Year: 2015

Profiting from prison: crime means big business for American companies

Posted on by Ashton Wenborn

Crime doesn’t pay, as the saying goes. But in the case of the US criminal justice system, it often does for the private companies housing the country’s many offenders. Over the last few decades, as repeated US presidents have sought to appear tough on crime, the US’ prison population has soared (see Fig 1). At the same time, private institutions have leapt to the aid of budget-conscious governments and offered to house many of the country’s prisoners.

However, while the number of Americans being locked up has soared, so have the private institutions’ profits. And while many people will be thankful that criminals are being kept off of US streets, there are also considerable concerns over both the treatment of those incarcerated, as well as the motives of the institutions profiting from their sentences.

Tougher stance
The statistics surrounding the US prison system are stark: while the country is home to only five percent of the world’s seven billion-strong population, it caters for around 25 percent of its prison population. Around 2.2 million people are imprisoned in the US, which equates to around one in every 100 Americans. This figure has steadily risen over the last few decades, and many believe that it is the advent of the ‘War on Drugs’ that has led to such an explosion in the prison population.

While the US’ prison population has soared since the 1980s, other democratic countries have maintained a far lower ratio of incarcerated citizens

In a recent article, Laura Tyson – a former chair of the US President’s Council of Economic Advisers under the Clinton administration – and former McKinsey & Co Director Lenny Mendonca wrote that the reason for this surge in America’s prison population was in part down to more severe penalties for drug-related crimes: “The boom in America’s prison population in recent decades is the result of ramped up punitive crime-prevention measures, including tougher drug penalties and mandatory minimum sentences, backed up by growing numbers of police and other law-enforcement officials.”

While the US’ prison population has soared since the 1980s, other democratic countries have maintained a far lower ratio of incarcerated citizens. Indeed, the US has a prison population of between five and 10 times more per capita than that of any country in Western Europe, according to Tyson and Mendonca.

They added that the cost of keeping all these prisoners incarcerated, alongside paying for bigger police forces, is putting a strain on both state and federal budgets: “Beyond the financial costs of larger police forces and increased pressure on the judicial system is $60bn a year in spending on state and federal prisons, up from $12bn 20 years ago.”

Perhaps the biggest thing to have transformed the criminal justice system in the last 40 years is the War on Drugs that was begun by President Richard Nixon in 1971, but was enthusiastically scaled up during the 1980s by President Ronald Reagan. As a result of tough new laws around drug use, the number of people being locked up skyrocketed in just a few short years.

Fig 1 - prison

Stuck in a perpetual rut
One of the many consequences of this new tough approach to drug use and selling was that the law would disproportionately punish people in poorer communities: it would target people ravaged by drug dependency, with little sympathy for their conditions. At the same time, these poorer communities also tended to be trapped within a cycle of crime, as once someone has been arrested on drug offences, they find it increasingly difficult to get gainful employment.

In the 2012 documentary This House I Live In – which looks at the US’ drug sentencing laws and prison system – director Eugene Jarecki shows how prisons have effectively created a permanent underclass and trapped large swathes of society in a life of crime and reoffending.

According to David Simon, a former crime journalist and creator of acclaimed television drama The Wire, mandatory minimum sentences – mostly for drug offences – were not working, and in fact they were leading to increased crime. He told Jarecki in the documentary: “It’s one thing if it was draconian and it worked. But it’s draconian and it doesn’t work. It just leads to more.” By institutionalising people in prisons for small drug offences, it is exposing them to people who are far more accustomed to crime than they would otherwise experience.

Another consequence of the War on Drugs is the rocketing cost to the taxpayer. In a 2008 report conducted by Harvard economist Jeffrey A Miron, it was suggested that the US Government could save around $41.3bn in enforcement and incarceration costs if it was to legalise drugs, and therefore reduce the prison population (see Fig 2). In recent years, many states have sought to relax their laws on drug policy, helping to alleviate the prison population. However, mandatory minimum sentences remain, swelling that population.

Over the last few decades, the US private prison industry has ballooned in size, and is now thought to be a multibillion-dollar market. According to the US Department of Justice, in 2013 there were around 133,000 state and federal prisoners being housed in privately run prisons. This accounts for over eight percent of the country’s total prison population. This trend has steadily grown in recent decades.

Another study conducted in 2012 looked at the prison system in Louisiana, and in particular the large numbers of inmates that private institutions were housing. According to the study by New Orleans’ The Times-Picayune, more than half of the state’s 40,000 inmates were in private prisons. Elsewhere, it was reported in The New York Times in 2012 that over half of the country’s immigrant prisoners were held in private institutions.

While the costs of keeping so many people in prison are huge, in some instances it makes financial sense for the companies running the prisons: they are offered tax incentives to have high numbers of prisoners, as it means that there are fewer criminals on the streets. However, in reality it usually means that people are being locked up for relatively minor misdemeanours so that states fall down on minimum occupancy clauses.

According to a 2013 study by organisation research and policy centre In The Public Interest (ITPI), private prison companies are gaining considerable profits off the back of so-called ‘lockup quotas’ and tax benefits for crime prevention. The study, titled Criminal: How Lockup Quotas and Low-Crime Taxes Guarantee Profits for Private Prison Corporations, outlines how these private prison companies are gaining lucrative contracts that require high occupancy rates.

While having plenty of people in prison might suggest that such companies are keeping the public safe, in actuality it is in the interest of the authorities to go after people with strict penalties, even if they’ve committed seemingly less serious crimes.

Fig 2 - prison

Private provision
The US’ prison system is increasingly run by private institutions (see Fig 3), and the importance of their role is growing. A number of large companies operate prisons throughout the country on a profit basis, including the two leading firms, the Corrections Corporation of America (CCA) and the GEO Group. CCA currently has more than 65 correctional facilities across the US, with a capacity of around 90,000 beds. The GEO Group has operations all over the world, with facilities in North America, Australia, South Africa and the UK. As a result of their influence, these companies have played a key role in the formulation of the US’ criminal justice laws.

Indeed, these firms have been strong proponents of laws that include mandatory minimum sentences, which have helped to deliver record numbers of incarcerations. According to the ITPI report, both the CCA and GEO Group have “supported laws like California’s three-strikes law, and policies aimed at continuing the War on Drugs”.

It added: “More recently, in an effort to increase the number of detainees in privately run federal immigration detention centres, they contributed to legislation, like Arizona Senate Bill 1070, requiring law enforcement to arrest anyone who cannot prove they entered the country legally when asked.” The ITPI also brought up a statement made in the CCA’s 2010 annual report, which highlighted how it worried about any softening in criminal justice laws: “The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices, or through the decriminalisation of certain activities that are currently proscribed by our criminal laws.”

the CCA has been criticised in particular for its persistent lobbying efforts in recent years. It has spent considerable sums of money to influence various government departments to support it in recent years. According to a Huffington Post investigation in 2012, a reported $17.4m was spent by the CCA on lobbying the Department of Homeland Security, US Immigrations and Customs Enforcement, Congress, and the Bureau of Prisons between 2002 and 2012.

The ITPI report highlights the case. In 2012, the CCA approached 48 state governors about the prospect of buying their publicly run prisons. In return for purchasing the prisons and running them over a 20-year contract, the CCA would require a 90 percent occupancy guarantee from the states. Were prisoner levels to fall below 90 percent, then the state would have to pay the company for the shortfall. This would incentivise states to lock up as many people as possible, and for as long as possible. While no state agreed to the CCA’s offer, there are a number of private prisons that have already secured such contracts from local governments for their prisons.

According to the ITPI report: “Bed guarantee provisions are also costly for state and local governments. As examples in the report show, these clauses can force corrections departments to pay thousands, sometimes millions, for unused beds — a ‘low-crime tax’ that penalises taxpayers when they achieve what should be a desired goal of lower incarceration rates.”

As much as 65 percent of prison contracts that the ITPI studied included occupancy guarantees and quotas, as well as penalties if those beds weren’t filled. Many of these quotas tend to range from between 80 and 100 percent, with the states of Arizona, Louisiana, Oklahoma, and Virginia all being tied to contracts that require between 95 and 100 percent occupancy. In Arizona, three privately run prisons have 100 percent occupancy quotas, despite the cost to the state for housing each prisoner rising by almost 14 percent for each year of the contracts.

Elsewhere, Ohio’s Lake Erie Correctional Institution has a 20-year contract that requires a 90 percent quota, but the facility has reportedly faced issues with overcrowding, as well as safety concerns. “These contract clauses incentivise keeping prison beds filled, which runs counter to many states’ public policy goals of reducing the prison population and increasing efforts for inmate rehabilitation,” the report noted.

The ITPI added: “The private prison industry often claims that prison privatisation saves states money. Numerous studies and audits have shown these claims of cost savings to be illusory, and bed occupancy requirements are one way that private prison companies lock in inflated costs after the contract is signed.”

Fig 3 - prison

Reforming the flawed system
Pressure to reform America’s prison system has come from unlikely sources. While the ongoing Republican presidential contest has garnered the usual tough talk over the War on Drugs and sentencing, a visit by Pope Francis to the US in September saw him call for a focus on the rehabilitation of criminals, rather than mere punishment. “It is painful when we see prison systems which are not concerned to care for wounds, to soothe pain, to offer new possibilities,” he said. “It is painful when we see people who think that only others need to be cleansed, purified, and do not recognise that their weariness, pain and wounds are also the weariness, pain and wounds of society.”

Reacting to his comments, Holly Harris, Executive Director at the prison reform group Justice Action Network, said that Pope Francis was “removing the stigma” around how criminals are treated: “We’re no longer talking about an obscure minority of people – this is something that impacts everyone in America. When you’re sitting in church this morning and look to your left and your right, odds are one of those people has a criminal record.”

The pope’s comments came two months after President Barack Obama, going into the final 18 months of his presidency, revealed his ambitions for reforming the criminal justice system. In July, Obama announced his plan to overhaul a number of contentious areas within the law, with a focus on scrapping mandatory prison sentences, addressing racial disparities in sentencing, cutting the use of solitary confinement, and slowing down the soaring cost of incarceration. In a speech to the National Association for the Advancement of Coloured People (NAACP), Obama described the current system as one where society was turning “a blind eye to hopelessness and despair”.

Instead, President Obama said he wanted to offer the chance to those in the prison system to be rehabilitated into society: “While people in our prisons have made some mistakes, and sometimes big mistakes, they are also Americans and we have to make sure that, as they do their time, that we are increasing the possibility that they can turn their lives around. Justice and redemption go hand in hand.”

It seems that politicians from both sides of the political spectrum are eager for there to be some sort of reform. In bipartisan legislation proposed by Republican Senator Mike Lee and Democratic Senator Richard Durbin, sentencing in the US could become much more efficient. The Smart Sentencing Act of 2015 would look particularly at mandatory minimum sentences, although it would refrain from removing them entirely.

Senator Lee said: “Our current scheme of mandatory minimum sentences is irrational and wasteful. By targeting particularly egregious mandatory minimums and returning discretion to federal judges in an incremental manner, the Smarter Sentencing Act takes an important step forward in reducing the financial and human cost of outdated and imprudent sentencing policies.”

It is similar to the Smart Sentencing Act of 2013, which failed to pass through Congress the same year. This time, the act is a bi-partisan effort that will look at reducing mandatory minimum sentences from 10 years or more to five years or more, as well as reducing some sentences from 20 years minimum to 10 years minimum. Michael Collins, policy director at advocacy group Drug Policy Alliance, told The Guardian in July that mandatory minimum sentences must form a central part of any sentencing reform. “You cannot talk about sentencing reform without addressing mandatory minimums. It’s the main driver of mass incarceration in this country.”

As Obama embarks on creating a legacy for his two-term presidency, the prospect of a meaningful reform of the prison industry has become more real. Everything seems on the table in terms of reform, with serious consideration being given to reducing mandatory minimum sentences and putting the onus on institutions to encourage rehabilitation of inmates. While it may not mean longer-term profits for private institutions, it may just help improve society.

Global Review: countries with the most and least gender equality

Posted on by Ashton Wenborn

women's inequality1

1. Iceland (Rank 1)

For the sixth year running Iceland has topped the leader board with the lowest gender equality gap. The country’s journey to the top began 40 years ago, when many of its female population protested against wage disparity between genders. Of Iceland’s population, 25,000 women went on strike for a day – prompting the government to form the Gender Equality Council. Since then, Iceland has made massive strides with high numbers of women in education and parliament. A state-run school system has given Icelandic girls access to some of the best teaching and academic institutions in the world. In 2013, the number of women graduating from the University of Iceland was two women for every man.

2. Finland (Rank 2)

Finland, along with neighbours Sweden and Norway, has one of the strongest global reputations for gender equality. The Scandinavian country’s government uses a systematic and target-oriented approach to tackle sexism, and has its own Gender Inequality Policy. Finland’s parliament has worked hard to improve the labour market, ensuring that career development and pay conditions for men and women are the same, and that jobs are not divided into gendered roles. Its parliament is one of the most balanced in terms of its gender split, with high numbers of women in lead positions. Academic outcomes are good for Finnish girls, with all expected to move into primary, secondary and tertiary education.

3. Germany (Rank 12)

Germany consistently outperforms its European neighbours when it comes to economic performance, and yet falls flat on the treatment of women. Between 2005 and 2010, the number of women trafficked into the country for sexual exploitation increased by 70 percent. It has one of the continent’s highest gender pay gaps, which its government has desperately tried to address. In March it controversially introduced boardroom quotas, coming into effect in 2016. This will mean major companies have to issue 30 percent of their supervisory seats to women. It follows a number of steps politicians have taken to promote female representation, with some even looking to change Germany’s ‘sexist’ traffic lights that only show men.

4. South Africa (Rank 18)

Installing gender equality has been a struggle for South Africa, which has poor scores for female economic participation and opportunity, and even worse credentials for girls’ literacy levels. It was set a series of millennium development goals in 2000 by the UN to achieve in 2015. Many of these targets set out to address gender inequality, with the aim of promoting parity for men and women across educational and workplace settings. OECD commentators suggested that South Africa will miss these, however, because of the extent of gender-based violence in the country. It has a justice system that is more favourable to men, according to reports. Both these factors are stagnating all other forms of growth.

women's inequality2

5. US (Rank 20)

In spite of its global standing, the US is no better than many developing countries when it comes to gender equality. While plenty of economic opportunities exist for women, they are generally paid a lot less than male colleagues and work in lower-ranked positions. Perhaps the US’ worst offending area is political empowerment, as women rarely get into important governmental positions. There are large disparities in how women are treated across the country, with southern women generally earning less than their northern counterparts. The status of women is also dictated largely by their race and ethnicity. Some commentators believe public figures such as Hillary Clinton will help close the gap.

6. Australia (Rank 24)

While Australian women have a healthy life expectancy and are one of the most educated groups in the world, they are stifled by inadequate workplace conditions. Data collected in 2013-14 by the Workplace Gender Equality Agency shows that women face more barriers than men in employment, with female representation on a steady decline when being promoted. It also suggests that one third of employers have no key female management personnel. Women are more likely to suffer from harassment going about their daily work. The country ranked low for women’s political empowerment, but the government has vowed to tackle gender inequality, which is seen as damaging to economic growth.

7. UK (Rank 26)

The UK’s position on gender equality sent shockwaves around the world, as it dropped eight spots from the previous Global Gender Gap report. The country has been on a negative slide ever since 2006, when it was ranked in ninth place, and it is believed changes in income estimates are behind the dramatic fall. While education is strong throughout the country, women are poorly represented in parliament and positions of power, and are inadequately remunerated at work. Other reports corroborate that women are generally paid much less than men, and that there is often an unequal representation of them in sport, culture and social spheres.

8. Yemen (Rank 142)

Yemen has a dreadful record for parity between the sexes. Though women are fairly equal to men in terms of health, they are grossly behind for rankings relating to economic participation and opportunities. The country has no female members of parliament, with only one in 10 ministerial positions held by women. The gaps between the sexes in terms of enrolment in education, as well as the literacy rate between girls and boys, are some of the largest. Times are tough for Yemeni women in general, with ‘honour’ killings and high incidences of rape and violence. A 2013 demographic and health survey showed that around 92 percent of women said violence against women commonly occurs in the home.

Source: World Economic Forum

Investors are hungrier than ever for sustainable projects

Posted on by World Finance

Socially and environmentally responsible investments are growing in the emerging market space. Yves Duponselle, CEO of Xeon International, and Giancarlo d’Elia, CEO of Xeon Fund, discuss the rising demand for socially and environmentally responsible investment funds in the wake of successive financial crises.

World Finance: Socially and environmentally responsible investments are growing in the emerging market space. Here to share insight: Yves Duponselle, and Giancarlo d’Elia.

So first let’s talk about corporate social responsibility and the demand in the wake of successive financial crises. Tell me about what your average investor is calling for today.

Yves Duponselle: The new age investor is actually calling to contribute to something that benefits the environment and society.

Originally this was a phenomenon that was very niche-oriented: it was for non-profit organisations. But it recently became mainstream. It’s a business that is reaching out to two to three billion today, and it’s estimated in the next three to five years to grow very, very rapidly, from the concern of these investors to contribute with their money to something that is good for the environment.

We believe, not only from our heads but also from our hearts, that it’s necessary our generation starts doing something in terms of social and corporate responsibility.

World Finance: So Giancarlo, why should the average investor believe that you’re any different from any other hedge fund that bet against sovereign states prior to the 2008 crisis?

Giancarlo d’Elia: We are a private equity fund; we are not into financial speculation. Our job is to create value: to generate value. And by doing so, to add this social dimension, respecting at the same time the environment, and having an eye for sustainability.

So basically, we are accountable to our investors.

Our job is also to make sure that the generated value is in equation with perceived value: otherwise we’re out of business.

And don’t forget that capitalism in the third millennium should have a social inspiration. Otherwise it won’t be, anymore.

World Finance: So Yves, what type of investors are you attracting?

Yves Duponselle: We’re attracting new business leaders that are conscious of sustainability. We’re want to talk to the second generation, who want to add the dimension of meaningfulness to what the first generation has created.

They are investors that cross all typologies. They’re a bit younger, they like technology, they are well-educated, they know how to take a calculated risk. They’re very open in assessing change as a positive thing, and they’re very open-minded towards new business models.

World Finance: Interesting. So Giancarlo, tell me about their risk profile.

Giancarlo d’Elia: Well basically we have to typologies of investors. One is more risk-inclined, and the other one is more oriented to the preservation of wealth.

But both have one common denominator, which is that they take calculated risks. And to do that, the vehicle that we have, the specialised investment fund in Luxembourg, is very well suited. Because the whole structure is designed to protect investors. All players in the circuit are there to make sure that the funds of the investors are properly taken care of. And all possible risks are mitigated.

There’s only one element which is left over, and this is the industrial risk. And this is where we intervene as a general partner: by employing the best possible specialists in their respective areas, and making sure that the top-notch people are with us.

World Finance: So how does this interest apply to alternative energies and water shortage?

Yves Duponselle: We’re actually proposing to investors two distinct, different vehicles.

One is effectively investing in alternative biofuels in emerging markets. We have been thinking how they could become more self-sufficient. We combined two pretty poor performers in the industry: we put them together, and all of a sudden we got a very well performing company that is creating very interesting profits for investors, that is putting a lot of farmers to work – so there is the social compound.

And we see a huge reduction in the carbon footprint of the energy that is produced locally. So there is our environmental impact.

The second fund is a water fund in the regions that are under severe threat of drought. This water fund is actually hoping to cope with the shortage that is forecast over the next years. So, the idea here is to produce water and to deliver it to the local communities, so it can contribute to have a social impact. And of course, also, for the farmers to have an environmental impact.

World Finance: Finally Giancarlo, how are you able to prove that this is a socially responsible opportunity as well as wealth generating?

Giancarlo d’Elia: We act according to the principle that if you can measure it, you can improve it. And according to this principle, we have inserted into our key performance indicators in the daily management of the funds, the social dimension and the environmental impact.

So basically, we know exactly how many jobs we’re going to be creating in the target market. If we look at the water fund, where we produce and supply potable water to populations suffering from water scarcity, we know exactly how many households we’re serving. And if we make water flow, we make life flow. So things are going to improve dramatically.

World Finance: Yves, Giancarlo, thank you so much for joining me.

Yves Duponselle: Thank you.

Giancarlo d’Elia: Thank you for having us.

Asia’s big slowdown rattles the world

Posted on by Ashton Wenborn

“For its swiftness and confounding of experts, the evaporation of the Asian economic ‘miracle’ probably ranks second only to the unravelling of Soviet socialism,” wrote Walden Bello, a Filipino academic and politician, for the Australian-based journal Inside Indonesia. He continued: “All at once convention has been turned on its head, as South Korea, Thailand and Indonesia line up for a multibillion-dollar bailout from the International Monetary Fund [IMF], and many of the same institutions and people who recently celebrated the Asian ‘tigers’ as the engine of world growth into the 21st century now speak of them as a source of financial contagion, even as the trigger for global deflation.”

Any casual observer of current affairs could be forgiven for thinking Bello was writing about recent events, except perhaps with a little confusion over the conspicuous absence of reference to China or wondering why anyone would still refer to the Soviet Union. Bello was writing in 1998, during the fallout of the East Asian financial crisis of that decade. Yet the themes he draws out – a reverse in the fortunes of Asia’s rising economic stars and concerns over the implications for the global economy – seem to have returned, as the spectre at the end of the Asian economic miracle has once again reared its head.

Concerns over the implications for the global economy seem to have returned, as the spectre at the end of the Asian economic miracle has once again reared its head

An engine for growth
The region has indeed seen a declining growth rate, a fall in the volume of trade and, in the instances of some economies, unwanted currency depreciations. The Asian economy faced “strong headwinds” in early 2015, according to the Asian Development Bank’s September Asian Economic Outlook Report. Growth figures for the region are predicted to slow from 6.2 percent in 2014, down to 5.8 percent in 2015. The reasons for this are numerous, yet a common thread seems to run through all of these financial misfortunes: the economic slowdown of China. Being the world’s second-largest economy, China has been the engine for much of the world’s economic growth for the past few decades, and particularly in the Asia-Pacific region. As such, the recent dampening of economic growth in China is being felt throughout the region.

After the stalling of the Japanese economy in the 1990s, the late 1998 Asian financial crises, and finally China’s accession to the World Trade Organisation in 2001, the regional Asian economy has been powered by China’s rapid growth. With China as their engine, the economies of the region, for the most part, sustained impressive growth rates throughout the 21st century, even weathering the 2008 economic crises. For this reason then, the transformation of the Chinese economy and resulting slowdown has had reverberations around the world, being most felt by the various East and South-East Asian economies that surround it.

Yet while the model of growth and dependence on China makes for disconcerting reading, certainly in terms of the economic statistics, a closer look reveals that rather than facing a decline in fortunes the region is going through a period of economic transformation.

A little perspective
Since 2014, China has being seeing a slowdown in its economy. However, the country’s slowdown itself should be put into perspective: while growth rates have declined, it is still the site of an impressive – historically unprecedented, even – economic expansion. “Overall it seems to me that the scale and impact of China’s economic slowdown is being exaggerated,” Daniel Ben-Ami, an independent economics expert and financial journalist, told World Finance.

“For example, a growth rate of about seven percent of Chinese GDP today is worth more (in dollars or yuan terms) than 10 percent of its GDP a few years ago. It may be a smaller percentage, but of a much higher number. Therefore China is still easily the largest source of growth for the global economy.”

While doom-mongering headlines have portrayed the slowdown as much worse than it actually is, growth rates have still undeniably cooled off. However, according to Jonathan Fenby, Managing Director of China Research at Trusted Sources and long-time observer of China, the slowdown itself is part of a long-term plan by the Communist Party. He noted in a Trusted Sources paper from August 2015: “The Chinese growth slowdown has been programmed since 2012, when the leadership in Beijing changed and policymakers turned their back on the broad credit-driven stimulus measures introduced at the end of 2008 in reaction to the effect of the global slowdown on exports. One year later, the Communist Party’s Third Plenum adopted the 60 point economic reform programme. At that time, the official number for annual growth was 7.7 percent.”

While the slowdown has also been influenced by global economic factors such as lacklustre demand due to a depreciated euro and yen, as well as a weaker-than-expected recovery in the US, the primary cause is the beginning of the end of China’s 30-year model of growth kicked off by Deng Xiaoping’s post-Mao reforms. “The most fundamental cause [of the slowdown] is that the basic strategy of the rapid economic growth of China over the past three decades, which primarily relies on the simple rapid expansion of the low value-added sectors, has reached its limit,” said Kevin G Cai, Associate Professor of East Asian Studies, Political Science and Social Development Studies at the University of Waterloo.

After reaching a certain level of development, this model grows increasingly ineffective. According to Cai: “The economy has to move into a new stage in which the quality improvement is crucial and more important than simple quantity expansion.” China has been moving in this direction and therefore has begun “phasing out of a growingly number of labour-intensive sectors and moving into more hi-tech and high value-added sectors and service sectors. As such, it can well be expected that China would no longer be able to maintain a high growth rate of the past three decades plus.”

South Korea exports

Korea takes a knock
Meanwhile, South Korean exports in August 2015 fell by 14.7 percent on the previous year, to a value of under $40bn (see Fig 1). With exports accounting for roughly half of the country’s GDP, such a steep fall is having and will continue to be felt by the rest of the economy, with Morgan Stanley cutting growth predictions from 2.5 percent down to 2.3 percent for 2015.

South Korea’s economy is particularly vulnerable to global macroeconomic trends. According to the World Trade Organisation, in 2014 the country’s trade-to-GDP ratio was 103.2 – a significant amount higher than economies of a comparable size, or Japan’s figure of 33.6 percent. The consequence of this is that any decline in world trade volumes is going to have a significant impact on South Korea. With less-than-impressive growth figures across the board, demand for exports from Korea have fallen in general. And yet, at the same time, a large part of its exports – around a third – come from China. From the late 1990s onwards, South Korea has increasingly relied upon China as part of a global supply chain, exporting parts to China for assembly by its low-wage and abundant workforce, and for re-export to the world market. Declining Korean trade figures to China, then, can be seen as part of a general fall in demand, in tune with global economic conditions.

However, part of China’s transition is also leading it to produce higher-value goods itself. As Konstantinos Venetis, an economist at Lombard Street Research, noted: “Competition in important market segments has intensified, not least as Chinese players are gradually moving up the value chain. For example, lower-cost Chinese smartphone manufacturers have been making their presence felt, largely at the expense of Samsung.”

Not only is South Korea at a loss due to competition from China for high-value goods, the other aspect of China transition – higher-paid workers – is also stiffening its competition with western high-value producers. Growing wages and spending power in China is leading consumers who are prepared to pay higher prices to look further afield for goods. “Korea’s automakers are getting squeezed by their US and European counterparts in large growth markets such as China, where higher incomes are underpinning less price-sensitive spending patterns,” said Venetis. For the aspirational Chinese consumer, now with more money in his or her pocket, Apple trumps Samsung, while now-attainable western car brands are more appealing than Hyundai.

Fears for the country’s economic future, however, should be parlayed. According to Gerard Roland, a professor of economics and political science at University of California, although exports to South Korea’s largest trading partner have fallen due to China “going up in the quality ladder of its exports… so has South Korea”. Roland points out that South Korea still has a comfortable technological and productivity advantage over China. Meanwhile, Cai said that South Korea still has “a comparative advantage in hi-tech and high value-added sectors”.

Yet South Korea will need to confront these changes stemming from China: according to Cai, it will likely continue to “promote these sectors by developing new series of products to remain competitive”.

Or, as Ulrich Volz, a senior lecturer in economics at SOAS University of London, points out: “[The] country needs to further innovate, which will also require changes to the education system to support creative learning and innovative teaching.”

Further, the country will look towards expanding its services sector. Since the conclusion of the Second World War, South Korea has honed a model of export-led growth; while it will continue to produce high-value and hi-tech goods for exports, in the face of structural challenges to this model, it will further grow its services industry, just as many other mature and industrialised economies have. According to Cai: “It seems wise for South Korea to promote service elements as a new source of growth.” Although this is already happening, according to William W Grimes, Professor of International Relations and Political Science at the Pardee School of Global Studies, who said: “Korea is undoubtedly moving toward a more service-based economy, as have generations of countries that developed earlier. The challenge will be to develop high value-added services that can provide good quality jobs for Korean workers.”

Fig 2

Slow down south
Further south, the economies of South-East Asia have also felt the impact of China’s economic landing (see Fig 2). Although growth in Vietnam has been particularly strong, other South-East Asian economies have held the region’s collective growth back, to a large extent due to exports being impacted by a fall in demand for commodities in China. In September 2015, the Asian Development Bank revised the region’s growth figures down to 4.4 percent, citing “subdued demand from the major industrial economies and the PRC [People’s Republic of China]”. In particular, the bank pointed out, Malaysia and Indonesia have seen their export figures slow (see Fig 3) due to “the investment slowdown in the PRC”.

Over the past few years, many economies in South-East Asia have seen a boom in their exports, particularly due to strong Chinese demand. South-East Asian nations “became particularly dependent on China during its long investment-led growth and the associated commodity boom, during which demand for and prices of commodities were high”, Alasdair Cavalla, an economist at the Centre for Economics and Business Research, told World Finance. Fuelled largely by Chinese demand, the world economy saw what is now being referred to as the ‘commodity super-cycle’, a long-term upwards swing in prices.

Now, with China’s demand drying up and bringing the super-cycle to a close, the regional economy of South-East Asia inevitably has seen some trouble. The reduction in Chinese demand not only resulted in falling trade volumes, but also a decline in prices across the board.

“The fall in commodity demand harms Indonesian and Malaysian fiscal positions – though they are able to trim fuel subsidies, they lose revenues from exports,” said Cavalla. “But the stress on budgets means both are likely to see borrowing costs rise, which will drag on their growth. It may harm trade balances, though increased competitiveness through depreciation has ameliorated this problem – in fact, Indonesia has run a series of surpluses recently. Falls in currency are principally a problem for consumers whose purchasing power will fall; for Malaysia this is particularly problematic coming just after an increase in sales tax.”

The decline in commodity demand is partially cyclical. Grimes said that the sag in demand for commodities, which is driven by export demands from China by the rest of the world economy, can partially be put down to “weak demand in end-user countries in Europe and North America”. However, for the most part it is structural. According to Grimes, growth in Chinese commodity demand will weaken “as manufacturing gives way to services, competition from India and new competitors increases, and Chinese firms use factors more efficiently”. The structural change in China, of moving away from breakneck growth rates, low-end manufacturing and higher internal productivity and wages, then, is presenting a challenge for the model of growth pursued by South-East Asian economies for the past 15 years.

However, any pessimism concerning the region should be resisted. The end of the commodity super-cycle and seemingly never ending growth of demand from China may have come to an end, but South-East Asian nations now have a chance to reorient away from simply selling commodities, creating more sophisticated economies. “China’s partners [in South-East Asia] will have to adjust to this new norm,” said Grimes, although according to Cavalla, the region must diversify. He believes this is achievable: “Development strategies in these economies have been successful in the past. Most now have some plan to move into knowledge-based industries, be it creating industry clusters, improving tertiary education or through tax breaks.” Hi-tech exports, he continued, have actually increased from South-East Asia over recent years, but have just been overshadowed by the faster growth of commodity exports, and in the future such “consumer exports will be in higher demand than commodities”.

At the same time, as part of China’s transition to a more mature economy – the reason for the slowdown itself – many South-East Asian nations are set to benefit from the relocation of industry to the region, as the cost of labour in China rises. “As a result of structural transformation in the Chinese economy, more and more labour-intensive and low value-added sectors are being relocated into neighbouring South-East Asian countries, where labour costs are now lower than those in China, which will obviously help the economic development of Southeast Asian countries,” said Cai.

Fig 3

The sun has not set
Asia’s regional economy still provides rates of growth above world averages, providing the engine for much of the world economy. Asia has spurred ahead for the past two decades on the coattails of China’s unprecedented economic boom. While this has come to an end, countries in the region will need to re-orientate and restructure their economic models; whether it’s South Korea transitioning to a service economy and away from its hyper-dependence on export-led growth, the relocation of low-paid labour intensive industry to the poorer regions of Sout-East Asia, the development of better domestic markets and productivity, or the searching for new markets for commodities.

While the transitions that the various countries of East and South-East Asia are going through have led to dips in economic figures, and may lead to more in future, this should not be seen as a prolonged downturn or major reversal of the region’s fortunes. Rather, it is the result – growing pains, even – of an economic region in transition; progressing and ever more becoming the new dynamic centre of global capitalism. “Growth rates are likely to be around four to five percent in coming years, which is a clear slowdown, but Asian economies will continue to grow above the world average in the coming years,” said Grimes.

Or as Peter Frankopan pertinently puts it in his 2015 book The Silk Roads: A New History of the World: “Slowly but surely, the direction in which the world spins has reversed: where for the last five centuries the globe turned westwards on its axis, it now turns to the east.”

Fed to set new rules on banks handling commodities

Posted on by Ashton Wenborn

The United States Federal Reserve has proposed new regulations for banks that handle in physical commodities. Financial institutions that handle physical commodities will be required to hold increased capital reserves to act as a buffer, in the advent of unforeseen disaster such as an oil pipeline explosion or oil tanker spill. The hope is that the requirement for increased capital reserves will mean that banks can cushion.

Financial institutions that handle physical commodities will be required to hold increased capital reserves to act as
a buffer

While many banks sell and buy derivatives in physical commodities such as oil, coal and metals, many also, such as Goldman Sachs, Bank of America Merrill Lynch and Citigroup are also engaged in the storage and shipping of such commodities. While banks face strict capital requirements to cushion swings in commodity markets prices that they trade, no such requirements exist to cover the operational risks associated with the physical handling of such commodities.

The issue has been pursued by the Federal Reserve in recent years. As Reuters notes, “Fed Governor Daniel Tarullo said in November last year the bank was considering introducing new rules that would increase capital and insurance requirements, limit the size of the operations or prohibit certain commodities held by the firms.” These new proposals, however, see the Fed preferring the use of increase capital requirements rather than size restraints or certain commodity prohibition.

The fear is that such large financial institutions are “too big to fail,” and therefore the Fed feels the need to institute certain regulations to ensure that any unforeseen disaster will not bring down large banks, which would threaten the entire economy. Recently, however, many banks have been disengaging from the business, due to a decline in profitability. For instance, as the Financial Times reports, “earlier this year Morgan Stanley agreed to sell its sprawling physical oil merchant business for more than $1bn.”

Breaking up is hard to do: why ‘too big to fail’ banks can’t split up

Posted on by Ashton Wenborn

When the banking crisis struck in 2008, the calls from the industry for government assistance were panicked and clear. Many of these institutions teetering on the brink of disaster were deemed to be too big to fail, with an economic footprint so large that it would have a devastating knock-on effect for the rest of the economy.

In the aftermath, popular opinion dictated that such a situation, where huge private financial institutions required billions of dollars of state money to survive, could never happen again. Regulators set about debating whether to split these banks up, creating ‘firewalls’ around traditional savings operations, and allowing riskier investment funds to operate separately.

However, as the years have passed and the global economy has, somewhat half-heartedly, bounced back, so too has the attention on these firms. Many have remained as big as ever, and in some cases grown to be even larger. Despite this, there remain calls among many political figures for banks to be curtailed.

No single financial institution should have holdings so extensive that its failure would send the world economy into crisis. If an institution is too big to fail, it is too big to exist

Breaking banks
In Britain, the question of what to do with some of the big financial institutions has rumbled on ever since the crisis engulfed London and the wider UK economy. Demands for tighter regulations and enforced downsizing have not been enthusiastically met by many of the big firms, with HSBC rumoured to be considering relocating its headquarters to Hong Kong as a result. The company is also thought to be spinning off its UK retail banking division into a new firm, possibly named after the old Midland Bank that it bought over 25 years ago. Elsewhere, the partially state-owned and bailed-out Lloyds and Royal Bank of Scotland each had their investment divisions sold off or scaled back in recent years.

Another leading firm, Barclays, has faced its own challenges in how to modernise its operations. In July, the British banking giant ousted its CEO Antony Jenkins after just three years in the job, with many suggesting that his departure was down to the slow pace of his structural changes. Barclays was one of the financial institutions in the UK that was criticised as being too big to fail, even though it resisted the temptation to call for a government bailout at the height of the financial crisis, like rivals Royal Bank of Scotland and Lloyds.

Barclays’ investment banking division was seen as being a particularly divisive aspect of the operations, with some calling for it to be scaled back and the bank to refocus itself on its traditional consumer services. Jenkins was hired in 2012 with the task of addressing these issues and transforming Barclays into a more efficient and flexible business, not so wedded to its investment banking operations.

During his three years in charge there were rumblings of discontent among board members, who felt that reforms hadn’t been implemented fast enough and that Jenkins was dragging his feet. His temporary replacement, newly appointed chairman John McFarlane, is expected to clip the wings of the investment banking division that has come under fire for its role in the Libor and foreign exchange rate rigging scandals.

While there are still many people who bemoan the dominance of Britain’s biggest banks, a number of smaller and more modern financial institutions have emerged in recent years to challenge the hold of their larger counterparts. So-called challenger banks have sprung up across the UK; offering stripped back and efficient retail banking services than their more unwieldy rivals. Metro Bank is perhaps the most high-profile, receiving the first new banking licence in the UK in 2010 for over 100 years. It now has branches across the country. Regulators have since offered licences to six new banks. There now seems to be a suggestion that many of these bigger firms are out of tune with how the rest of the industry is changing.

Wall Street worries
Some political figures are also refusing to let the banks continue as before. In July, Democratic presidential candidate Bernie Sanders wrote an article that called for the big banks in the US to be broken up. Placing the blame for the financial crisis squarely at the door of Wall Street’s biggest banks, Sanders wrote: “Today, 99 percent of all new income goes to the top one percent. During the last two years, the 14 wealthiest Americans saw their wealth increase by $157bn, which is more wealth than is owned by the bottom 130 million Americans.

“In the midst of all this grotesque level of income and wealth inequality comes Wall Street. As we all know, it was the greed, recklessness and illegal behaviour on Wall Street six years ago that drove this country into the worst recession since the Great Depression. Millions of Americans lost their jobs, homes, life savings and ability to send their kids to college. The middle class is still suffering from the horrendous damage huge financial institutions and insurance companies did to this country in 2008.”

His desire to see the banks split up comes from the fact that the banks that required bail out funds in 2008 have grown even larger since then, despite calls at the time to clip their wings so such a situation wouldn’t be necessary again. “During the financial crisis of 2008, the American people were told that they needed to bailout huge financial institutions because those institutions were too big to fail. Yet, today, three out of the four financial institutions in this country (JP Morgan Chase, Bank of America, and Wells Fargo) are 80 percent larger today than they were on September 30, 2007, a year before the taxpayers of this country bailed them out. 80 percent!”

He added: “No single financial institution should be so large that its failure would cause catastrophic risk to millions of Americans or to our nation’s economic well-being. No single financial institution should have holdings so extensive that its failure would send the world economy into crisis. If an institution is too big to fail, it is too big to exist.”
The balance of power within the US economy towards the banking industry is, Sanders says, both wrong and a huge risk to the country’s economic prospects. With around $10trn in assets, this represents almost 60 percent of America’s GDP.

Sanders proposes a bill that would see regulators target the biggest financial institutions – including JP Morgan Chase, Bank of America, Citigroup, Goldman Sachs, Wells Fargo and Morgan Stanley – and break them up. His legislation has been endorsed by the Independent Community of Bankers of America, which represents six thousand community banks across the country.

While Sanders represents a populist wing of his party and is unlikely to overcome Hillary Clinton in the race for the Democratic nomination, his views reflect the growing discontent that many Americans have towards the financial behemoths that they feel were responsible for the economic downturn in 2008. His Democrat colleague Senator Elizabeth Warren has been a vocal opponent of the influence that Citigroup has in both the economy and in the political system in Washington.

Last year, she launched a scathing attack against Congress after the Dodd-Frank rules were weakened, and singled out Citigroup’s influence on politicians at the same time. “Many Wall Street institutions have exerted extraordinary influence in Washington’s corridors of power, but Citigroup has risen above the others. Its grip over economic policymaking in the executive branch is unprecedented”, said Warren.

Influential institutions
The global banking industry has emerged in the last year considerably stronger than the position it found itself in five years ago. While the fears of a banking crisis are no longer at the forefront of people’s minds, there still remain valid concerns over just how large and influential many institutions are.

While there are many valid arguments for curbing the influence of the world’s biggest banks to prevent a situation where they are too big to fail, many people argue that limiting the size of these institutions would in fact make it more expensive to consumers for traditional banking services. Forcing the banks to limit their scope and scale would result in them not being able to deliver price cuts to consumers, according to a 2012 report by the Federal Reserve Bank of St Louis’s David C Wheelock.

Wheelock wrote: “Although size limits could, in principle, end too big to fail, some research suggests that they could also raise the cost of providing banking services by preventing banks from exploiting economies of scale.”

Although America will elect a new president next year, the chances of it being someone who will genuinely curtail the power of these banks is slim. Democrat frontrunner Hillary Clinton is reported to have close ties with Wall Street, while most of her Republican rivals are unlikely to want to impose tougher regulations on the financial industry. However, the popular uprising that has seen Bernie Sanders emerge as a genuine challenger to Clinton for the Democrat nomination has shown that many people are still genuinely concerned about the industry’s sway.

While many people may well think that banks need regulations to curtail their influence, there are signs in the UK that competition is happening naturally as a result of challenger banks – hinting at how the industry might evolve worldwide. Smaller, more nimble firms targeting specific demographics might be the sort of institution that are able to survive an economic downturn while at the same time not receive the opprobrium of a weary public.

Mexico opens up its energy industry

Posted on by Ashton Wenborn

When the charismatic Enrique Peña Nieto was sworn in as Mexico’s 57th president at the end of 2012, it was a decision that suggested the electorate had finally grown tired of economic stagnation. Nieto’s campaign had been based on the promise of radical economic reforms that would kick start the country’s flagging economy, and bring about a new era of prosperity.

Many of the industries due for reform had seen little to no investment for many years, with state-owned monopolies dominating much of the country. One such area is the energy industry, which for 77 years has been run by state-owned companies with almost no competition whatsoever. In September, however, Nieto took a significant step towards liberalising the industry and encouraging foreign ownership on a scale not seen in decades.

State-owned market
The hope is that this opening up of the energy markets will see much needed investment in creaking infrastructure, and to help modernise the country’s power supplies. However, global energy companies have not had a good time of things when it’s come to investing in Mexico on a historic front. In 1938, then President Lázaro Cárdenas seized the assets of global companies like Standard Oil and Royal Dutch Shell, and transferred them to the state-owned Petróleos Mexicanos (Pemex). Ever since, the energy markets in Mexico have been dominated by the state.

Mexico's energy production

The need to reopen the markets to private – and international – investment has become stark in the last few years. With the country’s large deposits of natural resources – including the third largest oil deposits in Latin America – many of the world’s biggest energy companies are circling with the intention of bidding for lucrative contracts. These include ExxonMobil, Chevron, Total, as well as domestic firm Pemex. Such is the scope of potential, it’s thought that there are as much as $220bn in investment opportunities for the private sector in Mexico as a result of the energy reforms.

The laws implemented by President Nieto have been aimed at “building a better country”, he told the World Energy Forum on Latin America in May. He added, “They are a platform for beginning a new stage of development.” The rule changes include allowing private companies to bid for contracts, boosting government finances in the process and increasing competition.

Many agree that Nieto’s energy market reforms signify his boldest actions since getting into office. In a paper for the IMF published in February by experts Jorge Alvarez and Fabián Valencia, it is suggested that the reforms could dramatically transform Mexico’s manufacturing industry, as a result of lower energy prices.

According to a study by global analysts IHS, the reforms to Mexico’s energy industry are set to give the petrochemical market a considerable boost. This comes after years of underinvestment in the industry that forced it to rely on imports, which has hampered the development of its own domestic energy market.

Writing in the report, Rina Quijada, Senior Director of IHS’ chemical group, said that years of underinvestment had led to the country having to import its raw materials for the industry. “The Mexican petrochemical industry has been overdue for investment and has had to rely heavily on raw material imports to meet its need for local production of many chemicals.” According to the IHS, Mexico imported $24.5bn worth of chemicals last year, which included 75 percent of the polyethylene that the country uses. She said, “Last year, Mexico had to import approximately 1.5 million tons of this widely used plastic, which is about 75 percent of the country’s polyethylene demand.”

As a result of a lack of investment by the state-run Pemex in the industry, Mexico has not got a modern infrastructure that is capable of extracting all the oil and gas it could. According to a study last year by Goldman Sachs, Pemex is likely to form partnerships with “more innovative companies” in order to get the best out of Mexico’s oil and gas deposits (see Fig. 1). “The areas with the greatest potential are technologically challenging and will require Pemex, who has not invested sufficiently in new technology in the past, to partner with more innovative companies.”

Indeed, US investment giant BlackRock announced in September that it would be partnering with Pemex, as well as acquiring infrastructure management firm Infraestructura Institucional. It is just the beginning of BlackRock’s plans to take a more central role in Mexico’s infrastructure investment programme.

A wealth of investment
Leading international analysts EY reported earlier this year that the reforms being made to the industry present a ‘historic opportunity’ to the private sector, as well as those seeking to build the necessary infrastructure for this updated energy industry. They add that with the large deposits of natural resources, the time is perfect for investment into the market. “The timing could not be better, as Mexico is an attractive market with significant opportunities for inbound investment. Mexico, the 14th-largest economy in the world, has abundant natural resources, including both conventional and unconventional oil and natural gas reserves.”

For US energy businesses, it is these large reserves that will be of most interest, noted the EY report. “Although the proposed energy-related reforms impact all areas throughout the oil and gas value chain, most US-based energy companies are naturally focused on gaining access to Mexico’s energy reserves. [Pemex], says the country’s reserves are about 50 billion barrels of oil equivalent, with another 60 billion or so in unconventional resources. Those are substantial numbers that understandably attract a good deal of attention.”

However, not everyone has welcomed them. Environmental groups, including Greenpeace, have said the reforms will devastate Mexico’s environment, not least because of the dramatic increase in oil and gas exploration across the country. Others fear it will lead to a rejection of nascent renewable energy technologies in favour of tried and tested fossil fuels.

Mexico's crude oil field production

 

Other vocal opponents include acclaimed Mexican filmmaker Alfonso Cuarón, who took out an advert in Mexican newspapers in April last year, demanding that the government make clear what measures they were making for protecting the environment, as well as combatting corruption. He wrote in a letter to Nieto, “The world’s multinational oil companies have as much power as many governments. What measures will be taken to keep our democracy from being taken over by illegal financing and the other methods of pressure by powerful interests? In a country with such a weak or non-existent legal system, how can you avoid large-scale corruption?”

Renewable energy may not be getting as much attention as its more polluting cousins, but the government hopes that heightened competition will mean the industry could provide Mexico » with 35 percent clean energy by 2024. The solar industry in feels that the reforms will provide new clean energy certificates that will fund new projects across the country. Many firms are investing in both wind and solar as a result of the reforms, including Spain’s Iberdrola, which has committed $5bn towards a natural gas plant and wind farms by 2018. Ignacio Sanchez Galán, Iberdrola’s CEO, told the World Energy Forum in June that the reforms would be a “real revolution” for the industry, and in particular renewable energy.

However, the hope is that alongside the development of Mexico’s oil industry will come an emphasis on the less-polluting natural gas sector. New pipelines connecting Mexico with the US could see the industry dramatically grow.

Infrastructure boost
Despite these concerns, there is considerable enthusiasm about the benefits that the reforms will have, not least for the country’s infrastructure. Some of the reforms are looking at developing the country’s pipelines, with connections to natural gas in Texas potentially transforming Mexico’s gas provision. This will come in the form of the Los Ramones pipeline, which currently delivers around 2.1 billion cubic feet of natural gas from Texas. According to the IHS, that figure could increase by another 3.45 billion cubic feet as a result of future investment.

Quijada added, “For Mexico, that gas means access to abundant, competitively priced feedstocks for petrochemical production. Just as important, it can be used for production of reliable, cost-competitive electricity, which is absolutely essential to grow the entire manufacturing base in the country and to making Mexican petrochemical production cost competitive.”

Giving the industry a new lease of life could have wider repercussions for Mexico’s economy and some of its poorer regions. The IHS’ David Crisostomo, an analyst on natural gas and power, added: “These pipeline investments are needed to connect the regions that don’t currently have access to natural gas. As a result, fuel-oil generation is still being used in regions such as the northwest, which is more costly than gas. This means Mexican consumers and manufacturers pay more for electricity when compared to their US neighbours.”

The improved infrastructure will mean many of these regions will start to get much better access to fuel, helping them to grow their own industries substantially. “Access to more affordable power will not only enable the petrochemical industry to grow and flourish, but also many other industries, such as automotive and consumer goods production. The process will take some time, but the impacts for the Mexican petrochemical industry, the manufacturing base, and the economy will be positive, and the power sector is pivotal to this success”, Crisostomo added.

While the intentions of Nieto are to clearly get the industry moving, it remains to be seen whether he can actually deliver on these reforms. In a country where the rule of law is notoriously ignored, implementing any reforms will prove tough. Another report – this time by global risk management consultancy firm Control Risks – said that regardless of whether the reforms had been passed into law, it was essential that they are implemented in full, without any watering down: “…the passage of legislation and the implementation of the details are not the same thing. Often, the interpretation taken by a government’s myriad bureaucracies and courts can be affected by lobbying and less savoury forms of pressure by interested outsiders, blunting or changing the emphasis of language now written into law.”

Mexico’s President Enrique Peña Nieto during his swearing in at the Chamber of Deputies, Mexico City
Mexico’s President Enrique Peña Nieto during his swearing in at the Chamber of Deputies, Mexico City

Because of this history of bureaucratic wrangling and lobbying, it is unclear whether many of the reforms will actually be implemented. The Control Risks report added: “By that measure, much remains uncertain in Mexico’s energy reforms. The legal structures certainly exist to enable profitable and efficient partnerships between Pemex, CFE and international suppliers, producers and subcontractors. But now the secondary phase is underway and risks abound. Legal challenges may tie up these provisions, forcing amendments or at least delaying their implementation.”

However, the forthcoming reforms to the oil, gas, and electricity markets in December should help to deliver serious investment from private sources, according to Control Risks. “These should serve as the catalyst for serious prospective investors, potential bidders and others interested in participating in Mexico’s new opportunities to begin taking serious soundings of their risk tolerance, mapping sectors and sub-sectors, and investigating in detail just how the business environment ushered in by Nieto’s reforms will translate on their corporate balance sheets.”

Getting Mexico’s energy market will take time, but Nieto’s reputation has been staked on opening up the country’s myriad state-run markets to proper competition. The potential benefits for the energy industry – and wider Mexican economy – are vast. However, concerns over the tumbling price of oil will dampen any rampant enthusiasm. For the government, getting private companies to step in and develop the industry and getting it off their balance sheet will be a welcome move.

 

Billboards may be ugly, but advertisers still need them

Posted on by Ashton Wenborn

For those seeking a foothold in emerging markets, São Paulo of the 2000s – one of the world’s most populated cities and fastest growing economies – was earmarked as an easy advertising opportunity. Billboards, bench ads, car wraps and exterior signage were all pounced upon by opportunistic brands, and before long towering billboards craned over the streets, while marketing speak was plastered against every space that could conceivably be sold.

Far from an isolated case, out of home (OOH) advertising has grown exponentially not just in São Paulo but in emerging markets generally, and with little in the way of regulation to temper its encroachment. In 2003 and 2004, growth clocked in at an impressive 22 and 15 percent, compared with global averages of 4.7 and 11 percent, and São Paulo, like so many cities before it, was lost among a crowd of neon signs and showpiece campaigns. The influx was an unspectacular event; that is until activist groups and city authorities were later united by a vision to banish the billboard.

“We decided that we should start combating pollution with the most conspicuous sector – visual pollution”, said São Paulo’s then Mayor Gilberto Kassab. By clamping down on billboards the world’s fourth largest municipality triggered a trend that, almost 10 years later, is still gathering momentum. “When advertising is used for good, it can be a powerful tool. Effective social marketing campaigns can change behaviour for the better. Unfortunately consumer product advertising can change behaviour for the worse – and typically does. So the best is to simply get rid of all billboards”, said Erik Assadourian, Senior Fellow at the Worldwatch Institute, an environmental research organisation based in Washington DC.

Does the sickly, overweight American public really need to be primed to drink more Coca-Cola or eat more Big-Macs?

This idea of a billboard ban is by no means a new one, yet it’s one that is gaining in popularity, as a great and growing number of activist groups work towards cleansing the city of OOH advertising, mostly on the basis that it constitutes visual pollution. In turn, local authorities are beginning to question the supposed benefits associated with OOH advertising, not to mention the sector’s enduring influence – or lack thereof – in the digital age.

Cleaning the city
In the case of São Paulo, the aptly named ‘clean city law’ made outdoor advertising illegal. Almost $8m fines were issued in the name of cleansing the city’s advertising scourge and within a year 15,000 billboards had been taken down and 300,000 oversized storefront signs reduced to an acceptable minimum. Fearing that the removal of these ads would entail a revenue loss of $133m and a net job loss of 20,000, the law has actually done much to uncover previously unseen areas and in 2011 enjoyed support from 70 percent of the population, who said the ban had benefited them in some way.

Similarly, in 2009 Chennai banned billboards, and several US states, including Vermont, Maine, Hawaii, and Alaska enjoy the distinction of being billboard-free. Scenic America puts the number of cities and communities that prohibit billboards at 1,500 and argues that doing so can bring both aesthetic and financial benefits to practicing communities. “Billboards are certainly visual clutter”, said Assadourian. “The goal of billboard advertisements is to direct attention to them, as opposed to the broader setting, and in competition with other billboards. Hence, billboards tend to spawn more and more distracting billboards. But worse than them being clutter is the fact that billboards typically advertise products that are unnecessary or often cause ill-being to people or the planet (or both). Does the sickly overweight American public really need to be primed to drink more Coca-Cola or eat more Big-Macs? If billboards were dedicated only to social marketing – advocating for wearing seat belts, spending more time with your children, eating less and eating healthier foods, and quitting smoking, I could understand their limited use, but their current use is self-destructive.”

Visually stimulating
Those in favour of billboard advertising, meanwhile, argue that the opposition is contained to a select few instances. “Consumers welcome OOH advertising because they recognise it as visually stimulating, creative and emotionally seductive”, said Alan Brydon, CEO of Outsmart, the UK marketing body for the OOH industry. “OOH sites symbolise renewal, modernity, convenience and the excitement of the modern urban experience.” In support of this view, Allie McAlpin, Communications Director for the Lamar Advertising Company, one of the largest outdoor advertising companies in North America, said: “We strictly adhere to local ordinances to help preserve scenic beauty. We also have extensive experience working with local city planners, landscape architects and others to create signage that is embraced by our communities. Many of our billboards, especially in major cities such as NYC, Los Angeles and Chicago, are spectacular landmarks that enhance the urban environment.”

However, the extent of the criticism and its influence on policy decisions would suggest otherwise. Across the Atlantic, Paris has set in motion plans to reduce the number of ad hoardings by a third, and earlier this year Tehran replaced all of its 1,500 advertising billboards with art for 10 days, again pointing to a global movement rather than a handful of isolated incidents. Other cities that have considered or implemented bans include – though are not excluded to – New York, Canberra, Paris, Bristol and Grenoble.

Of this sample, the last is of especial importance in that it was the first city in Europe to ban street advertising. In place of 326 advertising signs, including 64 billboards, the French Alpine city has agreed to plant upwards of 50 trees, in keeping with its reputation as one of Europe’s most innovative cities and in response to falling billboard revenue. Echoing what others have said on this same point, a crackdown on advertising can inject character into a community, and bring economic growth, either through increased tourism or better consumer sentiment.

By deciding not to renew a long-running contract with JC Decaux, the city also forfeit €150,000 in advertising revenue, which, while significant, is significantly less than the €645,000 it earned in 2014 for the same contract. “It’s time to move forward in making Grenoble a more gentle and creative city”, said the city’s Green Party Mayor Eric Piolle. “We want a city which is less aggressive and less stressful to live in, that can carve out its own identity. Freeing Grenoble of advertising billboards is a step in this direction.”

Each of these cases has enjoyed widespread support and yielded largely positive results, be they better tourism numbers or community spaces, yet this isn’t to say that the case against billboards is without opposition. Far from it, the movement to uproot outdoor advertising has come up against stiff resistance, some with good intentions and others not so much.

A fair case?
Going back to São Paulo, there are some of the opinion that the money spent on the campaign – together with the money lost as a result – detracts from some of the city’s more prominent issues, and would’ve been better spent on alleviating citywide poverty for instance.

“I think this city is going to become a sadder, duller place”, said Dalton Silvanom, the only councilman to vote against the law and a native to the advertising business, in an interview with The New York Times. “Advertising is both an art form and, when you’re in your car or alone on foot, a form of entertainment that helps relieve solitude and boredom.” Silvanom’s comments echo those of the wider industry, and for this reason attempts to ban billboards have failed to get off the ground. Opposition to billboards is gathering momentum, this much is true, though it largely manifests in the form of grassroots uprisings and small-scale protestations.

In Paris vigilantes and artists have taken matters into their own hands, with one artist, Etienne Lavie, choosing to paint over ads under the hash tag #OMGwhostolemyads. Likewise, in New York a new app entitled No Ad allows users to replace ads with artwork using augmented reality technology through their mobile devices.

Unfortunately, many of the benefits OOH advertising brings have been obscured amid a mire of criticism. In São Paulo a rash of billboards was responsible for an excess of commercial clutter and a distinct lack of character, though it was also responsible for much-needed jobs and revenue. The fact remains that many communities rely on the income that outdoor advertising brings, and the transition to digital looks only to increase the benefits.

Digital transition
As can be seen in the case of Grenoble, outdoor advertising doesn’t come with the prestige it once did, and the proliferation of mobile channels has led many to question – wrongly perhaps–- the relevance of billboards in the digital age. According to the Outdoor Advertising Association of America, OOH advertising revenue rose 3.8 percent in the second quarter of 2015 and accounted for $2.25bn overall. The results also show that all major out of home advertising categories are on the up, and the segment, alongside local radio, is the only traditional media channel to see “significant growth”. The figures here point to a reality distant from that of say São Paulo, Grenoble and a growing list of others where the segment is on the slide, and it appears that the opposition expressed by the public is at odds with the enthusiasm shared by brands.

PwC’s outlook for the sector also shows that in mature markets digital OOH revenue will replace physical. Revenue for the sector will reach $18.04bn in 2019, up from $9.71bn in 2014, and, should the company’s predictions prove accurate, at the expense of physical revenue – if only in mature markets. OOH is the “traditional advertising medium benefitting most from digitisation”, according to the report. “Digitisation has affected many traditional advertising media. For instance, global newspaper advertising revenue is set to decline at a CAGR of minus one percent over the next five years. Digitisation in OOH, however, has made a positive impact. By converting panels to digital, providers can vastly increase their revenue by displaying multiple ads of higher quality in the same space. This process will drive an impressive CAGR of 13.2 percent in DOOH advertising revenue.”

Aside from diversification, the digitisation of outdoor advertising allows brands to more closely engage with consumers, by integrating mobile and physical channels and by interacting with devices using technologies such as near-field communication. Though again, this development has not been without criticism. “Sadly, we can see that billboards are getting an upgrade – with digital billboards cropping up in cities around the world. This is a big step in the wrong direction”, said Assadourian. “Environmentally we’re talking about a new source of wasted electricity and resources to build these public advertising computers. And as these screens refresh, unlike paper billboards, they’re increasing digital clutter and total advertising exposure, helping to make the public even more into consumer zombies.”

So often positioned as a threat to traditional advertising and consumers both, the digitisation of OOH has actually done quite the opposite, in that the opportunities for brands have increased. “Technology and consumer behaviour is enhancing the power of the medium and as more people spend more time out and about, in an ever more connected way, OOH provides a wonderful way for advertisers to reach and engage with their audience”, said Brydon. “There is ongoing investment in digital OOH sites across the industry. With the rise of digital, the medium can now also enable time-specific and location-specific messages to be delivered, often prompting actions on consumers’ mobile devices in response to them. Classic posters still resonate with brilliant creative, delivering huge impact and memorable executions.”

According to McAlpin: “Using digital screens and technology, marketers can trigger tailored messages in the moment a consumer drives or walks past a structure. The dynamic capabilities coupled with the immediacy of the digital out-of-home medium offer endless possibilities for advertisers.”

Seen on the one side as a problem, businesses, on the other, see OOH advertising as an important means of getting more eyeballs on their brand. Fortunately, the transition to digital could mean the two reach a compromise, in that upgraded ads allow companies to be more responsive in how they position their brand, and may even allow them to directly address some of the concerns shared by the public.

Five of the world’s most influential refugees

Posted on by Ashton Wenborn

The world as we know it today would not be the same if it wasn’t for the impact and influence of various notable individuals, who happen to have been refugees that fled from conflict and persecution. Numerous asylum seekers have made a profound impression on global society through politics, philosophy and the arts, from Madeleine Albright to Karl Marx and Salvador Dalí. World Finance takes a look at a handful of the most influential in science and business.

Albert Einstein, physicist

Considered a genius and the most important physicist of the 20th century, Albert Einstein was born in Germany in 1879 into a secular Jewish family. After dropping out of school, he moved to Switzerland to study, but it took him two attempts to gain admission to the Swiss Federal Polytechnic School. Soon after entry, Einstein renounced his German citizenship in 1896 in order to avoid conscription; he was stateless for five years.

In 1905, Einstein published four papers that changed the future of physics – the best known was his fourth, which contained the famous equation, E=mc2. Einstein was awarded the Nobel Prize in physics in 1921, not for his theory of relativity, as widely assumed, but for discovering the law of the photoelectric effect.

As Einstein travelled the world giving lectures on his findings he became a target of the Nazis, which led him to take up a teaching post in Princeton in 1933. After WW2, Einstein became an activist, speaking out against the use of the atomic bomb and campaigning for civil rights in the US. He remained in Princeton until his death in 1955.

Sigmund Freud, Father of Psychoanalysis

Sigmund Freud was born in 1856 in Moravia, (modern-day Czech Republic), before his family moved to Vienna. After gaining a doctorate in medicine and working on hypnosis, among other things, Freud set up his own private practice in 1886. He soon gained a reputation for controversial theories, including the Oedipus complex and the prescription of cocaine as a ‘miracle cure’.

His major work, The Interpretation of Dreams, was a commercial failure when it was first published in 1900, but then went on to become the foundation of modern psychotherapy.

Although he was an atheist, Freud was born into a Jewish family and his books were among those publicly burnt by the Nazis. Following the German annexation of Austria, Freud’s apartment was raided and the Gestapo arrested his daughter, Anna. With help from his patient, Princess Marie Bonaparte, in 1938 Freud escaped Vienna with his wife and Anna. Bonaparte was unable to help his four sisters, who all died in concentration camps. Anna went on to become a renowned psychoanalyst in her own right.

Peter Drucker, business management guru

Born in Vienna in 1909, Peter Drucker became a world-famous professor, writer and management theorist. Considered by many as “the man who invented management”, he had a direct impact on some of the world’s most influential organisations, including Intel, IBM and Proctor & Gamble.

Drucker wrote numerous books and academic papers, making predictions that were way ahead of his time, including decentralisation, privatisation, the rise of Japan as an economic power and the importance of marketing and innovation for success in business. Regarding his first major work, The End of Economic Man, Winston Churchill described Drucker as having “the gift of starting other minds along a stimulating line of thought”.

Having realised the dangers of living in 1930s Germany, Drucker moved to London in 1933 and then went on to the US, where he began a consultancy service that drastically changed the internal structures of several major corporations, starting with General Motors.

Roberto Goizueta, CEO

Roberto Goizueta served as Coca Cola’s CEO and Chairman between 1981 and 1997. He is responsible for introducing Diet Coke, the biggest selling sugar-free soft drink in the world, taking the Latin American market from Pepsi, and, earning the company billions through the acquisition and sale of Columbia Pictures.

Goizueta fled Cuba in 1960 when Fidel Castro came to power and settled in Miami with nothing more than $40 and 100 shares in Coca Cola. Soon after, Goizueta joined the soft drink giant as a chemical engineer and quickly rose through the ranks. Coca Cola was struggling when Goizueta took over, but he drastically shook things up by purchasing unproductive bottling plants, replacing their management and increasing volume, before selling them off to a subsidiary.

The business legend also revised the company’s financial strategy to focus more so on shareholder returns. According to CNN, Goizueta created more shareholder wealth than any other CEO in history; during his tenure, the total return on stock was over 7,100 percent.

John G Kemeny, inventor of BASIC

John Kemeny, a mathematician and computer science revolutionary, became famous for developing BASIC with Thomas Kurtz in 1964.

Until recent years, BASIC was the most common computer programming language in the world. The software was a vital step in educating the world on coding, and speeding it up significantly as well.

While studying for his doctorate at Princeton, Kemeny served as a research assistant to Albert Einstein.

Kemeny became president of Dartmouth College from 1970 to 1981; he made drastic changes to the curriculum process and the student body by admitting women and introducing a programme for Native Americans. After being convinced by his students to sell BASIC commercially, Kemeny and Kurtz established True BASIC in 1983 and created versions for DOS and Mac operating systems.

When he was 12 years old, Jewish-born Kemeny left Hungary with his family to flee the Nazis. Relatives that stayed behind did not survive the Holocaust.

Refugees are an economic benefit, not burden, to Europe

Posted on by Ashton Wenborn

Over the past year or so, Europe has witnessed the most pressing refugee crisis since the Second World War. Hundreds of thousands of people have fled from the brutality of the so-called Islamic State (IS) and persecution in Syria to seek asylum in Europe’s strongest economies, where they desperately hope to start life anew (see Fig 1). Not limited to Syria, among the crowds knocking at the EU’s gates are refugees from Somalia, Afghanistan and Eritrea. Also in the mix are economic refugees from countries such as Albania and Kosovo.

Throughout the widespread media coverage of the refugee crisis, the fears of both policymakers and the public have been voiced. It is commonly believed that refugees are harmful to host nations and drain precious state resources, as those seeking salvation require accommodation, healthcare, basic supplies, food and clothing. Another presumption is that the provision of employment to refugees takes jobs away from residents and drives wages down, while the inflow of thousands of children places pressure on a country’s education system. Yet there are various theories and examples that argue the contrary.

At present, Europe has an impending problem on its hands that could have disastrous repercussions: an ageing labour force and a declining birth rate

At present, Europe has an impending problem on its hands that could have disastrous repercussions: an ageing labour force and a declining birth rate. In order to maintain Europe’s economic growth and industrial output, an injection of young workers is desperately needed. According to the OECD, to avoid stagnation, it is imperative that the EU adds 50 million people to its workforce by 2060 (see Fig 2). Such a demographic shift is also necessary to fund the pensions of Europe’s expanding elderly population. An influx of people is what the region needs right now – and that is exactly what is currently being offered, albeit through unfortunate circumstances.

Ill-informed debate
The common misconception that refugees are a burden to host states is a dangerous facet in dealing with Europe’s present refugee crisis. It distorts the realities of the situation, while promoting both disdain and inaction. “These arguments are often advanced without recourse to evidence. Indeed, few economists have worked on refugees and forced migration, and governments do not have disaggregated immigration data that can show the economic impact of hosting refugees,” Professor Alexander Betts, Director of the Refugee Studies Centre at the University of Oxford, told World Finance.

In Betts’ 2014 study, titled Refugee Economies: Rethinking Popular Assumptions, it was found that the presence of refugees boosts a local economy significantly as a result of additional purchasing power, the creation of employment and the provision of human capital. Betts explained: “Refugees around the world engage with markets. Even in the most restricted circumstances of closed refugee camps and without the right to work, economic activity can be observed. Refugees engage in consumption, production, exchange, entrepreneurship and the development of capital markets. Much of our research suggests that whether refugees are a benefit or a burden depends not just on who the refugees are, but also on the policies of the host states. When they are given the right to work, access to capital and educational opportunities, they are likely to have the greatest impact.”

The research conducted by Betts and his team took place in Uganda, as the right to work and move around freely for refugees is markedly better there than in neighbouring countries. “One of our most striking findings was the entrepreneurship of refugees. Faced with new markets, new social networks and a new regulatory environment, people adapt even faced with significant constraints,” said Betts. “In Kampala, the capital city, for instance, we found that 21 percent of the refugees have businesses that employ other people and 40 percent of those employees are citizens of the host country. In other words, refugees were creating jobs. Many of the businesses were, even in refugee camps, highly innovative and networked into the structures of the global economy.”

Fig 1

The German example
A large number of Syrian refugees are headed towards Germany as the likelihood of employment there appears to be greater than elsewhere in Europe. In a nod towards the country’s well-known record of accepting asylum seekers, in September, Chancellor Angela Merkel announced that Germany would open its arms to at least 800,000 refugees this year alone. There is, of course, a humanitarian element involved in this welcome, because helping those in dire need is ‘the right thing to do’. There is also another angle, which has allowed Merkel to make such a bold move: the influx of refugees can be extremely advantageous for Germany’s matured economy.

A recent study conducted by Hamburg’s World Economy Institute found that Germany’s birth rate is now the lowest in the world and is declining faster than that of any other industrial country. According to immigration researcher Herbert Brücker in an interview with Deutsche Welle in 2014, around 1.5 million skilled immigrants are needed to sustain Germany’s state pension system; it is estimated that by 2060, two workers will be needed to support every retired person in Germany.

Obviously, simply opening national borders is not enough to successfully assimilate refugees into a society: helping them to earn a living is key, but it is not a simple undertaking. To facilitate, institutions such as the Confederation of German Employers’ Associations (BDA) offer businesses assistance in order to integrate refugees into the market legally and effectively. Dr Carmen Bârsan, an advisor for the Labour Market Department at the BDA, explained the complex and lengthy process: “First of all, we think it is very important to create effective labour market access for these people. Unrestricted labour market access means without a ‘priority test’ and without a work ban. On the grounds of toleration, asylum seekers should be allowed to stay a further six months after the permit of residence for German territory.”

The ‘priority test’ that Bârsan argues should be abolished only allows German companies to hire asylum seekers in the event that a suitable German resident is not available for employment.

Directed by Hungarian police officers, refugees make their way through the countryside after crossing the Hungarian-Croatian border
Directed by Hungarian police officers, refugees make their way through the countryside after crossing the Hungarian-Croatian border

“Another important point is that successful integration in the labour market requires acquisition of the requisite language skills,” Bârsan told World Finance. “For this reason, elementary language learning should be open to all asylum seekers and tolerated residents; work-related language learning should be further developed also.” The third prong of BDA’s proposal involves improved access to education and vocational training, but is not limited to the fulfilment of such exercises. “Following successful completion of company training or further vocational training, the residency of these young people should generally be secured for two years of practice in the profession. Those [who] cannot be retained directly by the business providing the training should be able to stay for at least one additional year, in order to search for a job during this period.”

While such measures are a costly enterprise, particularly when factoring in millions of people, doing so is economically advantageous for the host nation. Contrary to common presumptions, refugees actually contribute more in taxes than they obtain in governmental support. A study by the Centre for European Economic Research (ZEW) found that on average in 2012, foreigners in Germany paid around €3,300 ($4,050) more in taxes than they received in state contributions – the total surplus amounted to €22bn ($27bn).

There are further examples which illustrate that refugee workers actually increase wages for the local population. When Yugoslav refugees in Denmark began working in low-skilled jobs during the 1990s and the 2000s, rather than driving wages down as many expected, their presence made the economy more complex. Instead of filling such jobs, natives moved up the skills ladder to more specialised professions that were better paid and more productive. Then there is the case where Cuban refugees settled in Miami in 1980, during which time they gave a major boost to the city’s economy by providing unskilled labour in numerous industries, including hospitality, textile production and agriculture.

Fig 2

Ethical self-interest
In order to successfully assimilate refugees into local populations, facilitating employment is absolutely crucial. As Bârsan explained, this requires easing labour market restrictions, together with training and language learning opportunities for asylum seekers. Access to capital will enable new nationals to seek their own enterprises – which, as evidenced by Betts’ study, enables entrepreneurship among refugees. To secure the political will needed to conduct such exercises, locals must be certain that they also stand to benefit. “Here, it is important that infrastructure and social services, from schools to hospitals to vocational training, are allocated to refugees and local populations simultaneously. Ensuring locals share in the benefits of service provision to refugees is as important in host countries in Africa and the Middle East as [it is] in Europe,” Betts said.

Public outrage across Europe has pressured governments to do more to help alleviate the crisis. Consequently, individual member states have promised to take in more refugees, while the EU itself has pledged to increase the humanitarian assistance it offers. Yet there is a vital piece of the puzzle missing: EU leaders are still struggling to organise a joint response, and only through collective action can such a large problem be solved. Doing so is also necessary to uphold the very principles upon which the EU is founded; a crucial aspect in keeping the fabric of the union intact, and one that must not be underestimated. And aside from the ideological reasoning for collective action, there is the pragmatic, as refugees are entering the union through multiple points. Turkey’s inaction must also be addressed: as the gateway to Europe, it has the responsibility to coordinate with EU forces in order to control the flow of people, and must also tackle the growing trend of trafficking along its coastline.

Undeniably, humanitarianism in the form of accepting refugees sparks fears in a populace – fears of the economic burden, as well as of cultural disconnection and the supposed threat of increased criminality. Yet, as research and history shows, refugees are in fact highly adaptable, willing to work and offer a different set of skills and experience. When afforded the necessary opportunities to integrate into host labour markets, the impact can not only be mutually beneficial – it can be extraordinary. It is therefore imperative to educate the local populace and businesses on the benefits they stand to gain in helping those seeking asylum. Moreover, doing so seems to be the most feasible answer to an undeniable problem that is currently looming over Europe’s future, or as Betts put it: “Europe should primarily be welcoming refugees because it is a humanitarian and ethical imperative, but it is also in our own economic self-interest.”

Many fear dictatorship as Turkey’s Erdogan is re-elected

Posted on by Ashton Wenborn

Following June’s bitter loss of parliamentary seats to the CHP, the Kurdish opposition party, ruling President Recep Tayyip Erdogan called for snap elections to take place just months later. The tactic was successful, and this time around, the Justice and Development party (AKP) can boast a sweeping victory with 49.4 percent of the vote. The result equates to 316 of the 550 parliamentary seats for the AKP, and thereby enables the return to a single party rule in Turkey.

The country is at a critical stage in its history and a point at which a new path will be paved

During a victory speech, Prime Minister Ahmet Davutoglu, leader of the AKP, declared that the win outlined the decision by the public to choose stability and democracy for Turkey. The comments come in line with Erdogan’s persistent campaign message throughout the run up to elections, namely that the choice to be made by voters was between “me or chaos”.

As is evident by the fact that a second set of elections was called as the ruling party was dissatisfied by the result in June and the growing power of the Kurdish political voice, democracy has not in fact prevailed in Turkey. The snap elections themselves give further indication for Erdogan’s increasingly authoritarian approach and growing clampdown on opposition of any kind. In the past five months, the incumbent regime has also been criticised by the international community for raids carried out on media outlets that are known to be critical of the AKP, while various high profile journalists have also been imprisoned.

Using the growing tension among Turkey’s populace, as well as mounting concerns over violence with Kurdish militants and Islamist insurgents, Erdogan has manoeuvred the outcome of the election on November 1. While he, along with Davutoglu, maintains that stability will ensue, it is more likely that the result will exacerbate social discord instead. Turkey is a deeply divided country, with social cleavages along sectarian and ethnic lines that are gaining further prominence, particularly as the ruling government takes a turn towards greater conservatism. Arguably, a coalition party was indeed the best approach for peacefully governing a myriad of social sub-sects in Turkey, while also helping somewhat to curb Erdogan’s growing grip on power.

The AKP may have successfully relieved accusations of corruption in the past term, and may continue to do so in the future, yet the ruling party cannot hide behind economics. Economic success is the basis of Erdogan’s staunch support, and the reason why many of Turkey’s 53 million eligible voters continue to support him. Yet, as the once booming economy continues to slow, with the Turkish lira plunging by 25 percent in recent months, the realities of inequality and rising unemployment levels (which recently reached 11.3 percent) will soon permeate the national consciousness – among various groups at least.

The country is at a critical stage in its history and a point at which a new path will be paved. Unfortunately, the indicators point towards a Turkey that is turning its back on the liberal and modern philosophy of Kemal Ataturk, an unsettling thought for millions in the country. Erdogan’s last term illustrates that the incumbent regime is indeed heading towards a dictatorship, and with the tables now turning with Europe in terms of the balance of power, there is little to stand in the way of this final outcome – a real shame for the West’s once democratic bridge to the Middle East and the Turkish people.

Rimac Seguros on how to innovate in developing economies

Posted on by Ashton Wenborn

In the 1980s, Latin America’s economic outlook was grim, especially in Peru. We faced yearly percentage increases on inflation rates in the thousands (see side bar), the outbreak of terrorism, political instability, high levels of poverty and the lack of a sizeable middle class.

The country’s outlook has improved greatly since then, and as a nation we have embraced open market economic models, bolstered the growth and role of the middle class, and strived to improve productivity. We still face several challenges in the coming years, in matters like the role and strength of public institutions, the fight against corruption and the formalisation of an economy that is still largely informal.

Financial services have had an important part in the country’s economic development

Taking successful risks
Financial services have had an important part in the country’s economic development, and will continue to play a key role in the coming years, with services like access to credit and insurance being particularly important. Businesses in Peru have been able to flourish, by investing in a risky, unpredictable environment. Insurance companies like Rimac provide a measure of protection and predictability that has been key in allowing the economy to grow. Nevertheless, insurance penetration in the country is still one of the regions’ lowest, at only 1.8 percent (premiums to GDP), hence it is very likely that the role of insurance in the future will be exponentially important.

Insurance in the coming years will be transformed, as new trends are disrupting business all over the world. The move in Peru towards wider insurance penetration will stem from the adoption of innovation that redefines how people and businesses shop for, source and interact with insurance providers – which will include not only traditional insurance companies, but new competitors from other industries. Central to this insurance revolution will be the client. Power keeps shifting towards the consumer, and the insurance buyer of the future will gradually level the field in access to information; will have more efficient tools for comparison; will be used to constantly spread opinions on services via social media; and will demand customisation towards his or hers specific needs.

Technology is already driving this transformation in insurance, but we believe it will have an increasing role in the coming years. It will change the way products are tailored to specific customer groups, using big data and analytic tools. These same tools will refine the way we understand and underwrite risk.

An area where technology will have a big impact – specifically analytics and devices – is health insurance. As more and more health data is analysed, insurance will be better able to measure specific risks and therefore provide coverage that adapts to customers, and by using data gathered from connected health devices (like smart watches and phones), companies will be able to create prevention programs and reward customers who practice healthy habits. Additionally, cognitive computing and predictive models will be used more and more to find the best treatment for each patient’s condition.

Advances in technology
The way insurance is bought will also change through technology, as the volume of sales via virtual channels increases and consumers use aggregators to shop for the options that best suit them. At the same time it will change the way consumers interact with the insurance company for different services. Most transactions are being done via virtual channels in many countries, and this shift will start to happen in Peru as well. Customers are moving towards paying, consulting their policy conditions and requesting services via online channels.

At Rimac we are very focused on following these changes, and adapting the best ones to bring them to Peru. Our goal is to be the company that pushes forward disruptive change in the industry. In the past few years we have made major investments to modernise our technology platforms, and we have started a transformation program that revolves around customer centricity and the adoption of leading technologies. These changes include adapting analytic tools to our underwriting, renewals and claims processes for a faster and improved customer experience. We were also the first in the country to offer auto insurance that the client can customise and buy online.

We aim to be a world-class company, and we know that in order to do this we must not only remain current, but move innovation in the industry forward and be the best at understanding and predicting what our customers want. We believe insurance will play a key role in Peru’s development in the future, as it will continue to provide protection against risk and diminish volatility in business and household finances. We are sure Rimac will be able to continue as the preferred insurance provider in the country, while at the same time pioneering technological advancements in the financial services industry.

Foreign banks engaged in window dressing

Posted on by Ashton Wenborn

A new report by the Office of Financial Research says that a number of non-US banks are engaging in window dressing at the end of each quarter in US markets in order to make their institutions appear less leveraged and healthier than they really are.

The seasonal sell-off is described as a form of window dressing

The paper, titled “Regulatory Arbitrage in Repo Markets,” notes that near the end of each quarter, an billions of dollars worth of US assets are dumped by non-US banks through the use of repo deals. “Non-U.S. banks with relatively low capital ratios,” the authors of the report point out “appear to temporarily remove an average of $170 billion from the U.S. market for tri-party repurchase agreements (repo) before each quarter-end in order to appear safer and less levered.”

The seasonal sell-off is described as a form of window dressing. As Greg Feldberg, acting deputy director for research and analysis at the Office of Financial Research notes, the temporary sell-offs allows foreign firms to “reduce the size of their balance sheets at quarter end to reduce their capital requirements in particular, to comply with the leverage ratio.” Assets are temporarily sold near the end of the quarter in order to allow the bank to appear to need less capital reserves, with the intention of their repurchase once the new quarter rolls around.

While no individual bank was named in the report, Deutsche Bank, Credit Suisse and Barclays are among the three largest foreign banks in the US repo markets. The repo window dressing practice is said to be similar to the Repo 105 scheme used by Lehman Brothers, in an attempt to cook their balance sheets, in the lead up to their collapse in 2008.

The maximum wage deserves maximum attention

Posted on by Ashton Wenborn

The minimum wage debate has captured the public’s imagination not just in the US – where low earners have taken to the streets bearing placards and bad things to say about their employers – but also in Britain, where a recent hike has been likened to a ‘living wage’. In mainland Europe, the EC President Jean-Claude Juncker has made the case for a pan-European minimum, and the German parliament last year approved its first minimum wage on record. Yet the disparity between the one percent and the rest lives on.

The scale and ferocity of the criticism is understandable, given that the ratio of executive-to-worker pay – particularly in the US and in industries such as food services – has come to border on the extreme. Studies show that a disproportionate share of the spoils has been handed to those at the top, creating a toxic societal gap between them and the rest, and without immediate and radical action there may be no end in sight. Athletes, surgeons, software engineers have all enjoyed a fruitful few years in a period where average wages have failed to keep pace with productivity gains. And while much has been made of the minimum wage in closing this gap, far less has been said about the merits of a maximum wage.

“In civilised societies, we set limits all the time”, said Sam Pizzigati, Associate Fellow at the Institute for Policy Studies and chief proponent for the maximum wage. “We tell hunters they can shoot only so many ducks. We tell motorists they can drive only so fast. We tell developers their buildings can only rise so high. We set limits like these to protect our common wellbeing. Enormous concentrations of income and wealth endanger that wellbeing just as profoundly as speeding motorists.”

A wage ceiling in its simplest terms would impose a limit on earnings and could even work alongside a minimum wage as a means of redistributing wealth

Dealing with a maximum wage
A wage ceiling in its simplest terms would impose a limit on earnings and could even work alongside a minimum wage as a means of redistributing wealth more evenly within society. A higher minimum enjoys more support than it, and for obvious reasons, given that the former promises immediate benefits for a far greater number of people than the latter. Though a quick look at income inequality shows that the issue is in need of addressing as much at the top as it is the bottom.

Executives at America’s largest firms earn three times more today than they did 20 years ago, that’s according to the Economic Policy Institute, and the effects of this increase mean that the income share of the highest one percent has doubled in the space of three decades. Last year, those heading the country’s 350 largest companies took home on average $16.3m, up 3.9 percent on last year and 54.3 percent on 2009, whereas earnings for the average employee were stagnant throughout.

Executive pay over this same period has ballooned at a rate 90 times that of the average worker, and the ratio of executive-to-worker compensation today stands at over 300, up from 25 in the 1970s. Those not necessarily opposed to the increase argue that a special talent deserves no less than an overstuffed pay packet. However, a look at the stock market shows that shares rose at half the rate of executive pay, which would suggest the rewards have outstripped performance.

What form a maximum wage might take in tackling this imbalance is uncertain, though early evidence suggests that a cap on pay, irrespective of its format, could apply some much-needed downward pressure on wages for the one percent.

Specific case studies
Despite the immediate advantages of imposing a cap on wages, notable attempts to do just that have failed to get off the ground. The most famous of these was in Switzerland two years ago, when voters overwhelmingly rejected the 1:12 initiative, or Initiative For Fair Pay. Binding votes on executive pay, as well as bans on golden handshakes and severance packages had recently come into play, yet the proposal to limit executive pay proved a bridge too far.

Roche, Nestle, ABB, Novartis are all Swiss companies and all enjoyed a CEO-to-worker ratio way over 200 in 2012. The call from the ‘no’ crowd was that limiting executive pay to no more than 12 times the lowest-paid worker would hurt businesses much like them. Another often-cited example of a maximum wage in action can be seen in the NBA, where a salary cap was introduced in the 1984-85 season in order to level the playing field.

Fixed at its highest rate yet, at $70m for the 2015-16 season, the cap is expected to still rise higher when the league’s new television contract comes into play next season. This limit means that employment decisions for the sport’s megastars often boil down to factors apart from financials; more than that the cap means that pay for the league’s middling talent is greater, and the ratio of the highest-to-lowest paid players stands at approximately 20:1 as a result.

Going by this example, a wage cap could serve to keep a lid on overly excessive pay packets, and lift wages elsewhere, particularly for the middle-income segment. However, such a system is a complex affair, and a maximum wage for one industry might be entirely inappropriate for another, whereas a cap in one jurisdiction might push affected parties elsewhere.

Levelling the playing field
“Fixed caps have a problem. They leave wealthy people eager to enhance their personal economic wellbeing with only one recourse: to attack the cap, either by cheating on their taxes or going all-out politically to repeal whatever cap may be in effect”, said Pizzigati. “We could lessen this resistance if we set our maximum-wage cap as a ratio, instead of a fixed sum. Going this route would create a healthier political dynamic. If the maximum wage were set as a multiple of the minimum wage, then the wealthiest and most powerful people in our society could see their incomes rise, but only if the incomes of the poorest and least powerful people in our society rose first.”

Discussions on what form a maximum wage might take centres mostly on this model. The premise here is that a lesser wage for those at the top would encourage firms to distribute their earnings more evenly. However, another option – and one that has entered into force before, though not under the banner of a maximum wage – is to introduce something akin to a super-tax so that the reasons for paying out over and above the uppermost tax band are less.

Roosevelt, with fears of war profiteering in mind, proposed a maximum salary of $25,000 – about $365,000 in today’s money – in 1942, with any on more than that subject to a 100 percent tax, though to no avail. A similar tax rate, of say 90 percent for those on a given maximum, would mean that a $1,000 hike for those treading the topmost territory would be worth less than a $1,000 raise for a mid-level employee. The theory is that a taxable rate of this magnitude would incentivise companies to raise wages for those in the middle more so than at the top, as was argued by Matthew Yglesias in Vox recently, and could serve to close the income inequality gap.

“In the United States, we had a super tax of sorts in the middle of the 20th century. Between 1944 and 1964 [see Fig. 1], the federal income tax rate on income over $400,000 averaged around 90 percent. Those years saw America’s wealthiest take home a steadily decreasing share of the nation’s income. But this egalitarian surge could not be sustained. The rich beat it back”, wrote Pizzigati. “To forge a more lasting egalitarian society, we would need to revise our approach to a super tax. We could, for instance, have a new super tax rate kick in at 50 times the minimum wage. In other words, any dollars over 50 times what a minimum-wage worker earns over the course of a year would face a 90 percent tax rate.”

Regardless of the support, or lack of, the devil is in the detail, and imposing a cap on performance-linked pay, for example, could introduce false incentives into the workplace, whereas not doing so might prompt companies to pay out in mostly stocks and dividends. Critics argue that paychecks would find their way into offshore accounts and the concern is that the stock market might suffer without ultra wealthy individuals to partake in it.

Caught between a rock and hard place, the success of any policy – by the name of a maximum wage or another – rests with the ability of policymakers to balance incentives for performance with penalties for any disparity. Perhaps the solution is to link a maximum wage to the statutory minimum, meaning that a hike for either is a hike for all. “The rich, in other words, would have a vested interest in improving the wellbeing of the poor”, said Pizzigati. “I think many of us would like to live in a society with that social dynamic.”

Property drives Indonesia’s economic growth

Posted on by Ashton Wenborn

After showing substantial growth across the board in recent years, Indonesia’s property market began a period of consolidation in 2014. The recent deceleration of prices (see Fig. 1) indicates that the sector is maturing, which in turn has soothed concerns of overheating.

Despite the slower pace, residential property in Indonesia continues to show healthy growth, particularly in Greater Jakarta, the most active and international market in the country. While the country’s capital remains the focus for the large majority of real estate outfits, other regions are also undergoing significant property expansion. In fact, residential property has become one of the fastest growing sectors in the economy in recent years due to a surge in demand among Indonesia’s expanding middle class.

One of Indonesia’s fastest growing regions is Tangerang, a secondary city that is adjacent to Jakarta. Serpong, a district in Tangerang with population of more than 6.5 million people, which is developing particularly rapidly, is no longer considered as a rubber plantation at the periphery of Jakarta. “It is now an independent city with majestic buildings adorning its remarkable infrastructure; city centres, commercial parks and entertainment centres can now easily be found there”, said Ervan Adi Nugroho, the President Director of PT Paramount Enterprise International (also known as Paramount Enterprise).

Changes in social perspectives… make property ownership part of one’s lifestyle choice

Gading Serpong
Serpong’s recent development can be largely attributed to Paramount Land, the property arm of Paramount Enterprise. Paramount Land’s flagship project is the Gading Serpong township, an area that was chosen because of its proximity to Soekarno-Hatta International Airport and its accessibility via two toll roads, the Jakarta-Merak and the Jakarta Outer-Ring Road. Its location has thus made Gading Serpong a new giant economic hub, which lies at the centre of other property and township developments that are being undertaken by various renowned Indonesian firms. The development of the 1,200 hectare township has been so successful that Gading Serpong has become one of the busiest trade and business centres in Tangerang, as well as one of the most desirable locations to live and invest in. Currently the population in the township exceeds 53,000 people, not including those that commute to Gading Serpong to work and/or to visit; and more than 15,000 houses, commercial units and several condominium towers are built.

Taking advantage of its expertise in urban planning, project management and property management, Paramount Land has built modern infrastructure for the township, which includes a network of roads, complete access via toll roads, a water treatment plant and underground fibre optic cables. “Gading Serpong has grown into a pleasant, modern, self-contained city with well-constructed facilities that are enjoyed by residents and visitors alike”, said Nugroho. Hotels, hospitals, schools, universities, commercial areas, restaurants, supermarkets, hypermarkets, wet markets, shophouse complexes, a small office home office complex, are all everywhere in Gading Serpong. In addition, essential cultural structures have been built, such as places of worship, sports and recreational spaces and community complexes, as well as green public spaces. Travel within the township has been made convenient via pedestrian walkways, bicycle lanes and various public transportation. “These facilities are expected to further accelerate Gading Serpong’s development in the near future”, said Nugroho.

“We have found that property in the township is attractive both to residents and investors alike due to Gading Serpong’s fast return on investment; on average, the value of property has increased by 15 to 20 percent per annum in the past five years or so.” In order to continue growth amid fierce competition in Indonesia’s property industry, Paramount Land prioritises constant innovation. “We always strive to give the best to consumers; we are committed to providing excellence, especially in terms of service, product quality and on-time delivery. Our motto, ‘Building Homes and People with Heart’, is at the basis of everything we do”, said Nugroho.

Lifestyle shift
As Indonesia’s population continues to grow, so will the need for housing. In addition, the desire to invest in primary or secondary properties is likely to increase in line with improving and growing economic growth and corresponding changes in social perspectives, which make property ownership part of one’s lifestyle choice. In response to this growing trend, last year Paramount Land unveiled more than 3,000 new residential units in the Gading Serpong township. These properties were developed with innovative concepts, such as detached homes: landed houses, which have maximum cross ventilation and optimum lighting; and compact homes that have critical land utilisation in mind. Other innovative products include big and micro-custom homes, in which customers can choose from more than 1,000 design options according to their needs and tastes, including various styles such as classic, Scandinavian, Japanese, Mediterranean, Victorian, colonial, and art deco. Currently, more than 5,000 residential units are under construction. Each development is in a different stage and will be handed over to buyers within the next year or two.

Paramount Land also owns and manages several strategically located land banks in major cities across Indonesia, which are due to be developed into either townships, real estate sites or integrated mixed-use developments. Due to the increasing demand for residential homes and condominiums in big cities, Paramount Land is currently making preparations for real estate projects in Semarang (phase two; phase one already launched successfully last June), Central Java, Manado, North Sulawesi, and Balikpapan, East Kalimantan. Other projects in the pipeline that include integrated mixed-use projects are those in Pekanbaru and Bali, as well as in Jakarta.

Recognising the lifestyle trend and the growing economy, the Indonesian government is showing great support, which can be seen from the numerous infrastructure projects that they are currently funding, including toll roads that connect the cities to the capital. This is a vital step in the future success of the townships as they enable citizens to commute into major cities from areas that they prefer to live in. Adding further to the potential of property investment in Indonesia is the fact that the average price of property is relatively low in comparison to other countries in Asia, such as Singapore, Hong Kong, Malaysia and China.

House price change in Indonseai

Recurring income
In addition to property development, Paramount Enterprise also develops hotels, resorts, and hospitals. Identifying the need to diversify its portfolio, Paramount Enterprise has entered various industries, such as retails, logistics, fisheries, alternative energy and multimedia.

Through its hotel management company, Parador Hotels and Resorts, Paramount Enterprise currently owns and manages six hotels that are located within various business hubs: four hotels in Gading Serpong, namely Atria Hotel (four-star), Atria Residences (four-star), Ara Hotel (three-star) and Fame Hotel (two-star); a four-star hotel in Central Java and another four-star hotel in East Java. A further two new hotels are due to be opened in the coming months in Sunset Road Bali and Serpong, while there are also serious expansion plans currently underway to build new hotels in Jakarta, Surabaya, Bali, Lombok, Semarang, Bogor, Bandung, Balikpapan and other major cities in Indonesia. In addition, Parador Hotels and Resorts will also manage the third-parties owned hotels.

In terms of its healthcare segment, Paramount Enterprise owns Bethsaida Hospital, the first general hospital in Gading Serpong, which provides quality and affordable healthcare, not only for residents, but also for the people living in West Jakarta, Tangerang and other surrounding areas. “The centre includes aesthetic, orthopaedic, dental, hyperbaric and cardiac wards”, said Nugroho. While in retail, Paramount Enterprise operates fashion stores, convenience shops, mini markets, and cafes that serve the varying needs of a rapidly growing suburban population. “The existence of business units is one of the strategies we have in place to increase and optimise the company’s recurring income”, concludes Nugroho. “Developing the property and lifestyle business responds to Indonesia’s rising middle-class income and the demographic shift that is currently taking place in the country.”