldn’t have too much influence in these areas,” says DeMartino, adding: “Economics has aspired to be the physics of the social world for over 100 years. That pretension has to be dropped.”
