2015 | World Finance

Diamonds aren’t forever? Coloured stones come into favour

Posted on July 16, 2015April 10, 2018 by Ashton Wenborn

A clear, sparkling diamond is engrained in the minds of many women around the world as being the symbol of everlasting love, while for some men it is the requisite token bought to signify a proposal of marriage. For decades, diamonds dominated the market for fine jewellery, particularly for engagement rings, and while they remain emblematic of luxury and perpetuity, a new trend is emerging. Coloured gemstones are back in vogue, with more jewellery pieces set with rubies, sapphires, emeralds and amethysts emerging as worldwide demand increases by the year.

“Following a few decades of domination by the clear stone, the coloured gemstone revolution is most definitely back,” said Ian Harebottle, CEO of Gemfields, the world’s largest producer of precious stones. The company has seen first-hand the marked increase in jewellery and luxury good purchases (see Figs 1 and 2).

The cause of this growing inclination can be attributed to many reasons, including a desire to wear something unique, along with macroeconomic themes within both traditional and emerging markets. “The average consumer is reluctant or unable to spend freely on jewellery, so they are turning to coloured stones, which can offer bigger looks for less money,” according to Russell Shor, Senior Industry Analyst for the Gemological Institute of America.

A diamond story
Prior to the 1940s, marriage proposals did not carry the compulsory mandate of a diamond engagement ring as they do today. Actually, the ritual was more uncommon than the alleged rarity that the stones themselves proffer. This social transformation began when an abundance of the colourless jewel was discovered in South Africa. The De Beers group was created in 1888 to diffuse inevitable market saturation, and so became involved in every process of the industry, from exploration to mining and retail. “The diamond market was very successful during the last part of the 20th century in monopolising the market by making diamonds synonymous with rarity and absolute love,” said Antony Zagoritis, a gemologist for the mining group Lapigems Gem Company. Through stockpiling, the group was able to set its own prices, thereby giving the stones the illusion of scarcity and the price tag of something precious.

Although a ‘limited supply’ had been successfully engineered, sales were still faltering. Tensions in Europe and the looming cost of war had driven demand down further for the superfluous product, while its price put it out of reach for most. Contrary to tried-and-tested business models, De Beers set about creating a need where one did not exist, embarking on arguably the most remarkable marketing campaign in history.

Advertising firm NW Ayer was hired in 1938 to create a culture in which diamonds were perceived as a vital purchase, regardless of one’s income and even within an unfavourable economic environment. What makes the strategy even more impressive is that De Beers was not selling directly to customers, nor publicising a brand name – they were simply spreading an idea. And this idea was that a happy marriage started with a diamond ring.

Named by Advertising Age magazine as the best slogan of the 20th century, ‘A diamond is forever’ not only had a powerful connotation for young couples, it prevented the resell of the product, meaning that it was kept for as long as the marriage lasted – presumably forever. The advertising message of how much should be spent on a diamond ring then set a minimum price of two month’s salary on this obligatory act.

De Beers also introduced the famous ‘4Cs’ grading system in order to encourage consumers away from only purchasing larger stones, thereby also shifting their surplus of smaller diamonds. For decades, countless adverts have since contained a ‘how to buy’ panel, teaching customers to look out for colour, clarity and cut in addition to the carat weight.

Colour block
Historically, coloured stones were a staple aspect of fine jewellery in various cultures across the globe: “Some of our most famous jewellery collections, such as the crown jewels, provide a clear indication that coloured gems have always played an important role in our heritage,” said Harebottle. And yet, in the 1980s and 1990s, this tendency diminished significantly as conservative pieces with diamonds became more desirable.

Another impediment that inhibited the industry was the traditionally inconsistent supply of coloured gemstones, due largely to the rarity of gemstone deposits. Furthermore, according to Harebottle: “These deposits are typically mined using primitive techniques, which means production is very small.” For some time, very little capital was injected into these projects, as they were deemed too challenging and dangerous. “For years this has therefore created an inconsistent supply of gemstones to the market place, resulting in both lack of investment and confidence downstream.”

Moreover, the market for coloured gems has not benefitted from the type of global campaign that De Beers has profited from for decades. “This is because the gemstone industry is extremely fragmented and most businesses are too small to support a sustained advertising campaign,” Shor explained. As such, a collective movement would be nearly impossible to administer, given the various interests and players that are involved in the mining and selling of each type of stone.

This failing of the gemstone industry exemplifies how truly unique the De Beers method was – a sweeping, worldwide strategy was enabled by its monopoly (see Fig 3). In recent years, however, the coloured gem industry has begun to evolve and improve its promotion techniques, taking a number of lessons from De Beers. According to Zagoritis: “[Traders] got more organised and savvy… I also think a lot of the television jewellery selling channels, which proliferate now, play a large part in getting consumers interested in coloured stones again, understanding them and that they are as rare, if not rarer than diamonds.”

In addition to the general ambiguity for the value of coloured jewels, consumer confidence suffered a further setback in the 1990s when traders were exposed for selling stones without disclosing vital information about filling and oiling treatments, which were applied in order to improve the appearance of gems, thereby affecting the product’s longevity and the long-term care needed. In response, the US FDA updated its regulations in 2001, making it compulsory for such information to be shared at the point of sale, which has since resulted in greater transparency in the market.

Among the few industry players that are in a position to carry out a wide-scale advertising campaign is Gemfields, which “is making the glamour push with actress Mila Kunis as its spokesmodel [and] the luxury jewellery brand of Fabergé”, according to Shor. “In addition, Gemfields is trying to mitigate some traditional impediments to large manufacturers by creating a dual consistency in supply and pricing.”

By employing a consistent structure for pricing gemstones, Gemfields is able to instil greater consumer confidence in buyers and end-customers – a factor which has long been a problem for the industry, having never had a universal grading system such as the 4Cs. According to Shor: “If Gemfields can demonstrate the benefits of consistent supply, consistent pricing and marketing campaigns sufficiently to the industry as a whole, the gemstone industry can be a strong partner to the fashion trade and greatly improve its market share with other jewellery products.”

In addition, having a more reliable and constant system in place encourages greater investment and new players to the industry, which is further supported by the expansion efforts being undertaken by Gemfields: “We are also supporting an increase in scale of coloured gemstone beneficiation and jewellery manufacturing, which is resulting in improved, consistent and predictable margins for all,” Harebottle explained.

Vibrant demand
The most rapid rise in demand for coloured stones can be seen from emerging economies – namely India and China – which are both experiencing an enlargement of the middle class and greater disposable income. “The demand has always been there; both of those two countries have long histories of love of gems,” said Zagoritis. “What has changed is their growing prosperity.”

Demand is also mounting in the US – the largest market for coloured stones – as more individuals and private groups prefer to invest in tangible, precious items. The exponential increase in value and relatively fast return rate for gemstones makes them increasingly attractive purchases.

“Our biggest growth area as a company over the last five years has actually been investment groups looking for tangible investments for their clients,” said Zagoritis. “We are noticing [this] particularly in tanzanite.” Moreover, given the volatility of various traditional markets, greater diversification within investment portfolios is gaining popularity.

As was the case with diamonds in the 1950s, celebrities are leading the latest jewellery trends, with coloured gemstones being the flavour du jour and now regularly seen on the red carpet. Along with global icons like Angelina Jolie and Beyoncé, there is one young woman in particular that is driving the movement: Kate Middleton. Upon her betrothal to Prince William in 2010, the world media spotlight shone brightly on the engagement ring worn by the soon-to-be Duchess of Cambridge. A large blue sapphire that had previously belonged to Princess Diana has since inspired countless women around the world to opt for something similar, or indeed, something a little different, as the case is.

This also touches upon another growing trend in fashion generally, as more individuals prefer to wear something unique, which in itself has made a big impact to the market. “Today’s woman is a self-confident, forward-thinking person [who] values her individuality. Opting for coloured gemstone jewellery provides a platform to make a statement – whether elegant or bold, it reflects a gusto for life and uniqueness,” according to Susan Abeles, US Head of Jewellery for auction house Bonhams. “Coloured stones of equal quality can be found in various hues and saturations; these variations allow women to pick the colour that best matches their personality and style.”

According to research conducted by Bonhams, some jewels have risen in price by 2,200 percent over the past decade. So rapid is their growing popularity that the auction house has proclaimed 2015 to be the year of coloured gemstones. “The demand has never been greater for quality coloured gemstones. In less than 10 years, the market for coloured gemstones has increased exponentially,” said Abeles. “The luxury buying community continues to grow with a greater understanding of the market, yet supplies of the rarest coloured gemstones remain limited.”

Recent sales in the industry demonstrate this. According to Abeles: “In the April 22 Fine Jewellery Sale in London, lot 165, a sapphire and diamond ring circa 1925, had a presale estimate of $74,000-120,000 and sold for $458,000. While this ring was set with a 21.27 carat Kashmir sapphire, the gemstone was not faceted, but rather fashioned in a seductive sugarloaf cabochon displaying a [non-traditional] blue colour… This ring is a good example of a unique offering for a coloured gemstone that still achieved a strong price.”

At the annual Gemfields ruby auction in Singapore last year, revenue totalled $43.3m – the most ever made at one of its auctions. Buyers flooded in from all over the world: along with the customary attendees from Austria, Germany, the UK and US, bidders came from the emerging markets in China, India, Sri Lanka and Thailand, buying the blood-red jewels for the highest ever average realised price of $689 per carat.

A colourful future
To say that this is a new interest would be incorrect, as rubies, emeralds and sapphires have been worn by many for centuries. But regardless of this historic love affair with coloured gemstones, there has been a recent period in which they were overlooked by individuals and jewellery-makers, as a lack of understanding of their value teamed with low confidence in the sellers themselves put buyers off.

But despite this relatively short blip, there has been a significant turnaround; demand is driving this upswing as more people are choosing colourful, distinctive jewellery designs over the more conservative styles of the 1980s and 1990s.

Global economic trends also support this development, as people in the West are choosing to spend less on fine jewellery while still want to wear something bold. At the same time, individuals in emerging markets are increasingly able to splurge on long-coveted luxury items. Investors from all corners of the planet are splashing out in the market, lured by the impressive returns for coloured gemstones, making them a smart addition to financial portfolios.

Together with the standardisation of cost analysis and quality – which instils far greater confidence for buyers on both the private and corporative level – there seems to be no slowing down in this movement.

The scarcity of these stones further adds to their appeal for all types of buyers. According to Zagoritis: “People seem to have an affinity to rarity – I think that knowledge is gaining currency within the market and has made a huge difference… People were duped into thinking that only diamonds were rare, whereas they are understanding now that other gems, and particularly fine coloured gems, are actually rarer.”

The media exposure of ‘blood diamonds’ has promoted some consumers to opt for ethically sourced alternatives, which includes gemstones. The growing popularity for coloured jewels will inevitably have an impact on the diamond industry, although the extent of this effect cannot be known at this stage. That being said, the unravelling of the social impact that De Beers has made does not seem likely by any stretch of the imagination: so successful was its marketing campaign (see Fig 4) that diamonds will continue to be associated with marriage proposals for a long time; a societal norm that has been passed down through the generations.

The recent discovery of tanzanite

Maasai herdsman first unearthed tanzanite in 1967 among the foothills of Mount Kilimanjaro. Luxury jewellery and specialty retailer Tiffany & Co named the gem after its country of origin and unveiled the vivid bluish purple jewel to the world the following year. Being the first translucent blue gem to be discovered for hundreds of years and a unique variation of the zoisite mineral, tanzanite has become known as the gemstone of the 20th century. Its unique colour is highly popular among new styles in fine jewellery, making it one of the world’s bestselling coloured gemstone since the 1990s. Its rarity adds further appeal for collectors. “Tanzanite is 1,000 times more rare then diamonds, and there is only one mine in the world,” Imran Khan, Director of the Tanzanite Foundation, said. Since entering the market, the gemstone has grown in value considerably, with this upward trend set to continue. “The market for tanzanite is always good,” Khan explained. “It will [continue to] grow because many people are still not aware of this stone.”

Save the ocean: how mankind destroyed an economic force

Posted on July 16, 2015April 11, 2018 by Ashton Wenborn

The abundance of H20 on Earth is what distinguishes it from all the other planets in the cosmos. Covering more than two thirds of the planet’s surface, oceans are estimated to be home to close to a million different species, with two thirds of those still waiting to be discovered. The world and the billions of people that inhabit it rely on the wealth that the numerous oceans provide, but there are fears that fish stocks are being exploited to such an extreme that, without drastic action being taken soon, they could be depleted within a generation.

The global economies rely on the health of the oceans for much more than just nourishment: oceans play a critical role in producing half of the Earth’s oxygen. What’s more, the ocean is also responsible for absorbing nearly a third of harmful human-caused emissions, while also providing an abundance of the raw materials used in the creation of various goods ranging from cosmetics to medicines.

All of this helps create a vast ocean economy, employing millions of people around the globe. However, despite the bounty that it affords, the stewardship over this most valuable of resources has been abysmal. The health of the oceans is failing, and fast. The level of destruction that mankind has wreaked on the world’s waters through overfishing and pollution is almost unfathomable, notwithstanding the effect that climate change – an issue exacerbated by human activity – is having on the temperature and acidity of the sea and the flora and fauna that call it home.

Oceanic revival
In an attempt to fix the problem, the World Wildlife Fund (WWF) released its Reviving the Ocean Economy report, which outlines the key areas where change is required to not only provide a scientific case for why urgent action must be taken to save the environment and the global economies from collapse, but also an economic one.

“[The] WWF has brought together the research and conclusions of an expert community and marries this scientific evidence with a common-sense economic case for action to safeguard the value of our ocean,” explained the lead author, Professor Ove Hoegh-Guildberg, in the report. “The message is clear: we are running down our ocean assets and will push the ocean economy into the red if we do not respond to this crisis as an international community. A prudent treasurer or CEO would not wait until the next financial report to correct course. They would act now.”

By looking at the economic impact that will follow from the continued mismanagement of the world’s oceans, the WWF is hoping it will cause industry heads and global leaders to take more decisive action in order to address the issue of ocean degradation. With help from the Global Change Institute – an Australia-based research institute – and the Boston Consulting Group, the WWF has calculated that the array of goods and services derived from marine environments “can be valued conservatively at $2.5trn each year, and the overall value of the ocean as an asset is 10 times that”.

Figures as big as these are unnerving for policymakers, but what is even more shocking is that these estimates do not include offshore oil, gas and wind energy, which attribute to a number of intangible assets.

Getting some perspective
The total asset value of the ocean economy is worth trillions of dollars, and is vast. The total direct output from tangible assets, such as marine fisheries and shipping lanes used to transport goods, is approximately $12.1trn to date. Then there are the those assets that are harder to see, such as the value of intangible ocean assets like primary production, which describes the important role that algae and phytoplankton play in reducing the levels of carbon dioxide found within the Earth’s atmosphere. The benefits of which are also valued at more than $12trn to date.

If those numbers are a little difficult to understand, then the report’s authors also placed the ocean economy within the GDP metric: if the ocean were its own country, it would post GDP figures that would make many members of the eurozone envious and BRIC countries look on in awe. Its GDP would make it the world’s seventh-largest economy, falling just behind the UK (see Fig 1). Despite these impressive statistics, the global ocean economy is in a state of decline. “As natural assets are degraded, the ocean is losing its capacity to feed and provide livelihoods for hundreds of millions of people,” Hoegh-Guldberg wrote in the WWF report. “The downward trends are steep and reflect major changes in species’ abundance and diversity, as well as habitat extent, most over a single human lifespan.”

According to the United Nations Food and Agriculture Organisation, nearly 90 percent of the world’s fish stocks are being exploited, a fact that is particularly worrying to experts as an ocean without fish would destroy the biodiversity of the oceans, and in turn destroy their economic value. The damage caused by our appetite for fish is vast, as the techniques used by fisherman to cast a wide net for quantity is not designed for precision fishing. This results in trillions of mistaken fish and other animals like sharks, dolphins and turtles getting accidently entangled in the many nets and fishing lines that sieve the seas in search of a good catch.

“Anything can be bycatch,” said Dominique Cano-Stocco, Campaign Director at Oceana, in the company’s report Wasted Catch: Unsolved Problems in US Fisheries. “The dolphins that are encircled to bring you canned tuna, the sea turtles caught to bring you shrimp… [or] the millions of pounds of halibut or cod that are wasted when fishermen have already reached their quota. Much of this captured wildlife is treated as waste, thrown overboard dead or dying. This conservation problem must be solved to ensure healthy oceans into the future.”

Alarmingly, the study claims that global bycatch amounts to 40 percent of the world’s total catch, which equates to 63 billion pounds of marine life every year being tossed overboard.

“Hundreds of thousands of dolphins, whales, sharks, sea birds, sea turtles and fish needlessly die each year as a result of indiscriminate fishing gear,” said Amanda Keledjian, report author and a marine scientist at Oceana, in a press release. “It’s no wonder that bycatch is such a significant problem, with trawls as wide as football fields, longlines extending up to 50 miles with thousands of baited hooks and gillnets up to two miles long. The good news is that there are solutions – bycatch is avoidable.”

Bycatch might be avoidable, but it requires implementation of these techniques on a global scale. And time is of the essence, especially when the WWF Living Planet Index, which measures biodiversity, is based on analysis of more than 900 marine species. According to the index, there has been a 39 percent decline in marine mammals, birds, reptiles and fish between 1970 and 2010. Intensifying the decline of these ocean-dwelling animals is the environmental impact that acidification is having on the coral reefs, which are home to nearly a quarter of all marine life on the planet.

Alex Rogers, Professor of Biology at the University of Oxford, told The Guardian: “The health of the ocean is spiralling downwards far more rapidly than we had thought. We are seeing greater change happening faster, and the effects are more imminent than previously anticipated. The situation should be of the gravest concern to everyone since everyone will be affected by changes in the ability of the ocean to support life on Earth.”

Road to recovery
There is clearly a consensus that global oceans are not stable and something drastic needs to be done in order to right the environmental wrongs that have occurred in order to make the ocean economy secure once more. There is reason to be positive, however, as a lot has been accomplished with regards to identifying solutions to shift the world’s oceans away from a path of decline, and back on track towards recovery.

One group that has worked tirelessly to provide solutions rather than just identifying problems, is the Global Ocean Commission. In the commission’s most recent summary report, it expresses how it has been encouraged by the rise in the number of new technologies that are now capable of providing viable solutions to understanding and fixing the issues the ocean economy faces.

“There are clear economic incentives for both the public and private sectors to take their responsibilities in the high seas more seriously. Without stronger governance and regulation, uncertainty will continue to pervade ocean-related industries and reduce profits,” explained the authors of the report. “We can continue to lay cables and ship containers across a dead ocean, but without paying attention to sustaining the life within it, we put our own lives and those of every living thing in peril. We all have a clear responsibility to act as the current stewards of this planet. We have an obligation to leave future generations a healthy and productive ocean, able to continue to give life and value to all humanity.”

In order to fulfil that obligation, the commission laid out a number of proposals that will look to stem the tide of decline and help undo the damage that has been caused as a result of pollution, overfishing and climate change. The security of the world’s oceans is only possible through a concerted effort: one of the key proposals in the Global Ocean Commission’s report is for all UN member states and stakeholders to agree to the terms outlined in the Sustainable Development Goal (SDG) for the global ocean. The primary purpose of the proposal is to establish the global ocean at the forefront of the UN development agenda, which will help provide the necessary drive for change in order to secure and protect the world’s seas.

“We must address the fragmented approach that is currently driving ocean decline,” the report said. “A concerted effort is required which should be framed in a specific Ocean SDG, underpinned by key reforms in global ocean governance and implemented by every government, by civil society and by the private sector so that the words on paper become action in the water.”

The type of action that the commission wants to see UN members taking would bring about an end to exploited fish stocks around the world and shift towards a sustainable fishing practices; reducing the size and capacity of shipping fleets, as well as applying a cap on the number of vessels sieving the world’s oceans.

According to the commission, there are simply “too many boats trying to catch too few fish”, with the number of fishing boats being 2.5 times larger than what is actually required in order to acquire the amount of fish necessary to meet global demand. Overfishing not only threatens the health of the ocean economy, it is also causing millions of the world’s poorest citizens to be robbed of a valuable food source. What’s worse is the fact that so much of the catch taken is wasted, while added strain is also being applied by illegal, unreported and unregulated (IUU) fishing.

According to the Global Ocean Commission’s report: “One of the biggest obstacles to the effective management of high seas fish stocks is the prevalence of IUU fishing caused by economic incentives, which in turn were enabled by a lack of regulation and enforcement resulting from global governance deficiencies. Each year that it is allowed to thrive, illegal fishing on the high seas is progressively stripping oceans of fish stocks and further threatening the food security of over a billion people, mostly in the developing world.”

It continued: “The overall extent of IUU fishing on the high seas is very difficult to estimate, largely because much of it is unreported or illegal. The most reputable estimate suggests that IUU fishing on the high seas is worth $1.25 billion annually.”

Plastic problem
Overfishing is having a substantial impact on fish stocks, but there is another source of harm that threatens marine life, the stability of the global ocean and the health of humans: plastics.

There are a number of extremely harmful toxic chemicals that are absorbed by plastic, such as PCBs and DDTs. These dangerous chemicals are made increasingly harmful to humans, as their concentration can increase dramatically by the time they are consumed by humans in the form of fish or other seafood. According to the Ocean Health Index, there are numerous health effects linked to the consumption of these chemicals, such as cancer, malformation and impaired reproductive ability.

Around 80 percent of all marine pollution comes from land-based activities, and the level of plastics in the world’s oceans has become so vast that it outweighs all other types of marine debris, according to the Global Ocean Commission. One of the biggest driving forces behind this surge in plastic is due to the incremental increase in the number of plastic-based products that are being manufactured.

The report claims that since the 1950s, there has been a tenfold increase in amount of plastic debris found in certain areas of the ocean. Researchers expect this worrying trend to continue, considering the popularity of plastic packaging by manufacturers in the global economy.

This has led to around eight million tons of plastic entering the ocean each and every year (see Fig 2) and, as a result of winds and currents, a proportion of that material accumulates in five basins around the world. The most famous of these is the Pacific Gyre, which is said to be twice the size of Texas. However, thanks the Dutch inventor and environmentalist Boyan Slat, there is a new technology that may be capable of cleaning the oceans of all this plastic debris.

Created by Slat and developed alongside his team at the Ocean Cleanup, the project is set for deployment in the second quarter of 2016 off the Tsushima coast – an island located in the waters between Japan and South Korea. Using floating barriers and the natural movement of ocean currents, the rig will passively gather the plastic debris. The system itself is set to span over 2,000 metres, making it the longest floating structure to ever be deployed in the ocean.

“Taking care of the world’s ocean garbage problem is one of the largest environmental challenges mankind faces today,” explained Slat in a statement. “Not only will this first clean-up array contribute to cleaner waters and coasts, but it simultaneously is an essential step towards our goal of cleaning up the Great Pacific Garbage Patch [the Pacific Gyre]. This deployment will enable us to study the system’s efficiency and durability over time.”

It is clear that the combination of pollution, overfishing and climate change is leading to an erosion of marine assets and pushing the ocean economy to the brink. Unless the international community makes a fast and concerted effort, the future of millions of people who directly rely on the ocean for their food, employment and livelihood could be jeopardised.

Pressure groups have tried to get the international community on board by highlighting the environmental consequences of inaction, but it appears that for too long the message has fallen on deaf ears. This time round, the message is the same, but the delivery of it has shifted to one that stresses the economic impact that will be felt should the world’s oceans be left to continue in their downward spiral. Considering the primacy that economics plays within our modern world, perhaps this tactic will provide the right narrative to make a difference.

Rare collectables whet the appetite of investors

Posted on July 16, 2015 by Ashton Wenborn

The stock market may be favoured by many risk-defying people eager to make a quick buck, but for some, a steady investment offers a much more attractive way of spending money. While that may have traditionally come in the form of government bonds, the desperately low interest rates being experienced around the world is meaning risk-averse investors have to seek out alternative measures for parting with their money.

While there are many dull sounding investments that people can make with financial institutions that will yield solid – if unspectacular returns – the many complex traditional financial investments don’t exactly offer much in the way of inspiration or attachment. However, an alternative category of investments is beginning to offer people prestige, engagement and substantial capital growth. Rare collectables are proving to be the sort of safe long-term investment that many people have been looking for over the last few troubled years.

Collectable items tend to attract people with an interest or emotional attachment, in a way that other investments couldn’t

These unique forms of investment are particularly resistant to the sort of fluctuations in value that other products have because they are both rare and unlikely to see any major rise in the number of items in the market. For example, a rare piece of art by a long-dead painter will retain its value because the artist is unlikely to be creating new works from beyond the grave.

However, while they might retain their value, they are also more susceptible to impulse purchases made more from the heart rather than the head. Few people will pour their money into a government bond because they particularly love the work of that country’s central banker, but an enthusiastic lover of impressionist art might decide to pay over the odds for a painting by Claude Monet were it to become available.

An investment like any other
Some businesses have long been focused on helping investors build portfolios of rare collectables. Stanley Gibbons Group is an alternative investment market listed company that focuses on managing rare stamp collections, among other similarly unique products. A long history that dates back to 1856, the company is one of the leading stamp dealers in the world and has offices in the UK, Hong Kong and Singapore.

In a video discussion with European CEO, Stanley Gibbons’ Managing Director Keith Heddle talked of the misconceptions people have towards the rare collectables investment industry: “When you invest in rare stamps and rare coins, people think of it as a very left-field investment, and sure, to some extent it is. But we’re not necessarily competing with classic cars, art, all of the other range of passion investments. What we’re really competing with is the dollar in the investor’s pocket, for the right strategy.”

Heddle says that his firm is like any other investment company that is trying to attract clients that want safer investments: “When we find an investor who is looking for long-term growth, capital appreciation, and for something to diversify their portfolio, we’re competing with the noise out there, to attract attention and say ‘this could be right for your investment strategy.’”

Investing in rare collectables can be done in many different forms. From vintage cars to highly sought after pieces of art, collectable items tend to attract people with an interest or emotional attachment, in a way that other investments couldn’t. For some, vintage cars can prove to be an attractive investment. Indeed, since 2005, values of some classic cars have soared by as much as 257 percent, according to private bank Coutts.

Cars made by Ferrari, Lamborghini and Porsche have all seen considerable jumps in value, even though the people buying them might not dare to actually drive them. While such iconic vehicles seem to be good long-term investments, based on recent rises the market has seen sharp peaks and troughs in the past. During the 1980s, values of classic cars soared to record levels, only to collapse during the early part of the next decade. The reasons for this seem to be because many buyers were funding their cars with loans, and were more concerned with the status that came from having a vintage car in the garage, rather than as a canny investment.

Works of art have always been something people spend staggering sums of money on, largely because of a buyers’ love for the work, but they can prove to be some of the most secure forms of investment too. Just recently, a painting by Pablo Picasso set a world record for the most expensive piece ever sold at auction when it was bought for $179.4m (see Fig. 1).

Speaking to the International Business Times (IBTimes) website after the record sale of Picasso’s ‘Women of Algiers’, Art Economics Founder and Managing Director Dr Clare McAndrew said that art can deliver substantial returns to investors: “In terms of yield, it differs across categories, but you can see returns as high as 40 percent.”

With regards to the record selling Picasso, McAndrew told IBTimes that she thought the extremely high price represented a bad decision: “Purely from an investment point of view, Picasso’s ‘Women of Algiers’ is a very bad investment because it will be difficult to find someone willing to pay more than this. It’s irrational from that perspective. What investors should look for is investing in quality art that stands the test of time. Typically, the top tier art works will only increase incrementally, so you probably want something in the second tier that might provide a decent return.”

Small but mighty
Perhaps the least glamorous items in the rare collectables market are stamps. While few wealthy businessmen are going to invite their dinner guests to come and see their dazzling collection of rare stamps, these tiny pieces of paper have proven to be one of the most resilient forms of investment around. According to Heddle, the global stamp collecting market is now worth an impressive £6bn ($9.49bn), and there are roughly 60 million collectors around the world. Notable investors in the market include Warren Buffet and Bill Gross, who appreciate the stable market that stamp collecting provides. It is also a particularly liquid market because of the large number of buyers driving up demand.

Heddle told The Express newspaper recently that Chinese buyers were particularly keen on looking to invest in stamps, partly for prestige reasons: “The Chinese are collecting in their millions. In China there is no stigma about collecting stamps – they want to reclaim their history. Millions of people go to stamp shows – they are looking for sophistication and want things that are traditionally British.” The most valuable stamps are British, with the Penny Black and Two Penny Blue stamps the most sought after by collectors, and a collection of four Penny Blacks were recently on sale for £140,000. However, the most expensive stamp ever sold is the Swedish Treskilling Yellow stamp, which sold at auction in 1996 for a staggering $2.3m.

Another investment popular among many collectors is vintage wine and whiskey. Collectors frequently pay huge amounts of money for extremely old bottles of wine they are unlikely to ever drink. Whiskey has started to emerge as a similarly lucrative market, with the number of vintage single malts sold during 2014 soaring by 68 percent on the previous year. The temptation to drink these bottles, however, means putting your money in vintage whiskey or wine could prove more risky than first thought.

Rare collectables provide a unique form of investment for people looking to put their money in a low-risk, long-term portfolio. They also provide a far more interesting way of managing money than the sort of complex financial instruments traditionally used. With an additional benefit attached to many of these products, it is understandable that people might want to put their money in rare cars, paintings and wine, when low interest rates mean bonds aren’t delivering decent returns.

How Singapore married dictatorship with a market economy

Posted on July 16, 2015April 11, 2018 by Ashton Wenborn

In an emotional televised press conference in August 1965, Lee Kuan Yew explained to the Singapore public that its voluntary union with Malaysia had come to an end. The leader of the new, tiny city-state had assembled journalists and television crews in order to inform the citizens of the new Singaporean republic that they would be on their own, no longer part of a political union with their much larger neighbour to the north. “For me it is a moment of anguish because all my life… You see, the whole of my adult life… I have believed in [the] merger and the unity of these two territories,” said Lee, trying to hold back his tears. “You know that we, as a people, are connected by geography, economics, by ties of kinship.”

Lee was devastated by the end of the short-lived union. During his time studying in both London and Cambridge, and living in Singapore under Japanese occupation during the Second World War, he became convinced of the need for self-governance in South-East Asia. After the war came to an end, he hoped to also end British rule, creating a political union between Malaysia and his native Singapore.

The fledging British Empire finally gave way and granted Singapore self-governance in 1959. The People’s Action Party (PAP) was voted to power and Lee, the party’s leader, became prime minister of the island. After a referendum in 1962, Lee’s vision of unification came true: in 1963, it was agreed that Singapore would be admitted to a recently independent Malaysian Federation ruled by Tunku Abdul Rahman.

And yet, only two short years later, Lee’s lifework was in tatters. After race riots broke out in 1964 between the island’s two minority groups, Malays and ethnic Chinese, relations with Malaysia soured. Malaysia’s government felt that the crisis was not worth the effort, and accused Singapore’s government of disloyalty, declaring that all ties would be cut between the two nations. Singapore was expelled from the union, and the impoverished city-state, racked by racial strife, was henceforth alone, no longer under the tutelage of an empire.

Singapore was able to create a prosperous society for its citizens. But this road to economic development came
at a price

Despite the divorce being received with such devastation by Lee and other like-minded Singaporeans, the separation was a blessing in disguise. Although no one could have imagined it at the time, the small poverty-stricken nation would go on to be one of the most prosperous in the world – or from swamps to skyscrapers, as it is sometimes said. In 1960, an economist investigating the island’s economic viability referred to it as a poor little market in a dark corner of Asia. At the time of independence, Singapore’s GDP per capita stood at just $512. Now it has the eighth-largest GDP per capita in the world (see Fig 1), and is consistently ranked among the top echelon of countries, with the highest density of millionaires relative to population (see Fig 2).

Lee, the man who presided over this transformation, would also quietly go on to be one of the most influential leaders of the 20th century, with many seeing his legacy reaching far into the 21st. During his tenure, he had forged a nation that combined both an authoritarian state and free market. “To whom will monuments be built a century from now?” wrote Slovenian philosopher Slavoj Zizek in the Financial Times. “Among them, perhaps, will be Lee Kuan Yew. He will be remembered not only as the first prime minister of Singapore, but also as the creator of authoritarian capitalism, an ideology set to shape the next century much as democracy shaped the last.”

Capitalism and democracy
After the Second World War, many American thinkers argued that economic development engendered democratic and liberal political values known as ‘modernisation theory’. Sociologist Seymour Martin Lipset, in his influential 1959 paper Some Social Requisites of Democracy: Economic Development and Political Legitimacy, argued that as countries pursued economic development, becoming richer, they tended towards democracy: “All the various aspects of economic development – industrialisation, urbanisation, wealth and education – are so closely interrelated as to form one major factor which has the political correlate of democracy.”

These optimistic theories were anchored to a general hope that as countries emerging from colonialism advanced in the economic sphere, they would mirror the democratic states of the western world in the political sphere as well.

The 1970s saw the global spread of communism and numerous military coups across the world. Yet the decade also saw the beginning of what Samuel P Huntington termed ‘the third wave of democratisation’. Among other reasons, Huntington argued in The Third Wave: Democratisation in the Late Twentieth Century that the fruits of economic modernisation – education, urbanisation, the growth of a middle class – saw a wave of democracy spread across the world.

Portugal’s Carnation Revolution ended decades of dictatorship in 1974, which was soon followed by the fall of the fascist dictatorship in Spain after Francisco Franco’s death, and then the end of the regime of the colonels in Greece. The 1980s saw Latin America’s infamous military dictatorships eventually cede power to popular rule.

Towards the end of the 1980s, Taiwan, South Korea and the Philippines, in the face of popular protests, also dumped theirs. Furthermore, democracy slowly began to reappear across across Africa throughout the 1990s; a continent once dominated by military regimes and communist dictatorships. Likewise, Eastern Europe rid itself of its corrupt communist regimes in 1989, adopting both capitalism and democracy as if the two were one and the same.

For many, this was evidence of not only the superiority and desirability of both democracy and capitalism, but its inevitability. Within this spread of democracy and capitalism, Francis Fukuyama saw the end of history. In his book The End of History and the Last Man, he argued that history – if understood as a constant struggle by humans to find the best system under which to live – was over, as any way of economic and political life other than democratic capitalism was no longer conceivable. Democracy and capitalism had proven to be the most suited way for humans to live together in peace and prosperity. As Fukuyama wrote in the early 1990s: “There is now no ideology with pretensions to universality that is in a position to challenge liberal democracy, no universal principle of legitimacy other than the sovereignty of the people.”

Yet quietly in the background, the small island state of Singapore failed to budge. Under the rule of Lee, it refused to cede any ground to democracy while its fellow Asian Tiger economies were democratising. Singapore had modernised, developed economically, yet its authoritarian rule went unchallenged. As Milton Friedman observed in the 1990s, as much of the world succumbed to democratic rule, Singapore demonstrated that “it is possible to combine a free private market economic system with a dictatorial political system”. Singapore stood in opposition to the wave of democratisation.

Working against the odds
Faced with few natural resources, internal ethnic strife, widespread poverty, a small domestic market (after the break with Malaysia), no meaningful armed forces and an irredentist Indonesia to its south, the chances of the newly independent Singapore surviving in 1965 seemed slim. Survival depended upon economic development. “We had to create a new kind of economy, try new methods and schemes never tried before anywhere else in the world, because there was no other country like Singapore,” wrote Lee in his book From Third World to First.

In the 1960s, many countries were emerging from colonial rule. Under the influence of ‘dependence theory’ economics, many leaders in these countries saw economic investment from the West as a form of neo-colonialism that would result in a perpetual state of underdevelopment. The new leaders of Singapore saw things differently: they believed that economic development would require collaboration with their former colonisers and the western world in general. The island realised that its best route to economic development was to attract investment from Japanese, American and European manufacturers.

This attempt to turn Singapore’s economy into an export-orientated manufacturing base for international capital came at the right time. Professor Garry Rodan of Murdoch University told World Finance that this strategy came “at a time when new international divisions of labour were being developed by multinational corporations to take advantage of different labour and production costs in manufacturing”.

In 1968, Singapore’s Economic Development Board announced that it had successfully secured investment from Texas Instruments to open a manufacturing base in the country. Soon a whole host of other western firms were flocking to the area, including National Semiconductor, Hewlett-Packard, General Electric and Philips. By the 1980s, Singapore had established itself as a major exporter of electronic goods.

Huge investment
According to Rodan, Singapore’s success in attracting investment relied upon several factors: “Huge investments in specialised physical infrastructure, generous tax incentives to attract capital, politically docile labour, and efficient bureaucratic and administrative regimes combined to make this strategy hugely successful in generating economic growth and employment.”

Investment from multinationals and an accommodating geography to maintain the city-state as a trading post required investment in infrastructure. The government accessed the funds for this infrastructure, not through international borrowing or printing money, but through using government-imposed savings. The state set up the Central Provident Fund (CPF), and citizens were expected to pay money into the CPF as a form of social security. However, contrary to schemes such as National Insurance in the UK or Social Security in the US, the payouts dispersed by the CPF upon residents’ retirement were proportional to what was paid in.

This incentivised Singaporeans to save. According to W G Huff in his essay What is the Singapore Model of Economic Development?, in 1960 Singapore had a savings ratio of 10 percent. This rose to 29 percent in 1970, and to a further 40 percent in the 1980s. This gave the state a large reserve of savings to draw upon, allowing it to fund public infrastructure projects conducive to attracting international investment. This method of raising funds allowed Singapore to avoid the ‘crowding out’ phenomena through borrowing, according to Huff. These funds were also used in raising the skill of its workers and teaching them English, further attracting foreign investment, and to create Singapore’s world-renowned education system, which still receives strong government investment (see Fig 3). The savings ratio also remains at a high level today (see Fig 4).

While the basic principles of a free market economy were adhered to, the state never shied away from state planning or ownership where it deemed it important. State enterprises played a large role in the economy until privatisations in the 1980s. Economic planning was pursued, although often in line with and taking into account world economic trends rather than being rigid production plans such as in the soviet and soviet-inspired economies.

This new model was one in which the state was active, yet the philosophy of the welfare state was spurned. International investment was encouraged and private property respected, while the labour force was disciplined and political dissent punished. Red tape and business regulation were relaxed, while the population was regimented through micromanaging laws.

An iron fist in a velvet glove
The economic ends of these policies were achieved through much less appealing political means: the smooth running of Singapore’s economic policies relied upon a high degree of state and economic cooperation, achieved through the curtailment of Singaporean democratic life and civil society.

While the PAP had ascended to power democratically, it used its newfound powers to reduce any political opposition. Beginning in 1963, political rivals of the Socialist Front – a left-wing split from the PAP – began to be arrested through the use of the Internal Security Act. Likewise, the Societies Act, a law left by the former British authorities, was strengthened and amended in 1967 to ban any organisation that was not registered as a political group from engaging in political activities.

“This was in response to a spate of student activism and represented a killer blow for what was left of civil society,” Rodan told World Finance. “It enforced a very narrow avenue for political expression – electoral politics – where an array of administrative and legislative obstacles curtailed open competition with the PAP anyway.”

Through political repression, Lee was able to create a climate of political stability. Independent trade unions were emasculated, preventing strikes and work stoppages. By the 1970s, strikes were almost unheard of. Wages were also kept low through the use of state-sponsored trade unions and the National Wages Council. This helped to foster a friendly climate for business.

With no opposition, the PAP was able to integrate itself with the state apparatus. According to Rodan, through a “virtual merger between the PAP and the state through strategic appointments in public bureaucracies”, the PAP was able to perpetuate its rule: it blocked the use of any independent electoral commission, allowing it to engage in electoral gerrymandering as well as using the state’s administration to discriminate against any PAP critics. With party and state integrated, Singapore was able to seamlessly put its economic development plans into action.

Model for growth
Emerging from years of self and internationally imposed isolation, China’s new leader Deng Xiaoping made a regional tour in 1978, visiting Thailand, Malaysia and Singapore. According to Lee, what Deng witnessed changed China’s economic future. Talking to Spiegel in 2005, Lee recalled: “I think that visit shocked him because he expected three backward cities. Instead he saw three modern cities and he knew that communism – the politics of the iron rice bowl – did not work. So, at the end of December, he announced his open door policy. He started free trade zones and from there, they extended it and extended it.” The model crafted by Singapore is now widely seen as offering inspiration for China’s Market-Leninism – a mixture of a market economy with state intervention alongside a political dictatorship.

With the fall of the Soviet Union, the ideals of state planning and socialism were discredited, even among Western Europe’s democratic socialist parties. Now, with the world – for the most part – accepting capitalism, some see the major global political rivalry of the 21st century being over how best to manage capitalism, with the contenders on one side following Singapore’s authoritarian political model pitted against liberal democracies.

In an interview with the New Statesman, Zizek said: “Something genuinely new is emerging today in the guise of what are ridiculously called ‘Asian values’: authoritarian capitalism. A capitalism which, we can see now, is doing better in the crisis than the West. A capitalism that is more dynamic and efficient than our Western, liberal capitalism, but precisely as such functions perfectly with an authoritarian state. My pessimism is that this is the future.” Similarly, Professor Azar Gat of Tel Aviv University talks of countries around the world following the authoritarian market models of China and Russia, in an essay entitled The Return of the Authoritarian Powers.

Singapore was able to create a prosperous society for its citizens, but this road to economic development came at a price. Singapore’s ruling party allowed little room for political dissent, challenging the optimistic assumption that prosperity and democracy are self-reinforcing. Lee defended this trade-off of democratic rights for riches until the end of his life, insisting that the former would have precluded the latter. This is the international legacy of Singapore: the creation of a viable model that weds dictatorship with a market economy.

Corporations tackle cybersquatters who overstay their welcome

Posted on July 16, 2015 by Ashton Wenborn

Pop sensation Taylor Swift made headlines earlier this year when she was labelled – we can only assume for the first time – a squatter, as the latest in a long line of trademark disputes took hold. Arguably the best-known example of cybersquatting to date, the case was important insofar as it shed a light on what measures affected parties could take to tackle this new and growing phenomenon.

The incident was first thrust into the limelight when Ronnie Cremer, co-founder of The Cremer Brothers and the guitar teacher credited with having mentored Swift in her formative years, registered the domain name www.ITaughtTaylorSwift.com. Launched upon by Swift’s lawyers merely for having used his former pupil’s name, Cremer was issued with a cease and desist letter that alleged: “The use of Ms Swift’s name suggested sponsorship or endorsement of the website.” Fearing that Cremer could soil Swift’s reputation, the letter went on: “The domain name and the use of the domain name are also highly likely to dilute, and to tarnish, the famous Taylor Swift trademark.”

Unfortunately, the action succeeded only in rattling casual observers, who proceeded to buy up domain names featuring the Taylor Swift trademark en-masse, with the intention of unsettling the singer’s legal team and perhaps even turning a profit. Far from well-meaning innocents like Cremer, the buy-up that ensued was the work of internet trolls, intent only on upsetting the balance of things and muscling in on the limelight. The solution would prove costly.

313%

Increase in cybersquatting in the eight months up to March 2015

1,400

New generic top-level domain names added to the web

To protect against potential damages, Swift’s management snatched TaylorSwift.adult, Taylorswift.porn and a string of similar such domain names to ward off potential squatters. As a result, the Taylor Swift estate is sitting on dozens of domain names, as part of a method intended both as a brand protection strategy and a means of insurance. However, with the number of new top-level domains growing, any attempt to pip squatters to the post on millions of variables could prove expensive, beyond the means even of multi-millionaire Ms Swift.

In an online marketplace populated by .com, .net, .org, and hundreds more besides, the growing number of domain names in recent months and the months to come warrants a real and growing cause for concern.

Name explosion
“When it comes to misleading or downright fake web addresses, businesses used to have to keep an eye on a handful of so called generic top-level domains or gTLDs”, says Nick Wenban-Smith, Senior Legal Counsel at Nominet. “These gTLDs were limited in number with the original .com, .net and .org suffixes being gradually increased over the years by the addition of .biz and .info among others. Monitoring for abuse was relatively straightforward. However we are currently in the middle of an unprecedented increase in gTLDs.”

In January, the Internet Corporation for Assigned Names and Numbers (ICANN) led the largest known domain name expansion in the internet’s history, expanding the number of new gTLDs to well over 1,000. Around 1,400 new suffixes are being added to the web, with around half qualifying as ‘open’ registries, meaning that anyone can register on a first-come-first-served basis, say sources at Nominet.

The implications of the expansion are threefold. Firstly, the sheer scale of the expansion means there is more potential for abuse, as in the case of Swift, which in turn means that the issue is both more difficult to monitor and to enforce. Commenting on the situation and the costs it could inflict on affected parties, Wenban-Smith says: “Paying for protective defensive registrations to prevent third parties from using your brand name has become exponentially more expensive.”

At the same time, industry sources claim that these new gTLDs could prove beneficial for the online community. “There are now almost five times more generic top-level domains than there were only a few months ago and that translates to greater consumer choice”, said Akram Atallah, President of ICANN’s Global Domains Division. “We are as eager as everyone else to see what type of innovation these new domains will usher into the online world.” And though the stated intention was to spark innovation, the move has resulted in an explosion of cybersquatting incidents.

Figures compiled by the internet regulator show that incidences of cybersquatting have risen 313 percent in the eight months through to March, and the expanded list all but guarantees that the number of cases will rise further still in the coming months. Notable cases so far include redbull.vodka, lauraashley.email and burberry.clothing, all of which have been stung by cybersquatters, muscling in on the development to turn a quick profit.

The Red Bull domain, for example, was registered by an LA-based rapper who claimed his purchase was justified on artistic grounds, whereas the Laura Ashley email was acquired by one Giovanni Laporta, who bought up hundreds of .email domains with a view to selling them at a later date. Here, the differences between the two offer an indication of the offences in question, and just how broad the disputes can be.

“It’s early days”, says Wenban-Smith. “Just as the later entrants to the web address market such as .biz and .info only made a fraction of the impact of the original .com, .net and .org suffixes, so far there has been very little impact and it is not at all clear that anyone (other than ICANN which charged $200,000 a time for applications for new gTLDs) has made a profit from the raft of new suffixes. However the new gTLDs with most market potential such as .web and .app were heavily contested, and have not yet launched. The jury is still out.”

The internet .sucks
The proliferation of these new suffixes has brought new opportunities for related parties, and the work of domain name resellers has created an expensive challenge for idle brands.

Realising that these new gTLDs could prove valuable for brands in the near and far future, registrants are offering trademark owners the opportunity to bag a domain name ahead of public sale, though at a premium. Vox Populi Registry, for example, has come under fire recently for doing just that; giving trademark owners the chance to purchase a .sucks domain name for $2,500, before the opportunity is extended to the public come June for the lesser sum of $249.

Apple, Taylor Swift and Kevin Spacey have each bought into the .sucks movement early on, fearing that squatters could move in after the June 1 deadline and use the site as a platform to critique or discredit trademark owners. Allegations that Vox Populi’s methods are both exploitive and predatory, therefore, have been answered by the assertion that the PR value of the .sucks name means the web address is worth more to trademark owners than it is to the general public. “What we have the chance to do is create a platform, an opportunity – maybe we can call it a clean, well-lighted space – for criticism, where companies can curate, collaborate, moderate and gain valuable insight from it”, said John Berard, CEO of Vox Populi, in an interview with Law360. “I probably sound like a lunatic to most people, but I’ve been in the marketing and communications business for 40 years, and I’ve seen the value of hearing what people have to say about you, good or bad.”

Brand protection
The expanded list of top-level domain names means that brands must keep close tabs on their online presence, both of their own and others doing. And while the challenge is much the same as it was at the birth of the commercial internet, the solutions must be more comprehensive and far-reaching if brands are truly to uproot any and all cases of cybersquatting.

“A variety of new countermeasures have been put in place by ICANN, as part of the processes for granting such a large number of new gTLDs at once”, says Wenban-Smith. “These include: a global Trademark Clearing House for brand owners which enables a more efficient and scalable registration across the new gTLDs as they launch and a notification service; there is also a new rapid suspension process to combat very clear cases of cybersquatting. To date however these have not been heavily used – while Nominet’s Welsh gTLDs .cymru and .wales now have over 13,000 new registrations, we have only received one complaint about cybersquatting.”

What’s certain is that any trademark owner, irrespective of their financial clout, will be hard up to preempt all infringements on this front, though a balanced trademark portfolio will go some way to balance exposure and costs. Essentially, what’s needed is a brand protection strategy that weighs up the registration costs against the risks of being idle. Trademark laws are complex, prohibitively so in countries like China, meaning that brands can only stay vigilant as they come to terms with cybersquatting in its initial stages.

What makes Zara so good?

Posted on July 15, 2015 by Ashton Wenborn

The success of fast fashion has been a hot topic in recent times. H&M, Uniqlo, Cos and a whole host of other high street retailers now bring catwalk high-fashion designs to everyday shoppers on tight timescales, be they in mid-western shopping malls, British high streets or European town squares. Zara, owned by the Spanish Inditex Group, is the most successful of them all.

Fast fashion asks that certain trends make it from ready-to-wear fashion showcases to customers; the ephemeral nature of fashion trends mandates that this be achieved as quickly as possible. This is where Zara, with its highly responsive supply chain, excels. Although the company’s flexible supply chain means its price points are slightly higher than its competitors, it allows it to be the most responsive to changing fashion trends.

What began as a small Spanish clothing company, founded by Amancio Ortega in 1975, has transformed into a global business and market leader. Boasting over 6,000 stores, it has a presence in nearly 88 countries, with total net income rising to €2.5bn ($2.8bn) in 2014 (see Fig. 1).

From design to shop floor
The beginning of the Zara supply chain starts with its creative and design teams. Based in Spain, the creative team, including designers, make use of large amounts of information to inform their decision. As opposed to having an over-lauding design director, it has a vertical team of designers and other personnel in their creative teams.

While Zara has two seasonal release collections – Autumn/Winter and Spring/Summer – the fashion retailer makes only a small commitment of what products are to be produced at the start of a season. Designs are produced through a culmination of conversations with product managers, who are in constant contact with various store managers across the globe.

The production process is highly flexible, designed to allow a rapid response to changing consumer demands in season. For instance, when Zara purchases fabrics, much of the material is undyed. With these fabrics uncoloured, Zara is again able to respond to trends or consumer demands, dyeing the fabrics accordingly to whichever colour happens to be on-season or is required for a particular clothing design. Along with using European sources, much of the supply chain is owned by Zara, allowing the company to quickly source materials.

“We decide where to source the materials and where to produce depending on the item which has been designed, taking into account quality of that supplier and the timeline in which they can feasibly produce”, Julia Grindell, Head of Corporate Affairs at Inditex, tells World Finance. While Zara has resisted the trend in fast fashion to outsource much of its manufacturing to low-wage, developing world countries, it does where it makes sense: when price overrides fashion trends. Zara uses Asian manufacturers to produce clothing staples such as plain t-shirts, which are not sensitive to fashion trends and the use of lower-wage labour with larger contracts makes sense.

“As a general rule proximity markets (Spain, Portugal, Morocco) are used to produce higher fashion items because of shorter lead times and Asia for basic items with longer lead times”, says Grindell. The manufacturers used for the more time sensitive high-fashion items are located near Zara’s Spanish headquarters.

“Two tiers of the company’s suppliers are located in areas close to the headquarters, mainly Spain, Portugal, Morocco, Turkey and other European countries (55 percent).” In comparison, H&M has the majority of its products produced in Asia.

This use of close proximity manufacturers allows for greater flexibility and for Zara to fulfil its “aim of creating customer driven designs to customers as fast as possible”, while also incorporating any fashion trends as they see fit. This sets Zara apart in that, according to a paper by the Universitat Politècnica de Catalunya, “Traditional retailers lack this flexibility and they are obligated to place production orders to manufacturers overseas at least six months in advance of the season.”

The delivery time is then also made as short as possible. With the proximity of these producers used for high fashion and time-sensitive clothing located in and around Europe, they can be rapidly delivered to Zara’s central distribution centre in Spain and shipped to stores around the world twice a week. In contrast, H&M claims that its “displays are changed frequently and themed around an association or a feeling, but always keep the clothes in focus”. At H&M, stocks “are replenished as required from central stockrooms. As soon as a product is sold a request is sent for replenishment”, according to a Staffordshire University case study. In contrast, Zara does not necessarily replenish its stocks, but carefully considers whether or not to expand upon a trend or keep it to a limited batch release.

Feedback loops
This ability to produce and deliver items according to in-season trends relies upon a large amount of data, made possible by regular contact between stores and headquarters. According to Grindell, the company’s business model requires a “constant feedback between stores and designers (over 250 at Zara), through daily analysis of sales and data analysis of sales data and qualitative information on customer reactions to products”.

Designers will constantly respond to in-season changes throughout any given season. This requires high-frequency information: communication with store managers, the use of IT to monitor data sale trends, trend spotters on university campuses and in clubs, and taking into consideration the fashion choices of Zara’s own staff. Dr Yi Wang, a lecturer in supply chain and logistics at the University of Manchester points out the importance of IT in Zara’s supply chain, in allowing for the “collection [of] information on consumer needs”. Often a very limited number of new designs are presented in-store and produced on a larger scale if the reaction from customers is positive. If a trend proves successful Grindell says this “will be evolved and new items on this trend will come to store, if a trend is not successful this trend will not be evolved, or it will be adjusted through the season”.

Its highly responsive supply chain means that the clothing racks in Zara stores are always changing. Whereas in other high street fashion shops, one seasonal batch will be left on the shelf until stocks are depleted or the new season rolls over, what is on sale in a Zara store is subject to constant change, with new items expected in-store every two weeks.

Zara’s supply chain is responsive and flexible, with new items continually produced and placed on sale, often in limited batches; the current key to its success. This constant feedback allows for information to be easily relayed back so that workers can design, produce and distribute new designs constantly.

Playing catch up
The ability of rival fast fashion companies to replicate Zara’s model is uncertain. Zara relies on local manufacturers with which it has longstanding relations, and this allows it to place short-term quick orders, to be cancelled or expanded at short notice depending upon fashion trends and customer demands. Other retailers, who often rely upon long-term large orders with far-flung factories, will face a struggle to easily develop such relationships with local manufacturers.

Zara’s responsive supply chain works in tandem with its specific position in retail. While Zara generally offers low price points for the high-fashion designs its supplies, it is not a discount fashion retailer. According to Yi, “Vertical integration [of Zara] often leads to the inability to acquire economies of scale, which means they cannot gain the advantages of producing large quantities of goods for a discounted rate.” For other fast fashion firms to replicate its highly responsive supply chain, they would perhaps have to sacrifice the defining feature of their business: cheap and moderately fashionable clothes. In contrast, Zara has carved out a niche for moderately cheap and highly fashionable clothes.

Zara, however, has often neglected its online presence. In November last year The Guardian reported that Zara’s online retail accounts for only three percent of overall sales. Zara, along with other Inditex companies “need a digital push”, Daniel Lucht, Research Director at retail analyst group Research Farm told Essential Retail. Yet it is unclear how well Zara’s supply chain will adapt to e-commerce. Its custom of introducing small batches to certain stores does not apply to a nationally and globally accessible online store, while the constant adding of new stock every two weeks lends itself to the habits of the high street consumer, but not necessarily the e-shopper.

Despite this, according to Lucht, the fast fashion company took its online sales “a lot more seriously in 2014”. While Zara seems set to dominate the fast fashion market for the foreseeable future, its continued success will rely upon the ability of its business model to adapt to its growing digital sales.

Do benefits make people want to work?

Posted on July 15, 2015July 15, 2015 by Ashton Wenborn

In tough economic times there is a tendency for compassion, especially for those in receipt of social benefits, to diminish somewhat. It is understandable, however, considering the way the topic is presented in the press, for those with a job to view those without with a level of contempt. In the UK for example, the Citizens Advice Bureau, an independent charity that provides information and advice to help people with money or legal problems, took the government to task over the way it chose to frame the welfare debate – portraying the employed as hard-working and those without a job as freeloaders.

“The picture that is painted is that all benefits claimants and recipients are those who are idle and not wanting to work, and wanting to play the system”, Gillian Guy, Chief Executive of Citizens Advice, tells The Guardian. “That’s not very helpful, particularly to the vast majority of people who are not wanting to claim benefits, seeing this as a safety net that they need to have recourse to, and wanting to get out of it as quickly as possible.

“We’ve challenged the government over whether they are presenting that kind of picture – the scroungers/strivers issue – and they recognise that it is not helpful and they have said to us they will seek not to do it. It paints a false picture”, adds Guy. “There is an implication that it is people’s own fault when they end up in a situation where they need support, and that’s not the experience we have. Actually it could happen to anyone of us.”

By framing welfare recipients in this way, it not only dehumanises the unemployed, but it also helps justify a reduction in welfare spending. Politicians defend budget cuts to social benefits by claiming that generous welfare systems create a dependency culture, and that by rolling back the state it will incentivise people to find work. But according to research conducted by sociologists Dr Kjetil van der Wel and Dr Knut Halvorsen from Oslo and Akershus University College in Norway, “generous welfare benefits make people more likely to want to work, not less”.

Dependency culture
It is important to mention that there is evidence to support the notion that generous welfare systems create a culture of dependency. But, as Kjetil A van der Wel explains, these studies have their limitations. “There are studies that have been able to identify what they call social interaction effects”, explains the Norwegian sociologist. “These describe a situation where an individuals’ chance of taking say long-term sick leave for instance, or even exiting the labour market completely, increases if someone in that person’s social network did the same.”

Put simply, if an individual’s neighbour or friend began receiving incapacity benefit, for example, then the likelihood of that individual to apply or attempt to get the same support noticeably increases. Human beings are social creatures, and so, it is not surprising that they are affected by the actions of their fellow man. The trouble with studies that use social interaction effects to support the notion that generosity promotes dependency is that they tend to focus solely on benefit behaviour.

“There are also social interaction effects in many other types of behaviour; ones we would very much like people to engage in such as taking up employment”, he explains. “In the last 30 or 40 years we had a women’s revolution in the labour market and massive social interaction effects took place to make that happen.”

“None of these studies investigated whether welfare dependency or social interaction effects are stronger in a context where benefits are more generous, so we do not know whether these effects are stronger in more generous welfare states or in less generous ones”, contends van der Wel.

In fact, in Scandinavian countries, where for the last 40 years they have provided citizens with a very substantial level of social benefits, if these studies were correct, then it should be possible to see employment levels fall as a result of these social interaction effects and a dependency culture flourish. But in Halvorsen and van der Wel’s work, The bigger the worse? A comparative study of the welfare state and employment commitment, they found the opposite to be true.

In their research, they examined responses from 19,000 people in 18 European countries to the statement: “I would enjoy having a paid job even if I did not need the money”. The researchers found that the more a country paid to the unemployed or sick, and invested in employment schemes and other labour market policies, the more likely people were to agree with the statement, regardless of whether they were employed or not.

The researchers found that almost 80 percent of people in Norway, a country that pays the highest amount in benefits of all the other countries surveyed, agreed with the statement. And by comparison, Estonia, one of least generous, only around 40 percent did. While the UK, which provides a moderate amount in social benefits, saw almost 60 percent agreeing with the statement. They also noticed that those governments’ that are most willing to intervene in the labour market through active spending on labour market policies that help the unemployed find work, made people more likely to agree that they would work even if they didn’t need the money.

“A basic assumption is that if individuals can obtain sufficient levels of well-being – economic, social and psychological – from living off public benefits, compared to being employed, they would prefer the former”, the researchers say in the paper.

“[However], this article concludes that there are few signs that groups with traditionally weaker bonds to the labour market are less motivated to work if they live in generous and activating welfare states”, continues the researchers. “The notion that big welfare states are associated with widespread cultures of dependency, or other adverse consequences of poor short-term incentives to work, receives little support. On the contrary, employment commitment was much higher in all the studied groups in bigger welfare states.”

Relatively generous unemployment benefits, when combined with government money spent on active labour market policies, can also provide a number of auxiliary economic returns. For starters, they give people more time and security. Time that can be spent participating in skills training or education that allow people to become more compatible with the demands of the ever-evolving labour market.

It also provides people with a level of security, so they don’t have to rush into the first job offer they get simply out of desperation for money. This is crucial, because it is actually very costly to have individuals coming in and out of the welfare system every couple of months. So if people can find a job that suits them then the employer, employee and the state will all be better off.

Psychosomatic ideas
Despite all this, scepticism still remains. The reason for the doubters, however, might be more to do with how attractive the dependency culture narrative is, rather than how compelling any of the evidence out there to support it. “This story of how generous welfare and the mind works is a very catchy one”, speculates van der Wel. “There is also a class perspective here, because the middle and upper classes can place themselves on a moral high ground so to speak at the expense of welfare recipients, who are portrayed as either cynical free riders, lacking in proper self control or even moral fibre.”

“And this is very peculiar because in Norway for instance, the amount of tax money lost each year because of tax fraud, which is an activity conducted predominantly by the upper and middle classes, is around 20 times greater than the amount lost to benefit fraud”, he continues. ‘Yet, the first makes no one angry, while benefit fraud is constantly debated in the media.”

But this peculiarity is not limited to Norway. In fact, according to HMRC figures for 2012 to 2013, £1.2bn of benefit spending is lost to fraud (see Fig. 1), while £4.1bn is lost through tax evasion. The story is much the same throughout Europe. So it appears that when research is not unanimous and all signs do not point to one clear solution, a strong narrative trumps all.

Hence when individuals like the distinguished professor of economics, Peter H Lindert tell the world “social spending often has a positive effect on GDP, even after weighing the effects of the taxes that financed that spending”, it often falls on deaf ears.

And when the social welfare policy expert, Irwin Garfinkel, explains how “by enhancing human capital and economic security of the entire population, welfare state programmes in rich nations have achieved greater equality, and greater efficiency, productivity and economic growth”, many countries still choose to make massive spending cuts to the welfare budget.

It is simply easier to tell the tale of how recipients of social benefits are lazy, unproductive, unmotivated scroungers than it is to portray the complexities that lead to people becoming unemployed, and how social benefits, coupled with active labour market policies can help them get back to work and stay there. This is particular true during economic downturns.

So if advocates of greater welfare spending want to be heard, perhaps it is time they stop looking for more evidence to support their claim, which there is already an abundance of, and instead, focus on finding a way to turn that research into a more compelling story that people, the media and politicians can get behind.

Toshiba CEO resigns over accounting embarrassment

Posted on July 15, 2015August 21, 2015 by Ashton Wenborn

As Toshiba’s accounting scandal deepens, CEO Hisao Tanaka has announced his resignation in order to take responsibility for the group overstating revenue by more than $1.2bn. The news comes after several months of investigations, which began after Toshiba announced profits that were approximately triple the initial forecasts given.

The resignation came as no surprise to many

The resignation came as no surprise to many as Tanaka has been named among those in senior management for instructing the delay of reporting booking losses. Ardent profit targets for the group’s infrastructure business, which includes construction projects, electronic toll booths and smart metres, are also attributed to causing the anomalies. According to The Japan Times, Tanaka had sent emails and made phone calls to staff members pushing them to meet ambitious targets.

Tanaka stands down along with former CEO and current Vice Chairman Norio Sasaki, as well as other members of the board.

As a result of a probe by the Securities and Exchange Surveillance Commission, the Group was unable to report results in March, leading Toshiba’s shares to slump by 16 percent in April.

The investigation has also been extended to include other operations within the electronics conglomerate and may even alter the earnings reported for fiscal years between 2009 and 2013.

It is expected that investigators will recommend an overhaul of Toshiba’s management structure when findings are announced next week. The scandal highlights the need for a more rigorous implementation of Prime Minister Abe’s ongoing campaign to improve corporate governance in Japan.

A replacement for Tanaka and others have not yet been disclosed.

Businesses pipe up as Iran and the US seal nuclear deal

Posted on July 15, 2015August 21, 2015 by Ashton Wenborn

After many months of wrangling and virulent opposition on both sides, the US and Iran have finally sealed an historic agreement over the Middle Eastern country’s nuclear ambitions. The closest the two countries have got to cordial relations since the Islamic Revolution 36 years ago, the deal represents an historic moment for the region, and could shake up the geopolitical landscape.

[Iran] currently has around $150bn in frozen international assets

However, while the political implications of the deal are likely to be wide reaching, the world’s business community is eagerly anticipating the lifting of sanctions and ability to enter a potentially vast, untapped market. A number of energy companies – including Royal Dutch Shell and Glencore – are reported to have already made plans for their Iranian operations once sanctions are lifted. Other major firms from a range of sectors also see Iran as a big opportunity, including Apple and General Electric, which has reportedly contacted potential Iranian distributors in recent months, according to The Wall Street Journal.

The FT reports that Germany’s vice-chancellor Sigmar Gabriel is expected to take a delegation of trade executives to Iran within the next few days in the hope that a deal over updating the country’s out-dated oil industry infrastructure can be secured for German companies. It is thought such a deal could be worth as much as €10bn.

The conditions of the sanctions being lifted are that Iran provides evidence it is reducing its number of centrifuges and uranium stockpiles. It is thought that this will likely come at the start of 2016, meaning businesses have a little while longer to wait before they can start trading in the country.

While the deal between Iran and the West is merely a first step towards a thawing of relations, the country’s vast potential is clear. It currently has around $150bn in frozen international assets, while has huge deposits of oil and gas that it has been restricted in selling overseas. For international businesses, helping to facilitate the economic growth of the country is proving particularly exciting.

World Bank Group president pays China a visit

Posted on July 14, 2015August 28, 2015 by Ashton Wenborn

Over the course of his three-day visit, World Bank Group president Jim Yong Kim is to meet with state leaders and key ministers within China to talk about global economic development, health sector reform and financial inclusion – as well as looking at possible methods for strengthening the World Bank Group’s partnership with China.

“I would like to thank the Chinese government, particularly the Ministry of Finance, for their commitment to working with the World Bank Group,” said Kim. “We welcome China’s eminent role in global development, including support for the World Bank Group, and we are privileged to support China’s reform agenda.

“I am convinced our growing partnership will help the world achieve inclusive and sustainable development,” he added.

During the trip, Kim will be escorted by the IFC Executive Vice President and CEO Jin-Yong Cai, World Bank East Asia and Pacific Regional Vice President Axel van Trotsenburg, Chief Operating Officer Karen Finkelston of the Multilateral Investment Guarantee Agency, and World Bank Vice President for Human Development Keith Hansen.

US Treasury takes aim at high frequency traders

Posted on July 14, 2015January 19, 2017 by Ashton Wenborn

The US Treasury, in collaboration with various other financial authorities such as the SEC, the Federal Reserve and CFTC, has released a report into the October 15, 2014 “Flash Crash” in the US treasuries market. As with the now-infamous 2010 trillion-dollar Flash Crash on the stock market, the October 15 incident saw trading prices change beyond any reasonable expectations in a small period of time.

As the report explains, on that day, “the market for US Treasury securities, futures, and other closely related financial markets experienced an unusually high level of volatility and a very rapid round-trip in prices.” 10-year US government bonds, known as Treasury security, “experienced a 37-basis-point trading range, only to close six basis points below its opening level.” Such volatility in the US Treasury market had not been experienced in a single day without any major policy announcements.

The report concedes that HFT has brought market benefits such as reduced costs and increased market efficiency

“Intraday changes of greater magnitude,” regulators said, “have been seen on only three occasions since 1998 and, unlike October 15, all were driven by significant policy announcements.” The major swings in the market on the day in question, however, had no clear reason, which is “unprecedented in the recent history of the Treasury market.”

High frequency trading (HFT), general economic uncertainty and higher than usual trading volumes were cited as contributory factors to the crash. HFT has come under fire recently, with US regulators arresting a British high frequency trader for allegedly contributing to the flash crash in 2010. Such automated trading has also been the subject of public criticism, with financial journalist Michael Lewis’s book Flash Boys, which traces the history and outlines the problem of HFT, proving a top seller.

The report concedes that HFT has brought market benefits such as reduced costs and increased market efficiency, but outlines a number of new risks: operational risks, including incorrectly deployed algorithms reacting to inaccurate or unexpected data; market liquidity risks stemming from abrupt changes in trading strategies; market integrity risk due to the ability of “spoofing”, as well as the inability of risk management to sufficiently monitor such high speed trading activity.

How best to regulate HFT, the report says, needs to be further explored. “The trend toward increasingly automated and algorithmic trading on trading platforms,” the report claims, is “being addressed by various regulatory efforts underway by the SEC, the CFTC and others. To further these steps, the public and private sectors must continue to work together to address the outstanding risks, including operational risks and risks that may harm liquidity provision or price discovery.”

As oil prices drop, will Islamic extremism suffer?

Posted on July 14, 2015July 14, 2015 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Germany vs. Google

Posted on July 13, 2015 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

Economic policy turned inside out

Posted on July 13, 2015July 13, 2015 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cracking the US copyright code

Posted on July 13, 2015July 13, 2015 by Ashton Wenborn

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Andrés Velasco is former financial minister of Chile