In August 2016, Bancomext issued $700m in tier two subordinated preferred capital notes, to shore up its business of helping Mexico’s exporters improve the country’s foreign trade prospects. CEO Francisco González and CFO Miguel Siliceo explain foreign trade’s significance as the engine of Mexico’s economy and Bancomext’s five goals to develop it – and discuss the bank’s innovative bond issuance.
World Finance: How important is foreign trade to Mexico’s economy?
Francisco González: Foreign trade is really the engine that moves the country. It’s 60 percent of the GDP. Mexico is double the size of all the manufacturing of central and south America together. It’s a huge manufacturing factory.
As a development bank we have very good collaboration with the financial institutions of Mexico. We work with SMEs via these institutions. And what we offer is guarantees, for example, to help banks give loans to those companies, with a better interest rate, lowering the risk, helping to perform in a better way.
World Finance: Bancomext’s mission is to expand and develop Mexico’s foreign trade, and you’ve broken that mission down into five goals?
Francisco González: That’s right. The first one is to promote exports; to promote Mexican companies selling goods and services abroad.
The second one is internationalisation of Mexican companies. The footprint of Mexican companies worldwide is increasing. We are, for example, the number one investor in Ecuador. Number one in Spain, after the European Union. One of the three top investors in the Philippines.
The third one is increasing the value chain and competitive possibilities for Mexican companies: improving the capital expenditures, for example.
Then, Mexico’s really moving also in foreign direct investment, so we can bring more and more anchors to Mexico, like the automotive industry.
The last one is also to increase the possibilities of services like tourism, like IT, and others, so we can have a healthy economy; not only in manufacturing, but also in the service arena.
World Finance: Miguel, turning to your recent issuance: what drove Bancomext to expand your capital in this way?
Miguel Siliceo: When a government institution like ourselves requires capital, the injection of capital that’s the most straightforward mechanism is to have an injection from the owner: from the government, in pesos.
In our case, we were talking to our authorities, analysing different alternatives.
We were able to launch a transaction, a tier two transaction of subordinated debt, that according to our records is the first time that a public bank accessed this particular kind of transaction.
The positive effect for our bank was basically twofold. On one hand, we were able to increase our capital from 11.4 percent to 19 percent. On the other side, considering that 70 percent of our assets are in dollars, when we have the injection of capital in dollar terms, we offset any devaluation, or any movement, from the exchange rate.
World Finance: It was highly successful; what made the issuance such a success?
Miguel Siliceo: First was innovation: it has never been done before. Second was a strong support from the Mexican authorities, from the National Banking Commission of Mexico, from the central bank, and investor banks who helped us launch the transaction.
What we did, in coordination with our banks, was launch the transaction in a one-day roadshow. Five different teams in London, New York, LA, Boston and Mexico.
Fortunately the markets opened very strong for our favour. We initially offered $500m. We had a demand of almost $3.8bn – eight times the demand for that particular bond. We had participation of about 220 different investors. And we were able to increase from $500m to $700m, because that was particularly the number that we were looking for.
World Finance: So Francisco: what’s next for Bancomext?
Francisco González: We’re looking in this troubling worldwide economy to fulfil all the requirements of the Mexican companies. We have to support them, for example, with factoring and letters of credit, to all the countries in which they have trade.
The idea is not to stay only in the area of manufacturing, in services and tourism, but to go beyond. We’re looking for example for medical tourism. For the telecom area. We are really really interested in developing the industry 4.0, with all the IoT, internet of things. This has to do also with software, it has to do also with creative industries.
And we have to continue developing these areas, but not leaving the actual manufacturing companies alone. We have to be with them in new trades, new experiences, new countries. And in this sense we are very happy to be behind Mexican exporters.
World Finance: Francisco, Miguel: thank you very much.
As the newly elected French President Emmanuel Macron addressed an ecstatic crowd on the night of his election victory, he said: “I would like to say a word to those who voted for Marine Le Pen.” When boos and whistles emerged from the crowd, Macron responded: “No, don’t boo them… They have expressed today their anger and dismay, and sometimes convictions. I respect them. But I will do everything I can in the next five years so there is no reason to vote for extremes.”
This kind of conciliatory approach towards a party that was once dismissed by the mainstream for being racist, homophobic and anti-Semitic has become the new normal in Europe. In fact, the French election was an archetypal snapshot of the tense political setting across the continent, whereby centrist parties, faced with a potentially destabilising political force, have begun to accommodate the priorities and sentiments of the far-right into the mainstream political conversation.
The pendulum swings
Indeed, similar stories are playing out across the continent. Far-right populist parties have emerged as serious players in Germany, the Netherlands, Italy, Greece, Austria and Poland. Moreover, a similar anti-immigration, anti-establishment sentiment has also taken root in the US with the election of President Donald Trump.
With the populist far-right steadily chipping away at mainstream parties, the political pendulum is clearly in full swing. The exact direction of this swing, however, is not always clear. Perhaps the best way to characterise it is that rather than shifting towards the right on economic matters, politics is instead moving away from the left-right economic axis altogether. In its place, new cultural divides are emerging as a primary concern for large swathes of the electorate.
Centrist parties, faced with a potentially destabilising political force, have begun to accommodate the priorities and sentiments of the
far-right into the mainstream political conversation
Speaking to World Finance, Director of the Institute of Social Sciences Daniel Oesch said: “The main appeal of right-wing populist parties is cultural, and centres on identity politics: who belongs to the national community and what should this community look like? The key issues then relate to immigration, Islam, supranational integration, sexuality and gender. In comparison, economic issues have always been of minor relevance for right-wing populist parties.”
Winning formula
The role of economic policy for far-right populism has gradually evolved over time. In 1995, political scientist Herbert Kitechelt famously described a ‘winning formula’ for emerging far-right parties, outlining a particular combination of neoliberal economics, together with an authoritarian stance on social issues, as the key to capturing a significant new slice of the electorate. However, this characterisation of the far-right is now out of date: as Oesch explained: “Over the last two decades, most right-wing populist parties abandoned their initial neoliberal anti-tax stance of the 1980s.”
The National Front provides an archetypical example of this shift: it once championed an extremely market-liberal and anti-statist approach – dubbed by academics as ‘Reaganite before Reagan’ – yet it now openly backs a programme of more extensive state redistribution, if not one that extends to immigrants.
By the early 2000s, it became increasingly clear that successful far-right parties were in fact no longer confined to the right end of the economic spectrum, but were instead appealing to a much broader audience. A new winning formula emerged, whereby the populist parties that espoused centrist economic views – alongside their socioculturally authoritarian stance – appeared to capture a greater chunk of the electorate. However, this economically centrist characterisation is also somewhat unsatisfactory as a depiction of today’s far right. Contemporary populist parties achieve success with policies that run across the economic dimension, and supporters certainly do not cluster around the centre with regard to their economic views.
Instead, the electorates of most contemporary far-right parties can be better characterised as ‘unlikely coalitions’, due to their tendency to win votes from both poles of the political spectrum. More specifically, far-right support consists disproportionately of small business owners (shopkeepers, artisans and the self-employed), who traditionally vote for right-wing parties, and blue-collar workers, who were once the stronghold of left-wing parties.
0.2%
of the French population voted for the National Front in the cantonal elections of March 1982
33.9%
of French citizens voted for Marine Le Pen in the May 2017 election
A 2005 analysis by political sociologist Elizabeth Iversflaten pinpointed the counterintuitive nature of this populist support, which she described as being an “uneasy marriage” between groups that rarely find a common cause. She found that, despite voting for the same party, the groups fundamentally disagreed over economic matters relating to the role of the state in the economy. As a result, populist parties ultimately rely on an ideological affinity of cultural concerns eclipsing deep divisions on economic issues among their support base.
In light of these divisions, the winning formula hypothesis once again needs updating. One suggestion is that today’s populist parties support two concurrent winning formulas: simultaneously catering to their economically liberal and working-class support bases, uniting them through a core cultural ideology, but with economics playing little part in the equation.
There is, however, a question hanging over the idea that casting such a wide net can truly constitute a winning formula. While the far-right has continued to build an increasingly dedicated support base from both those on the economic left and right, a divided electorate could easily be cast as a weakness. Indeed, back in 2005, Iversflaten wrote: “The germ of destruction or limitation that these parties carry within them is without doubt their electorates’ deep division over taxes, welfare provisions and the desirable size of the public sector.”
A question of branding
Clearly, Iversflaten’s analysis from more than a decade ago begs the question of how these parties have overcome this weakness to become such a commanding new political force. Oesch points to an interesting strategy being employed by populist parties: “Right-wing populist parties put heavy emphasis on cultural issues in order to mask the fact that their voters have strongly diverging economic interests.” This would imply that dwelling on issues relating to the economic spectrum is actively harmful to populist parties, and that they owe their success to an ability to mute discourse on the economy and instead drag the political conversation toward cultural issues.
The political approach of far-right parties often focuses on pushing the boundaries in terms of what is deemed acceptable. They frequently utilise inflammatory rhetoric to draw the political conversation towards the issues that ignite cultural frustrations, to which they position themselves as being the only answer. To take an example, the German populist party AfD, which is heating up its campaign efforts in preparation for the upcoming federal election, operates a self-professed strategy of “targeted provocation”.
This technique, outlined in a recent strategy paper, urged for continued “careful planning” to “focus on being politically incorrect” in order to maintain the party’s electoral momentum. With such tactics, far-right parties are able to bring forward the cultural concerns of the electorate, while obscuring the economic issues that could alienate their voters.
Opaque ideology
Beyond the tactic of pulling attention towards cultural issues, there is also evidence many populist parties have actively embraced a strategy of ‘position blurring’ on economic issues. Jan Rovny, a political scientist at Sciences Po, argued that, while pushing hard on the non-economic dimension, Europe’s populist parties maintain a “consciously opaque profile” regarding their position on the left-right economic spectrum, helping them to hold on to the support of a base that is divided over economics.
Radical right-wing parties devote less space to economic issues and almost twice as much of their manifestos to non-economic issues
According to Rovny’s analysis, the way parties carry out this strategy can take on different guises, and can vary from simply lacking any economic position or holding a concurrent multiplicity of positions, to holding distinctively unstable positions over time.
Rovny noted the manifestos of major parties are generally skewed toward economic issues – something that is not surprising given the central role of the economy in conventional political discourse. Radical right-wing parties, on the other hand, devote far less space to economic issues and almost twice as much of their manifestos to non-economic issues.
The pattern stretches further than just the weighting of manifestos: both voters and experts were found to have trouble pinpointing where far-right parties stand on the economic spectrum. Rovny’s analysis reads: “The data [shows] that radical-right economic placement seems rather erratic. While some sources suggest that a radical-right party stands on the extreme economic right, others place it to the left of the major-left party in the given system.”
Rovny noted the success of this position-blurring strategy could break down as parties enter government, where they will be forced to actively implement policies and clarify their positions. With this logic, as far-right parties edge closer to achieving active roles in government, the effect could be the exposure of underlying cracks in their ideologies.
Yet, if the concerns of the electorate remain focused on cultural divides rather than details of the economic spectrum, then far-right populists may never be fully exposed to this vulnerability. Brigitte Granville, Professor of International Economics and Economic Policy, said she didn’t feel the disagreement among voters would make populist parties vulnerable. “These parties are elected in response to the feeling that the other political parties are not listening”, she told World Finance. “Support for them will continue to rise if politicians do not listen and respond effectively to citizens’ concerns.”
Mexico is examining possible revisions to the North American Free Trade Agreement (NAFTA) ahead of talks to renegotiate the arrangement next month. The decision demonstrates the country’s determination to preserve a good trading relationship with its largest export market, the US.
On the campaign trail, US President Donald Trump blasted NAFTA with claims that removing tariffs on Mexican imports had flooded the US with cheap foreign products and caused a dramatic increase in layoffs of US workers. Since taking office, Trump has continued to denounce the trade agreement, issuing multiple threats to pull the US out altogether if NAFTA is not rewritten to offer a better deal to US workers.
Trump has issued multiple threats to pull the US out of NAFTA altogether if it is not rewritten to offer a better deal to US workers
Mexico, the US and Canada are due to meet next month to begin renegotiating the trade deal, with the US set to publish its negotiating objectives for the talks on July 16.
In an interview with Reuters, Jaime Serra, a former trade minister who led the original NAFTA negotiations for Mexico, stressed that NAFTA changes should further integrate the three countries in order to protect the entire area from growing export competition from Asia. He said: “If we integrate further and make Mexico more competitive versus China… even if our exports rise, US jobs will rise, because when we export to the US, they’re exporting too.”
Around 80 percent of Mexico’s exports currently go to the US. Trump has claimed that comparatively cheap labour in Mexico has driven US firms to outsource jobs, accelerating the decline of US manufacturing. However, much of Mexico’s export trade is not consumer products, but items at the early stages of manufacturing. These undergo value-adding manufacturing processes in the US, before frequently being exported. This means Mexican imports often help the US maintain a competitive edge in international markets.
To make matters more complicated, despite Trump’s claims of an overwhelming trade deficit with Mexico, the US enjoys a comfortable surplus in agriculture and services. This is a benefit both industries will be loath to sacrifice. When negotiations begin, both countries will have to work hard to meet the complicated goal of trying to maintain many of the current benefits NAFTA offers, while seeming to make few concessions.
“Sadly, the American Dream is dead”, were the despairing words of Donald Trump as he announced his presidential bid back in July 2015. For all the business mogul’s false claims during the ensuing campaign, this is one that might just ring true.
According to research conducted by the Equality of Opportunity Project, the American Dream is indeed fading, and children can no longer expect to enjoy a higher standard of living than their parents. In 1940, a phenomenal 90 percent of American 30-year-olds earned more money than their parents at the same age. Now, that figure has dropped to just 50 percent (see Fig 1).
The Great Recession and the Not-So-Great Recovery have had a profound impact on the lives of most Americans, creating new economic hurdles and aggravating the existing challenges of poverty, unemployment and income inequality. While this economic strain has certainly been felt all across the US, its impact is most stark in the American South.
For several decades now, the southern states have been trapped in a cycle of economic and social decline. Four of the five poorest US states are concentrated in the South, with poverty rates soaring across the region. Southern states also have the lowest rates of upward mobility in the country, meaning a child born in the South is less likely to rise out of poverty than if they had been born in a different region of the US.
Overall, around seven percent of American children born in the bottom fifth of income distribution will make it to the top fifth in their lifetime, whereas approximately 13 percent of low-income children will do the same over the border in Canada. In the South, however, decades of acute intergenerational poverty mean children are much less likely to climb up the income ladder, with just four percent of the population moving from the bottom bracket to the top.
According to Benny Goldman, a predoctoral fellow at the Stanford Institute for Economic Policy Research: “If you’re born into one of these disadvantaged families in the south-eastern states, then the chance that you’ll ever reach the top 20 percent when you’re older is very small.” Lagging behind the rest of the US in upward mobility, employment rates and wages, the South is in dire need of an economic miracle.
Manufacturing misfortune
In 1938, as the US struggled to recover from the Great Depression, Franklin D Roosevelt declared the South to be “America’s economic problem number one”. Once a rich and prosperous region, the southern economy was crippled by the Civil War and the lengthy Reconstruction Era, and by the time the Great Depression hit in 1929, the region had fallen behind the rest of the country in terms of household income, wages and job security. This trend continued throughout the 20th century, and today the South remains a profoundly troubled region.
Similarly to the rest of the US, the southern states have seen a steady decline in their manufacturing industries, with thousands of factory workers losing their jobs to automation and cheap Chinese labour. In the South, however, most of these job losses have occurred in the region’s formerly ubiquitous textile industry. In North Carolina, for example, 40 percent of jobs were concentrated in textile and apparel manufacturing in 1940, but by 2013, the industry accounted for just 1.1 percent of the state’s jobs.
Between 1997 and 2009, around 650 textile plants closed in the southern states, leaving thousands of workers without jobs and depressing entire communities (see Fig 2). The blue-collar economic heyday of the 1970s is now long over, but many states have failed to adjust to this new commercial landscape.
While the economic strain of the Great Recession has certainly been felt all across the US, its impact is most stark in the American South
There are stories of manufacturing losses occurring all over the US – particularly in the once-powerful Rust Belt – but the South has been hit by the double whammy of job losses and low median incomes. Southern states have long been hostile to organised labour and unionised work, and five states still have no state minimum wage.
For workers in Alabama, Louisiana, Mississippi, South Carolina and Tennessee, wages need only comply with the federal minimum of $7.25 an hour and $2.13 for tipped workers, driving a low-wage economy. This culture is particularly alarming for the region’s auto industry workers, who frequently engage in high-risk work for comparatively little financial reward.
While the South has experienced a rapid decline in its textile industry, car manufacturing is now enjoying something of a resurgence throughout Alabama, Georgia and Mississippi. Between 1980 and 2013, the number of auto industry jobs in the South increased by 52 percent, with 26,000 workers employed in the field in Alabama alone. And yet, far from being a welcome manufacturing renaissance, the phenomenon represents a race to the bottom by profit-motivated auto parts suppliers.
Factory workers are expected to work gruelling 12-hour shifts, often for six or seven days a week. Pay is universally low, and little thought is given to worker safety. According to the Bureau of Labour Statistics, southern workers at parts suppliers earn just 70 cents for every dollar earned by their Michigan-based counterparts. Safety violations are all too common, often resulting in serious injury. In 2015, the chances of losing a limb or finger in an Alabama parts factory was 50 percent higher than the national average risk for the industry.
These jobs may provide a way to escape the demoralising cycle of unemployment, but low-wage, high-risk industries aren’t the answer to the South’s economic woes.
Separate and unequal
Joblessness and depressed wages do indeed lead to low family incomes, but economic decline is not solely to blame for the South’s alarming poverty rates. Interestingly, when examining upward mobility in the US, the Equality of Opportunity Project observed a correlation between low mobility and areas of concentrated racial segregation.
“Segregation along many different fronts appears to be related to upward mobility rates – with the strongest correlation being racial segregation”, said Goldman. “In places where there is less racial segregation, this seems to help children to climb the income ladder.”
Newly released census data shows that black-white segregation is in modest decline across America, but still remains high in most large US cities. Some 50 years after the end of legally enforced segregation, black and white Americans still often inhabit vastly different neighbourhoods, with African Americans more likely to live in areas of concentrated poverty. While the nation’s decades-old discriminatory housing policies are certainly somewhat to blame for the current state of residential segregation, the phenomenon has been further aggravated by instances of ‘white flight’ from the inner cities to the suburbs, and the use of excusatory redlining practices.
According to a report by the Pew Research Centre, in 2014 the median household income for black Americans was just $43,300, compared with $71,300 for white Americans. As such, African Americans are often priced out of the more affluent, majority-white suburbs, and are therefore denied access to the same public services.
“In the United States, school funding is largely done via property taxes”, Goldman explained. “So if you have an area that’s very wealthy, with high property taxes, then that school is going to be well funded.” Of course, the inverse is true for low-income neighbourhoods: tying school funding to property taxes means children from the poorest families will most likely attend underperforming schools, further entangling them in a vicious cycle of poverty.
Southern states have long been hostile to organised labour and unionised work, and five states still have no state minimum wage
According to Ted Ownby, Director of the Centre for the Study of Southern Culture at the University of Mississippi: “Today, we’re seeing a very different type of racial segregation… It’s not based on laws and rules as it was in the past, but it certainly has to do with zoning, educational access and economic access, and it has strong connections to the issue of race.”
Racial segregation remains a crucial issue in cities throughout the nation, but is perhaps felt most keenly in the South. Between 1970 and 2010, segregation levels increased in just six metropolitan areas across the US, but five of these (Birmingham, Chattanooga, Gadsden, Mobile and Monroe) were located in the southern states. The social segregation of the Jim Crow era might be long over, but modern residential segregation has become a poverty trap for many southern African Americans.
Incarceration at a cost
When examining the causes of economic decline and spikes in poverty in the US, many social scientists have begun to point to one key factor: mass incarceration. With a 500 percent increase in the number of imprisoned people between 1985 and 2015, the US is by far the world leader in incarceration. Aside from the ethical implications this phenomenon presents, large scale imprisonment also has a profound impact on the economy.
The 2.2 million people currently behind bars in the US are unable to contribute to society through work, and stand a poor chance of finding gainful employment once released. Meanwhile, it costs taxpayers approximately $31,286 per year to house one inmate in a state prison, putting a significant drain on valuable state resources.
“The prisons system takes an extraordinarily large number of people – especially African American men – and pulls them out of the potential workforce”, said Ownby. “It has such a dreadful set of consequences for the whole society, with economic, personal and family-related implications. People’s lives are essentially taken away, and they are turned into non-citizens, non-voters and non-contributors to the economy.”
When it comes to mass incarceration, the US’ southern states are some of the most punitive. Louisiana has the highest rate of incarceration in the country, with a staggering 776 people imprisoned for every 100,000 citizens. Similarly, the states of Alabama, Mississippi and Georgia all have incarceration rates well above the national average, and also have some of the US’ harshest felony voting laws. All of the southern states employ the death penalty, yet despite the ‘tough on crime’ legislation of the past four decades, longer sentences and high incarceration rates have not played an effective role in reducing crime and recidivism. Indeed, despite having an incarceration rate 13 times higher than that of China, Louisiana still has one of the US’ highest rates of violent crimes.
Instead of tackling crime, mass incarceration has proved counterproductive and costly, taking a significant toll on already stretched southern state budgets. According to the US Department of Education, over the past three decades, state spending on prisons has increased at triple the rate of funding for education, leaving public schools underfunded and underperforming. Louisiana’s budget deficit is expected to reach $313m in 2017, prompting a fresh wave of cuts to higher education and healthcare, while the state attempts to maintain its spending on corrections.
“For far too long, systems in this country have continued to perpetuate inequality”, said then-US Secretary of Education John B King Jr in 2016. “We must choose to make more investments in our children’s future. We need to invest more in schools, not prisons.”
Hung out to dry: around 650 textile plants closed in the southern states between 1997 and 2009
Diseases of despair
The prisons system isn’t the only thing tearing families apart in the US South. Over the course of the past two decades, the misuse and abuse of opioid medications has become a public health crisis, now claiming more than 33,000 lives each year. The opioid epidemic has been called the worst health crisis in US history, with more deaths caused by opioid overdose today than from HIV/AIDS at the peak of the pandemic in the 1990s.
The opioid crisis is now a nationwide epidemic, though the southern states consistently issue the largest number of painkiller prescriptions: in Alabama and Tennessee, there are approximately 143 opioid prescriptions for every 100 people. Just like other so-called ‘diseases of despair’ (heavy drinking, drug addiction and obesity) opioid abuse is most common in areas of extreme poverty.
According to Goldman: “When you look at the southern states, where you have some strong pockets of abject intergenerational poverty, then it’s perhaps unsurprising that those are the areas where crises like these tend to pop up.” Indeed, the Equality of Opportunity Project has used big data to measure the impact of income on average life expectancy, and has discovered that the richest American men can expect to live 15 years longer than the poorest, while the richest American women tend to live 10 years longer than women on the opposite end of the income scale. While it may not entirely explain this discrepancy in life expectancy between the nation’s rich and poor, the spike in deaths from diseases of despair and opioid overdoses could be a contributing factor behind the lower life expectancies of impoverished Americans.
What’s more, while southern Americans are more likely to suffer from chronic illnesses and general ill health, they are also less likely to receive health insurance than if they lived elsewhere in the country. Millions of southerners are currently eligible for coverage under Medicaid, but many states are yet to adopt the healthcare programme. Without adequate insurance policies in place, ill health can have a severely destabilising effect on families already struggling to make ends meet.
The South rising
“I think most of us dwell too long on the causes of the South’s difficulties and too briefly on what is to be done about them”, said Franklin D Roosevelt advisor Harry Hopkins during a nationwide address in 1938. The region might have been President Roosevelt’s “economic problem number one”, but he wasn’t prepared to give up on the once-prosperous South. Now, nearly 80 years on, it is more crucial than ever that the US finds a solution to the South’s economic decline.
4 out of 5
of the poorest US states are located in the South
650
textile plants closed in the southern states between 1997 and 2009
52%
The increase in the number of auto industry jobs in the South between 1980 and 2013
776
people are imprisoned for every 100,000 citizens in Louisiana – the highest rate in the US
The southern states have a host of socioeconomic hurdles to overcome, but there are certainly some bright spots in the region’s future. For some time now, mayors and governors have been looking to attract tech companies and workers to the area, and their efforts are now beginning to pay off. The city of Huntsville, Alabama has become something of a southern tech hub in recent years, with science, technology, engineering and mathematics (STEM) workers accounting for a remarkable 16.6 percent of the workforce.
Atlanta boasts more than 166,690 hi-tech workers, while Chattanooga has invested in superfast internet in order to lure tech companies to Tennessee. With these STEM workers earning good salaries, the hope is that this money will quickly pour back into the local economies, providing much needed support to public schools, health services and businesses.
Aside from these flourishing tech communities, the South also stands to benefit from a renewed interest in the region’s historic and contemporary culture. “Cultural tourism presents something of an economic opportunity for the South”, said Ownby. “Different pockets of the American South have things to offer that the rest of the world is interested in, such as Appalachian life, for example, or country music or the stories of the civil rights movement.”
Moulded by a unique history and boasting a strong regional identity, the South has long exerted an influence over American popular culture. Now southern states are beginning to ask themselves how their local communities might be able to benefit from the lure of the South, and how to best promote cultural tourism as an attractive industry.
Goldman explained: “It’s not as if the American Dream is dead across the board – there’s some places that are doing very well and others that are doing very poorly.” Indeed, while the South might be struggling to boost upward mobility, the good news is that, across the US, there are some areas that are performing strongly. If social scientists can identify what makes cities such as Minneapolis and San Jose so good at propelling low-income children up the income ladder, then this can be applied to social planning strategies elsewhere.
From joblessness to diseases of despair, the South has a long list of economic woes to contend with. And yet the region has shown remarkable resilience and adaptability in the face of adversity. As local governments turn their attention to courting new industries and encouraging economic diversity, the southern states are beginning to dip their toes into much-needed new revenue streams. The American Dream might be fading, but the South is intent on keeping it alive.
The rise of anti-globalisation political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. After all, lest we forget, the current arrangements – as pressured as they are – reflected our post-World War II forebears’ strong desire to minimise the risk of ‘beggar-thy-neighbour’ national policies, which had crippled growth, prosperity and global stability in the 1930s.
Similar considerations fuelled the launch, nearly 50 years ago, of the International Monetary Fund’s (IMF’s) Special Drawing Right (SDR) as the precursor to a global currency. And with renewed interest in the stability of the international monetary system, some are asking – including within the IMF – whether revamping the SDR could be part of an effective effort to re-energise multilateralism.
Safeguarding the monetary system
The original impetus for the SDR included concerns about a national currency’s ability to reconcile the need for global liquidity provision with confidence in its role as the world’s reserve currency – what economists call the ‘Triffin dilemma’. By creating an international currency that would be managed by the IMF, member countries sought to underpin and enhance the international monetary system with a non-national official reserve asset.
Legal and practical factors, as well as some countries’ political resistance to delegating economic governance to multilateral institutions, have prevented the SDR from meeting its creators’ modest expectations, let alone the grand role of a truly global reserve currency that anchors the cooperative functioning of a growth-orientated global economy. Information and other market failures have added to the challenges, as have weak institutional infrastructure and inadequate branding. The result is a substantial gap between the SDR’s potential and its performance.
That gap has meant missed opportunities for the global economy – particularly in terms of asset-liability management, responsive liquidity, adjustment between deficit and surplus countries – and thus a gap between actual and potential growth. With the SDR providing a stronger glue at the international monetary system’s core, prudential currency diversification could have been made easier, the need for costly and inefficient self-insurance could have been reduced, and the provision of liquidity could have been made less pro-cyclical.
The winds of change
So, do today’s anti-globalisation winds – caused in part by poor global policy coordination in the context of too many years of low and insufficiently inclusive growth – create scope for enhancing the SDR’s role and potential contributions?
Legal and practical factors have prevented the SDR from meeting its creators’ modest expectations, let alone the grand role of a truly global reserve currency
Addressing this question, were it to gain traction, would involve a focus on an ecosystem of SDR use, with the composite currency – which last year added the Chinese renminbi to the British pound, euro, Japanese yen and US dollar – potentially benefiting from a virtuous cycle. Specifically, the SDR’s three roles – an official reserve asset, a currency used more broadly in financial activity, and a numeraire – could ensure greater official liquidity, expand the range of new assets used around the world in public and private transactions, and boost its use as a unit of account.
Of course, given the advanced economies’ embrace of more inward-looking, populist and nationalist politics, a ‘big bang’ approach to reinvigorating the SDR is highly unlikely. Even an incremental approach, starting with practical low-hanging fruit that does not require amendments to the IMF’s Articles of Agreement, would face political challenges. But it would be worth considering.
Areas of focus would include using the SDR for some bond issuance and trade transactions, developing market infrastructure (including payments and settlement mechanisms), improving valuation methodologies, and gradually developing a yield curve for SDR-denominated loans and bonds. This would also help to leverage the interconnectedness of the SDR’s roles, in order to reach critical mass quickly and have a foundation for further incremental gains. For the effort to succeed, the IMF’s approach would need to evolve – just like it did on country-specific issues.
Delivering on promises
When I joined the IMF in the early 1980s, discussions with non-government counterparts, whether on country or policy work, were discouraged. The situation today is very different. Broader national engagement with NGOs, local media and a broad set of politicians is now viewed as an integral part of effective country advice and programme implementation, as well as being essential for the fund’s ‘surveillance’ function under its Articles of Agreements.
A similar pivot is needed if the IMF is to deliver better on the supranational issues that are now migrating up its policy agenda. Specifically, the fund would need to complement its traditional core constituency of governments and other multilateral institutions (particularly the World Bank) with systemically influential subnational and private counterparts. The resulting public-private partnerships would enhance issuance, the development of market infrastructure and liquidity provision for the SDR.
While it is not easy to combine developmental and commercial activities, the implications for global growth and stability of not doing so suggest that it is an effort that should be explored. Moreover, the IMF could start small, focusing on interactions with other official multilateral and regional institutions, sovereign wealth funds, and multinational financial companies – all anchored by an active coalition of the willing among the G20.
In an ideal world, the SDR would have evolved into more of a reserve currency during the era of accelerated trade and financial globalisation. In the world as it is today, the international monetary system faces two options: fragmentation, with all the risks and opportunity costs that this implies, or an incremental approach to bolstering the global economy’s resilience and potential growth, based on bottom-up partnerships that facilitate systemic progress.
On July 12, Google’s six-year fight with French tax authorities reached a major juncture, with a French court ruling that the search engine giant should be cleared of a disputed $1.27bn tax adjustment bill.
The court rejected claims that the tech giant had abused tax loopholes by routing its sales through Ireland between 2005 and 2010.
The ruling comes as a clear victory for Google, which has not always come out of such tax disputes unscathed
Google’s strategy of keeping its headquarters in Ireland has helped minimise its tax bills in France, as well as a whole host of other European countries. French authorities, however, argued that Google should have paid taxes in France during the disputed period because its Irish subsidiary was conducting sales of online adverts to French clients through its search engine.
In turn, judges in the Parisian court ruled that Google Ireland should not have been taxable by French authorities at this time because the company, Google France, did not count as a “permanent establishment”. This, according to the court, came down to the fact that all orders needed approval from Irish headquarters, rather than being conducted in France.
While it has been declared that Google was acting within the law, the ruling could still be subject to an appeal from French tax authorities.
Google responded to the ruling with a statement that said the court “has confirmed Google abides by French tax law and international standards”. It further claimed: “We remain committed to France and the growth of its digital economy.”
The ruling comes as a clear victory for the company, which has not always come out of such disputes unscathed. In February last year, a similar skirmish with UK tax authorities resulted in a settlement where Google was forced to pay £130m ($168m) in back taxes.
The ruling is likely to feed into mounting anger over skimping tax arrangements and sweetheart deals that have been granted to large multinational companies. This said, earlier this month, the European Parliament passed new rules to force companies to publish detailed reports on where their profits are made, marking a potentially important step in tackling such arrangements.
On July 11, the US and Qatar signed a memorandum of understanding to track the flow of terrorist financing, a move that hopes to ease the diplomatic crisis currently embroiling the Gulf states. The agreement was signed in Doha by US Secretary of State Rex Tillerson and the Qatari Foreign Minister Sheikh Mohammed bin Abdulrahman Al Thani, and will see the two nations collaborate more closely in the fight against terrorism.
Speaking after the signing of the agreement, Tillerson praised Qatar for its anti-terrorism stance, and expressed his optimism the Gulf dispute would soon be resolved: “I am hopeful we can make some progress to begin to bring this to a point of resolution.”
The deal represents progress in Tillerson’s efforts to resolve the ongoing diplomatic crisis between the Gulf states, which has seen Saudi Arabia, Egypt, Bahrain and the United Arab Emirates attempt to politically and economically isolate Qatar over its alleged links to Islamic extremism.
Tillerson has praised Qatar
for its anti-terrorism stance, and expressed his optimism the Gulf dispute would soon be resolved
On June 5, Saudi Arabia, Bahrain and the UAE issued statements announcing they would be cutting diplomatic and economic ties with their Gulf neighbour. From this date, the respective governments gave Qatari citizens 14 days to leave their countries, and banned their own citizens from visiting Qatar.
All air and sea travel between the Saudi-led group and Qatar has since been banned. Qatar’s only land border with Saudi Arabia has also been shut, depriving the nation of its main source of food. As a result, Qatar has been forced to airlift food supplies from outside of the Persian Gulf, as well as rerouting flights for its citizens.
Banks in Saudi Arabia, the UAE and Bahrain have also begun to cut their exposure to Qatar, with some lenders withdrawing deposits from Qatari banks and ceasing the trade of riyals and bonds. As fears mount over the potential imposition of financial sanctions on the nation, there is a deepening sense of uncertainty among businesses in Qatar. While Qatar is one of the world’s richest nations, it has been left reeling by the sustained decline in the price of oil, and a comprehensive economic embargo would prove extremely costly for the Gulf state.
Until now, Qatari efforts to end the sanctions and resolve the dispute have failed. The Saudi-led group has issued Qatar with a 13-point list of demands, which include severing links with the Muslim Brotherhood, curbing diplomatic ties with Iran and closing the Al Jazeera television network, but Qatar has been hoping to meet a compromise.
As part of his four-day tour of the Persian Gulf, Tillerson is also due to meet with Saudi officials in a further attempt to resolve the standoff between the disputing nations.
Understanding tax regulation can be challenging at the best of times. In much of Latin America, rules around withholding taxes on B2B transactions vary so greatly it can dramatically hinder efficient business.
This fact is especially concerning when it comes to the consequences of non-compliance. For example, in Argentina, failure to pay withholding taxes can result in hefty fines of up to 10 times the amount not paid. Effectively managing B2B transactions, therefore, is of the essence.Doing so, however, requires an in-depth understanding of the individual, country-specific regulations that govern each jurisdiction.
World Finance spoke to Ana Paula Maciel, Tax Content Manager at leading tax solutions firm Vertex, and Ernesto Levy, Senior Leader of Global Indirect Tax at Intuit, to find out more about how Argentina, Brazil and Mexico differ in regulations, and what businesses can do to streamline their processes.
Untangling the complexities
In Maciel’s words: “Withholding tax is a government requirement for the buyer of goods or services to deduct a specific amount from the payment made to the supplier.” However, what sounds simple in theory is far more complex in reality, especially when various external factors – such as the various levels of government at play (federal, provincial and municipal) and frequently changing rules – are taken into consideration.
“Several common challenges crop up when tax functions address withholding tax requirements in Argentina, Brazil and Mexico, not least because each country has multiple forms of withholding taxes, rates and procedures”, said Maciel. “Rules, rates and calculations are subject to frequent adjustments and legislative changes, especially during periods of economic stress, in which governments are hungry for faster ways to collect revenue. Tax managers grappling to manage withholding taxes in these countries may feel that the rules, scattered throughout government layers, change at least every 100 days.”
When it comes to withholding, Brazil and Argentina are two of the most complex countries in the world. This is not helped by the fact that, in the latter country, a collection regime also applies, whereby the seller is mandated by the government to collect an advanced payment of taxes from the buyer at the time of invoicing.
The issue with Argentina
Both of these regimes are used heavily in Argentina; they can be found at the federal, provincial and municipal levels of government (see Fig 1) and are applied within almost all tax types, including income tax, VAT and turnover tax. According to Levy: “This approach complicates business and tax compliance in the country. Tax departments must collaborate closely with finance and accounting teams, investing significant time in tax management and compliance activities.”
Then there are the various regulations within each government level: on the federal side, almost all goods and services are subject to withholding income tax, and the majority of registered taxpayers are required to act as withholding tax agents. There are, however, some exemptions, including chargebacks, currency exchange transactions and payments made to government institutions.
“The calculation is highly complex, in part because it requires the buyer to track all payments made to each taxpayer within a specific category throughout the month”, said Levy. “The total payments made for each category must then be compared to each threshold.”
When it comes to VAT withholding, rates in Argentina vary depending on the type of goods or services being supplied – ranging from 50 percent on the sale of goods and certain construction services, up to 100 percent for ‘blacklisted’ taxpayers identified as high risk by the authority.
While this sounds confusing, things get even trickier at the provincial level. According to Maciel: “At this level, Argentina’s approach to withholding and collection taxes applied to turnover tax qualifies as complex.” There are 24 autonomous tax jurisdictions, and each one handles withholding and collection taxes based on a unique set of regulations. There are then various exemptions to consider; certain transactions may be excluded under different provincial tax regimes. In some cases, sales of capital goods are excluded from withholding and collection taxes, for example.
“As a result, there are numerous different withholding and collection tax rules, procedures and calculations that buyers and sellers of goods and services need to follow”, added Levy. “Usually, in order to be designated as either a withholding or collection agent, a taxpayer must have activities in the jurisdiction. Some provinces might also make the determination based on the company’s revenue; under this approach, larger companies tend to bear more of the brunt of withholding taxes.”
The Brazilian system
Over in Brazil, things are almost as complicated, with a system that can at times be unpredictable. “The Brazilian tax environment remains one of the most complex and fast-changing in the world”, Maciel said. “It’s important to recognise this condition in a country where indirect taxes and VAT withholding taxes apply only to services.”
The country is home to more than 80 different taxes. Those on VAT include: IPI, a federal tax on manufactured goods; PIS, a federal contribution applied to corporate gross revenues and used for the government’s social integration programme; COFINS, which funds social security and is applied to monthly invoicing; ICMS, which is a state value-added tax on the circulation of goods, interstate and intercity transportation and communication services; and ISS, a municipal service tax applied on services provided to a third party.
In much of Latin America, differences in rules around withholding taxes vary so greatly that it can dramatically hinder efficient business
Those on the corporate tax side include: IRPJ, a corporate income tax calculated on a company’s gross income; CSSL, a social contribution tax on net profit; and INSS, or National Institute of Social Security contributions, calculated on employees’ monthly salaries.
“It is important to keep in mind that some of these taxes apply differently, or do not apply at all, depending upon whether a transaction involves a good or a service”, said Maciel. “For example, at the federal level, IPI applies to goods but not to services. At the state level, ICMS applies to goods and some transportation and communications services, but no other services.”
The location of the transaction and its participants can also affect the status. The ISS tax in particular can vary depending on the city and service. In general, if the acquirer’s location requires the ISS tax, that city releases the ISS payment. However, there are rare situations where the two cities may understand that the ISS should be retained, and so the ISS is not paid.
A straightforward approach
Fortunately, Mexico has simplified things a little: it’s primarily income tax and VAT transactions that are subject to a withholding regime, making its regulations at least a little easier to navigate than the country’s South American counterparts. Here, income tax withholding generally applies to payments made from entities to individuals for professional services.
These local entities operate as the withholding tax agent and, as with Argentina and Brazil, withholding is triggered upon payment. The withholding tax rate is 10 percent, and it’s applied to the net amount of the transaction.
There are nevertheless still a few niggling details that companies need to navigate around. Transactions between local entities aren’t usually subject to VAT withholding, but for those that are, the rates vary – for example, from four percent for ground transportation of goods, to 16 percent for scrap to be used as raw material or sold. Independent personal and commission services, meanwhile, demand a payment of 10.67 percent. All of these rates are normally applied to the net amount, but in some circumstances come off the VAT amount.
There are further complications that apply to all three countries, however. If the value of individual goods and/or services isn’t itemised on an invoice, for example, withholding tax calculations becomes more difficult. “Chargebacks, payments in kind and instalment payments also tend to create additional layers of difficulty in the determination and management of withholding taxes”, added Levy. “Finally, some tax authorities provide software that taxpayers are required to use for reporting – and compliance – purposes.”
Fortunately, there are solutions to these issues – namely drawing on external knowledge and using technologies to streamline complex, tax-related data. “Withholding taxes in Argentina, Brazil and Mexico can be managed”, said Levy. “The leading approaches to doing so typically feature a blend of overall tax expertise, local knowledge, leading tax data management practices and supporting tax automation.”
Software platforms such as those offered by Vertex can help simplify systems and take the pressure off the companies themselves. Although the platforms can’t control the changes themselves, they can help organisations react to them. That’s well worth noting during a period of flux, when regulations are, according to Maciel, likely to undergo a series of rapid changes. This is expected to be the case over the coming years – but whether that’s for better or for worse remains to be seen.
For a group of people so often characterised as the ‘me me me’ generation, it may seem puzzling that Millennials could be on the cusp of driving a profound shift in the way the financial sector approaches the morality of money. In fact, the distinct value set of the Millennial generation – conventionally defined as those born between the early 1980s and the early 2000s – could have the firepower to drive a widespread rejection of traditional banking and financial models.
Alongside their more commonly cited traits – narcissism, impatience, multitasking, technological know-how and a penchant for selfies – Millennials also hold social responsibility far closer to their hearts than previous generations. As a group, they are more socially tolerant, globally minded, value driven and more likely to believe in climate change than older generations, and tend to prioritise ‘making a difference’ above higher paycheques.
Numerous studies have found a trend linking specific generations to their level of concern over the social impact of their investments. For instance, according to a study by Accenture, social responsibility is a factor in choosing an investment for 49 percent of US millionaire Millennials, compared with 43 percent of those in Generation X, 34 percent of Baby Boomers and just 27 percent of seniors. These differences are even more pronounced when the respondents aren’t restricted to just those who are millionaires. A separate survey by Morgan Stanley found that Millennials were twice as likely as other generations to invest in a portfolio or individual companies that seek to have positive environmental or social impacts.
The Millennial generation could have the firepower to drive a widespread rejection of traditional banking and financial models
Of course, previous generations were also concerned by social issues: the Baby Boomer generation, for one, was famous for its civil rights, environmental, gay rights and anti-war movements. What sets Millennials apart is that they see their money as an important vehicle through which they can act on their values. As such, they tend to translate this concern into an impact-orientated approach to investment.
The makings of a generation
Clearly, people’s beliefs can change as they grow older. World Finance spoke to Morley Winograd, a leading generational expert and author of Millennial Momentum: How a New Generation is Remaking America, who said: “One of the things that those of us in generational research are always looking for is the ability to separate out age effects from generational effects.”
An equally good explanation for trends regarding Millennials’ approach to social investments might be that they have simply not yet matured to become fiscally conservative like their elders. However, according to Winograd: “That is not true of this particular differentiation… It is in fact a reflection of generational change and generational attitudes and beliefs.”
The existence of profound attitudinal differences between generations rests on the concept that people are deeply affected by the collective experiences of their upbringing, during which their attitudes crystallise to form a particular generational character. It is generally accepted by psychologists that people’s attitudes are more malleable in their younger years. This period is known by various terms, including the ‘impressionable’, ‘formative’ or ‘critical’ years, but these phrases all allude to the notion that there is a pivotal time during everybody’s youth when their fundamental value set is forged.
Generational expert Cam Marston explained one key influence: “Some of [Millennials’ concerns were] likely taught to them in their young ages by their parents… the Millennials are children of the Boomers, who are the first generation to care about social and environment responsibility.” It is a clear fact of life that parents play a key role in shaping their children’s attitudes. However, this alone cannot explain the sharp divergence in the ways Millennials and Baby Boomers approach the world of finance.
Critically, the attitudes of a generation are defined in part by the events that happen to occur during their youth. Of all experiences that might permanently colour the attitudes of a generation, the Great Recession is certainly a standout event. For the Millennial generation, the financial crash and its aftermath hit home when they were aged between 10 and 25 – precisely those years when people are most impressionable.
According to Winograd: “The financial services industry engaged in illegal and irresponsible behaviour, and they lost an entire generation. They’ve destroyed Millennials’ families, their home life, and their confidence in the world.” This characterisation of the financial sector as something intrinsically linked to culpability and guilt has consequently become imprinted as a generational memory, and is buried deeply into the psyches of Millennials to a greater extent than any other age group.
Indeed, according to Winograd, Millennials bear striking parallels to the generation that grew up during the Great Depression of the 1930s. While this older generation didn’t react by shifting to socially responsible investments, they stuck with their suspicion of the financial services industry throughout their whole lives.
Millennials have always had the tools and the digital know-how to tap into the relevant information needed to scrutinise their own decisions
As a generation, they remained less likely to trust banks with their money and more likely to hold it in cash. Similarly, for Millennials, a deeply held suspicion towards traditional banking models and a critical approach to any interactions with the industry can simply be understood as a natural response to their experience of the financial crash.
Digital natives
This distrust of the banking sector can be combined with another key formative element for the Millennial generation. Having grown up at a time of huge technological leaps – including the birth of widespread internet use, social media and smartphones – this is a generation that has always had the tools and the digital know-how to tap into the relevant information needed to scrutinise their own decisions. They are accustomed to having direct access to the details of social problems, such as human rights abuses and climate change. In fact, the nature of the way in which Millennials consume and share information is entirely different to that of previous generations.
It therefore comes as no surprise that Millennials typically spend much longer researching their investments than their older counterparts. A recent study published by Blackrock found that Millennials spend seven hours a month checking on their investments – around three times longer than older generations. According to Will Lana, Partner and Investment Manager at Trillium Asset Management: “In the past, investment firms tended to write off responsible investing as impossible. That’s no longer working. Clients are aware good options exist and they are more comfortable raising the topic.”
The result, according to Winograd, is that “[Millennials] are going to take their desire to change the world and leverage it in their investments, and they are not going to let standard investment practices stand in the way of that”. In turn, banks will have to keep up with this curve, or risk being sidelined by the new market.
Millennial motivation
Socially responsible investing itself is nothing new. It began as the filtering out of ‘sin stocks’ such as those related to the tobacco, gambling, sex or weapons industries, but has since taken on proactive forms, involving investments in everything from environmentally sound companies to businesses led by women or minorities. It is also taking on new guises, such as impact investment, peer-to-peer lending and crowdfunding.
Many of these are increasingly being shaped by technology and driven by younger generations: a host of new investment platforms, many app-based, are emerging, which allow people to individually select their social and environmental priorities. Grow Invest, for instance, is an app that allows people to filter their algorithmically defined investment packages to reflect their own personal and social concerns.
49%
of millionaire Millennials in the US consider social responsibility when choosing investments
43%
The same share of GenerationX
34%
The same share of Baby Boomers
27%
The same share of older generations
Over recent years, there has already been a huge jump in the number of banks offering socially responsible investment products. According to a review of the industry published by the Global Sustainable Investment Alliance, global sustainable, responsible and impact investment assets reached $22.89trn in 2016. This marks a 25 percent increase from 2014, which was in turn up 61 percent from 2012.
Other strands of ‘investment with a conscience’ are rapidly gaining momentum. For instance, according to JPMorgan, assets in impact investment currently stand at around $9bn in the US, but the bank predicts this will rocket to $1trn by 2020.
“There’s no guarantee an investment firm that had success with Baby Boomers can repeat with Millennials”, said Lana. “Having a solid impact offering helps because it speaks directly to what Millennials are asking for. The financial sector would be well served responding to investor demand rather than fighting it.”
Crucially, this is just the beginning. While in many countries Millennials are the largest generation by number, as it stands, the world’s wealth is largely concentrated within the Baby Boomer generation. Nonetheless, Millennials are poised to become the heirs to this vast sum of wealth, which will gradually change hands over the course of the next few decades. In the US alone, this wealth shift will amount to a generational transfer of $30trn over the course of the next 30 years. Considering that assets under management by the world’s 500 biggest managers totalled just $76.7trn at the end of 2015, this is a transfer of immense proportions.
Whether or not a dramatic rise in socially responsible investing will have the effect that many desire is another question entirely. But based on the assumption that Millennials will stick to their ideals, the financial industry could soon be forced to play ball with a very different kind of customer. A glance back at history tells us that generational change can be a powerful force, and those players in the sector that fail to change will find themselves looking increasingly old fashioned.
President Donald Trump has nominated Randal Quarles as the new banking watchdog at the Federal Reserve, placing the investment fund manager in charge of regulating the nation’s biggest banks. The former Republican Treasury official is thought to be a fairly moderate choice for the post, and has previously criticised aspects of the post-financial crisis regulatory system.
Quarles will be the Federal Reserve’s very first Vice Chair of Supervision, which is perhaps the most powerful regulatory post in the US. The role was created by Congress in 2010 under the Dodd-Frank reform law, but was never filled during Obama’s tenure. By filling this influential position, Trump’s administration is outlining its ambition to reimagine financial regulations in the post-Obama era.
If the Senate confirms the nomination, Quarles will become the fourth member of the Fed’s board of governors, which still has three vacancies. The White House is currently working to find two suitable nominees for these seats. The Trump administration has also begun looking for the next Chair of the Federal Reserve, as President Trump appears unwilling to consider extending current Chair Janet Yellen’s tenure.
By electing a Vice Chair of Supervision, Trump’s administration is outlining its ambition to reimagine financial regulations in
the post-Obama era
Upon his inauguration, President Trump promised to “do a big number” on the 2010 Dodd-Frank banking regulations, which he accuses of limiting economic growth. His advisors have since offered scant details on how the administration plans to dismantle the legislation, but Quarles’ nomination gives the White House an opportunity to reshape the post-crisis regulatory landscape.
If confirmed, Quarles will immediately begin overseeing the Fed’s regulatory staff, who are charged with supervising some of the nation’s biggest banks, including Bank of America and Citigroup. As Vice Chair of Supervision, Quarles will be able to profoundly influence the way in which the Fed oversees these firms.
According to a White House official, Quarles’ nomination “shows that we’re looking for a change to the heavy-handed approach to regulation from the prior administration”. Last month, the Treasury released a 147-page document detailing potential changes to the financial regulatory system. Trump has long been a vocal critic of the Obama-era regulatory framework, attacking the Dodd-Frank reforms in particular for inhibiting the creation of jobs and making it difficult for banks to offer loans.
In addition to his regulatory role as Vice Chair of Supervision, Quarles will also vote on monetary policy as one of the Fed’s board members. In the past, Quarles has criticised the Fed’s policy of keeping interest rates near zero in the years following the financial crisis, and supports using a monetary-policy rule to guide rate decisions. As such, the new Vice Chair of Supervision may well clash with his fellow board members, who largely do not share his views on monetary policy.
China’s biggest shipping company, Cosco Shipping, has agreed to buy Hong Kong rival Orient Overseas International Limited (OOIL) for $6.3bn, further consolidating the embattled shipping industry. The merger will see Cosco become the world’s third largest shipping company, with its 400 vessels only surpassed by Denmark’s Maersk Line and Switzerland’s Mediterranean Shipping Company.
The family of the first Hong Kong Chief Executive, Tung Chee-hwa, founded OOIL in 1950, and still holds a 69 percent stake in the company. As majority owners, the family has accepted the Cosco bid, but the sale still awaits approval from Cosco shareholders, as well as Chinese and US regulators.
The acquisition of Orient Overseas will see Cosco almost double its share of the US shipping market
The deal is the latest in a wave of mergers sweeping the shipping industry: eight M&A deals have taken place in the last four years alone, as the industry struggles to recover from 2008’s global financial crisis. The industry was further shaken in September, when South Korea’s Hanjin Shipping filed for bankruptcy, marking the demise of one of the world’s largest shippers.
Falling demand has led several smaller lines to suffer a similar fate, while larger rivals have snapped up other struggling firms. Cosco itself is the product of a merger between China’s two biggest state-owned shipping companies.
As a result, the world’s six largest shippers now control almost two thirds of the market. The acquisition of OOIL will see Cosco almost double its share of the US shipping market, emerging as a strong competitor to the industry’s top players.
What’s more, the deal also strengthens Beijing’s hold over global container shipping. Hong Kong currently boasts one of the world’s busiest ports, but could lose ground to rivals on the mainland once the deal is finalised.
Over the last four years, Chinese President Xi Jinping has been focusing on his so-called Belt and Road initiative, which aims to extend Chinese influence over supply chains from Asia to Europe. By increasing Cosco’s vessel capacity and market share, Beijing is taking a significant step forward in this ambitious initiative.
For many of the world’s industries, 2016 was a year to forget. With surprise election results and sweeping rebalances of diplomatic relations, businesses were caught off guard, lacking the information needed to make crucial decisions. Whether businesses liked it or not, inaction was often the only sensible choice during a year when it felt like anything was possible.
But in the world of foreign currency trading, this situation proved to be an exciting playground for firms of every size. Such an environment provided the diplomatic jostling and policy swings that gave foreign exchange traders plenty of opportunities to turn a profit.
As the global economy enters one of the most uncertain periods for many years, the moments traders can take advantage of will only continue to emerge. As an industry that sees as much as $5.1trn in trades every single day, overlooking the potential of the foreign exchange market would be a mistake.
While the instability caused by Trump’s constantly changing policies may be problematic, forex traders with a keen eye may be able
to take advantage
Though filled with opportunities, this environment only rewards the best and bravest traders who are able to anticipate changes and interpret the market better than anyone else. Currencies continue to soar and sink, and while opportunities are out there, it takes a talented forex trader to notice the minute details that can inform a profitable decision.
In this exciting time, World Finance’s panel of experts has set out to find the current leaders in the forex industry. The firms listed in the World Finance Forex Awards 2017 have the potential to take the current wave of uncertainty in their stride and use it to their advantage.
Just in time
For forex traders, 2016 didn’t start out particularly positively. Warnings were raised that liquidity in the market was drying up, with both investors and banks instead favouring faster trades and avoiding substantial risks. Between October 2014 and October 2015, currency trading in the UK and North America shrank by more than 20 percent, Bloomberg reported. With a lack of volatility, many traders had little to work with.
Another factor making currency trading far more difficult was the increased speed markets now operate at. Whereas a change in government policy may have once taken months to fully play out on markets, it now takes mere seconds. Wild spikes and slumps are now common, meaning that traders need to either work faster, or embrace a far more long-term perspective.
But despite these early difficulties, 2016 soon livened up. The UK’s vote to leave the European Union had the knock-on effect of rejuvenating the forex sector, with trading desks suddenly kicked into overdrive. The Financial Times reported that, on the first day of trading after the vote, desks handled as much as 10 times their normal volumes, with many reporting that it was their busiest ever day on the job. As the Brexit negotiations continue to play out and specific details gradually emerge, traders will find plenty of opportunities with which to make some gains.
The other big surprise of last year was the election of Donald Trump, which created a whole new range of uncertainties and instabilities. The US dollar enjoyed a temporary ‘Trump bump’ immediately following the election, as traders were optimistic for his business-friendly policies. However, since Trump has more recently expressed concern the dollar is getting too strong and veered away from officially labelling China a currency manipulator, the currency’s price has slid back down. With the future uncertain and more swings likely, forex traders
are right in their element.
Further questions
After the previous year had set the stage, 2017 started with a surge of ups and downs for the global market. With the Brexit process officially triggered and a surprise election adding to the chaos in the UK, both the pound and the euro are set for a rocky ride. Traders can expect every tiny negotiation detail that inevitably leaks out to have a significant impact on both short and long-term trades.
The US economy also presents significant opportunities for forex traders as Trump continues to make his moves. As his first few months in office have already shown, the president is not beyond completely reversing his policies, and while the tremendous instability this causes may be problematic for some, forex traders with a keen eye may be able to take advantage of the opportunities others overlook.
Of particular note to traders should be Trump’s commitment to deregulate financial markets, particularly with regards to the Dodd-Frank Act. When signed into law in 2010, Dodd-Frank led to the closure of many smaller US-based forex businesses that were unable to maintain new minimum capital levels. But if capital requirements were to be eased, as is expected, smaller foreign brokers could soon return to US shores and shake up the market.
There is even potential for new companies to be created from scratch, something that has been more or less impossible over the past few years. The expectation of further rate hikes by the US Federal Reserve is also poised to liven up the economy.
With these forces looming on the horizon, it looks like the forex industry is set to become the most exciting it has been for a good long while.
The robots are here
As with all elements of the financial services industry, automation and online trading are making business faster and more competitive. Artificial intelligence is now being used to develop extremely effective trading algorithms, which – with the right methodology behind them – can greatly affect a business’ performance.
With these algorithms able to trade confidently against the most miniscule fluctuations in the market, even the swiftest trade can bear interesting results. For the classic human trader, a longer-term view is needed. With all the political and economic factors that have impacted markets recently – many of which came unexpectedly and without precedent – the opportunities for humans to make longer-term decisions still exist. While forex may be moving forward at an unbelievable pace, taking a moment to slow down and take stock of a situation remains a good idea.
This is going to be necessary in the coming months as traders keep several potential factors in mind. Whether or not the Chinese economy will increase its growth rate this year will be playing on the minds of plenty, with growth likely to benefit commodity-based emerging markets. The possibility of cuts to OPEC members’ oil production is also a factor, as the price of oil continues to put pressure on many. The number of elections currently taking place in Europe could also produce significant change. While algorithms can respond to these situations well, a good human trader may have the intuition needed to make more pre-emptive moves.
In such an exciting time for the industry, identifying the most innovative forex firms in the world has never been more important. The winners of the 2017 World Finance Forex Awards have demonstrated exemplary leadership in their field, and are equipped with the tools needed to deal with the incredible challenges and opportunities that lie ahead. In an industry that has been rejuvenated so swiftly and suddenly, with the potential for an even stronger future, these forex industry leaders have a big role to play.
The Rockefeller name is one so deeply entrenched in different spheres across the United States that it is perhaps unlike any other legacy the world’s largest economy has ever known. From the oil industry and banking to Wall Street, higher education, medical research and the arts, the Rockefellers have had an unquestionable impact on the spheres in which they worked.
Today, there may still be residues of criticism surrounding the Rockefellers – certainly with regard to the methods that the first in the family, John Davinson Rockefeller (John), employed in order to become the world’s first billionaire – but it is impossible to deny the positive impression made by him, his son John Davinson Rockefeller Jr (John Jr), and his grandchildren Abby, John Davinson III (John III), Nelson, Laurance, Winthrop and David in the worlds of business, politics and philanthropy.
Following the passing of David Rockefeller – John’s youngest grandchild and the world’s oldest billionaire at the grand age of 101 – in March, World Finance takes a look at his family’s fascinating history and the legacy left by the Rockefellers.
The first Rockefeller
As with all great stories, this one starts with a great character. John was born into a poor family, and to this day there are any number of rumours surrounding the identity of his father: that he was a thief, a crook, a gambler, a peddler. In any case, struggling to make ends meet, the family moved from Richford, New York, to Cleveland, Ohio in search of better prospects when John was 14.
John Rockefeller said the rich man shouldn’t die rich, the rich man should die having done good things with the wealth he has created
Signs of ambition became evident from a young age as John, the second of six children, embarked on various business ventures during his teen years. At 16, he got his first job as an assistant bookkeeper for a merchant firm called Hewitt & Tuttle. John had a natural flair for the job and rose to the role of cashier and bookkeeper within a matter of months. After four years at Hewitt & Tuttle, John set out in pursuit of his own dreams; together with a partner, he founded a commission merchant company that dealt with meat, hay and grains. By the end of its first year, the business had grossed $450,000.
Sensing the oil boom that was soon to take the country by storm, John decided to instigate his next venture – one that would change history. With the rate of oil production in Pennsylvania accelerating, he opened a refinery near Pittsburgh in 1863. Within just two years, it had become the largest in the area.
In 1870, John and his business partners incorporated the Standard Oil Company. Owing much to the favourable economic conditions at the time and John’s talent at streamlining operations, profit margins at Standard Oil remained consistently high from its early days. Motivated by the company’s rapid growth, John began an aggressive takeover strategy that would propel the company into a league of its very own.
Within just two years, Standard Oil controlled almost all refineries in the Cleveland area. John’s next move involved forging partnerships with railroad companies in order to transport his oil as economically as possible, while also buying up pipelines and oil terminals. By owning nearly every aspect of the business, Standard Oil’s control of the industry tightened – the company even bought up land to prevent rivals from establishing their own transportation infrastructure.
“He was very, very effective in integrating the totality of oil – foremost its extraction, and then its transportation, and then its retail and whole selling”, said Professor Michael Cox, Emeritus Professor of International Relations at the London School of Economics. “So it made Standard Oil, which became this extraordinary corporation even by the end of the 19th century, almost a virtual monopoly in terms of oil in the US… Given the increasing importance of oil in the world and for the American economy, it gave the Rockefellers, and [John] in particular, an extraordinary position of power, and of course of great wealth accumulation.”
But as John’s wealth and power mushroomed, criticism grew in correlation, intensified further by the fact that the numerous divisions involved in his enterprise were all consolidated under Standard Oil, with John overseeing absolutely everything. Congress soon took note.
Cox told World Finance: “The critics thought that the methods John employed were deeply immoral, and also ran against something else – it was not just that they were pretty grim in terms of getting the outcomes you wanted, some critics in Congress suggested very strongly that by creating an effective monopoly, [John] actually undermined competition in the United States as well. So his monopolistic practices were viewed by many of his critics as not only rather strong arm, but they also ended up creating a monopoly, and a monopoly was basically bad for America, and bad for American capitalism.”
John Jr was embroiled in controversy, but continued
his philanthropic work, rebuilding his reputation one good deed at a time
In response, Congress introduced the Sherman Antitrust Act in 1890, making any attempt to monopolise commerce in the US illegal. By 1892, the Ohio Supreme Court had ruled Standard Oil was in violation of state law, causing John to dissolve the company and hand over the management of each subsidiary.
Nonetheless, the company’s hierarchy remained intact, with control of all divisions staying in the hands of a board run by John himself. What’s more, in an audacious move nine years later, he reassembled the various companies into one holding group. Congress re-intervened in 1911, forcing it to dissolve once more.
“For those who are defenders of masses of wealth, he just did what every other businessman did, but maybe slightly on the ruthless side”, said Cox. “Others would say he was very ruthless, as were the methods he used. But again, in the context of the late 19th century, everybody was doing it; he just did it rather more successfully than everybody else. It was the age of the robber baron.
“It was in an age of what you might call Wild West frontier methods in order to achieve the outcomes you wanted… It was an extraordinary period of economic growth and the transformation of America, which made it into a world economic power, even before the beginning of the First World War. So I’d see it as part of that larger dynamic of how America became the America it was to become.”
Charitable giving
As well known as John is for his part in helping to create the great American economy, he is perhaps just as famous for his philanthropic work. Among the most notable instances of such efforts was his contribution to the creation of the University of Chicago. Cox explained: “He was basically the funder – it was his money in the 1890s that laid the basis for the creation of the great University of Chicago.”
$11bn
The estimated net worth of the Rockefeller family today
$30bn
John D Rockefeller’s net worth today if adjusted for inflation
174
The number of heirs to the Rockefeller fortune
101
The age at which David died, making him the world’s oldest billionaire
$4.8bn
The value of Chase Bank when David Rockefeller joined in 1946
$76.2bn
The bank’s
value in assets by 1981
John then went on to found the Rockefeller Institute of Medical Research (now called Rockefeller University) to spur the study of disease and its prevention. Numerous techniques born from the institution have since transformed biochemistry and medicine, including the treatment of pneumonia and spinal meningitis.
Another momentous act came in 1902, when John established the General Education Board in a bid to support education in the US “regardless of race, sex or creed”, with a specific emphasis on promoting higher education. Then, of course, came the Rockefeller Foundation, an institution John established in 1913 to “promote the wellbeing of mankind throughout the world”. It has done exactly that, donating millions to promote education, public health, scientific advancement, the arts, social research and more. The list of organisations and causes helped by the foundation is nothing short of astounding.
Despite the criticisms that enshrouded John’s career – including various accusations of tax evasion – his habit of charitable giving was one that started long before he became rich. From his very first paycheque, John began making regular donations to his local Baptist church, a Sunday school and an African-American church. It is therefore hard to deny it was his religious beliefs (rather than, say, a quest to elude taxation) that
drove his altruism.
“Maybe we live in such a secular age that we don’t understand the kind of Christianity that he adhered to”, Cox explained. “Let’s put it rather crudely: you earn $10, you give away your first three, and that started very early in his life as a young man, as he was beginning to build up his fortune. I think he genuinely did believe that it was the duty of the wealthy man in the Christian sense to disperse his fortune – and in useful ways – to help others.
“He embodied what many people would call the prime virtues of Protestantism – you know, hard work, getting up early, only having one wife, a standard family, religious, and also with a strong sense of philanthropy. He talked about this quite a lot: that the rich man shouldn’t die rich, the rich man should die having done good things with the wealth that he has created.”
Down the line
Born on January 29, 1874, John Jr was to follow in his father’s footsteps and make his own sizeable mark upon the world. Raised in Cleveland alongside his three sisters, John Jr was little fazed by his father’s vast wealth. After graduating from Brown University, he worked at the Standard Oil headquarters during a time of considerable upheaval. Consequently, feeling disenchanted, John Jr took a leap and left the business world behind to focus solely on philanthropy.
Despite his dedication to altruism, the oft-changeable tide of public opinion began to turn in 1913 when around 9,000 coal miners working for the Rockefeller-owned Colorado Fuel and Iron Company decided to strike, demanding better wages, hours and accommodation. The affair soon turned violent, with workers’ families evicted from their homes and forced to live in makeshift tents during a harsh winter. By 1914, tragedy struck as more than 40 people, including 11 children, were shot and killed by private security forces.
Blame was placed on John Jr; slated by the newspapers, the heir soon found himself in front of Congress, and the Rockefeller name suffered perhaps its biggest blow. For years after, John Jr was embroiled in controversy, but continued his philanthropic work with gusto, focusing on rebuilding his reputation one good deed at a time. Some such deeds include creating the world famous Rockefeller Centre, donating the land that would later be transformed into the United Nations headquarters, and restoring Colonial Williamsburg. However, in addition to making incredibly generous contributions to various causes, perhaps John Jr’s most profound imprint on the world came through the work of his children.
The five Rockefeller brothers. Left to right: David, Winthrop, John D Rockefeller III, Nelson and Laurance
A family like no other
While Abby Rockefeller pursued charitable work out of the public limelight, her five brothers each carved a reputation in their own right, weaving through the interconnected spheres of business, politics and philanthropy in a manner unlike that of any family in US history.
The eldest of the brothers, John III, devoted his life to foreign affairs and philanthropy. Inspired by a trip around the world following his graduation, John III developed a deep interest in Asia that resulted in the creation of the Asia Society and the Council on Economic and Cultural Affairs. John III was also responsible for the Population Council, the first such organisation to bring issues of overpopulation to the fore, and the Lincoln Centre, now one of the world’s leading performing arts centres. John III also founded and supported numerous NGOs before his untimely death in a car crash in 1978.
Nelson was perhaps the most high profile of the siblings. Despite his father’s efforts to instil in him the values of restraint and modesty, Nelson always had grand plans and spoke about becoming president from childhood. After a stint at Chase Manhattan Bank, he went on to lead the development of the Rockefeller Centre through a tumultuous economic period, eventually serving as its president. Nelson then entered politics, transforming the New York skyline through the numerous construction projects he instigated while serving as Governor of New York for four terms between 1953 and 1973. He then served as Vice President of the US under President Gerald Ford between 1974 and 1977.
Laurance also had a big impact on New York, but via Wall Street, as a pioneer in venture capitalism. During his decades on the New York Stock Exchange, Laurance invested in hundreds of start-ups that focused on electronics, aviation, computers and biotechnology. Laurance had a talent for sensing the next big thing, as can be seen in his early investments in Apple and Intel. He was also a keen environmentalist and was instrumental in establishing and expanding numerous national parks throughout the US, from Wyoming to Hawaii.
Lessons in modesty worked for Winthrop, who was unwilling to merely waltz his way to the top based on his family name alone. Instead, he started his career as an apprentice working in his family’s oilfields. After the Second World War, Winthrop went into politics and became famous for the profound cultural and economic change he propelled in the state of Arkansas while serving as governor between 1967 and 1971. He introduced the state’s first minimum wage and the freedom of information law, and tightened insurance legislation, to name but a few examples.
The youngest brother, David, was a powerful force on Wall Street, as well as an incredibly influential individual who traversed the highest echelons of society. After graduating from the London School of Economics, David went on to gain a PhD from the University of Chicago in 1940. David’s first job, which involved writing letters for the Mayor of New York, came to a grinding halt – like so many others – as a result of the Second World War. Choosing to forgo the use of his family name, David enlisted as a private, rising to the rank of captain during his service in the US Army.
The Rockefellers changed the nature of doing business, establishing efficiency as the baseline and waste as anathema for any enterprise
After the war, David joined the company in which he would stay for the entirety of his professional career: Chase Manhattan Bank. Given that his uncle Winthrop Aldrich was chairman of the bank and his father and grandfather were its largest shareholders, David was unsurprisingly deemed to be nothing more than a spoiled rich kid upon arrival. However, he soon proved his worth, while his habit of getting the public subway to work every day helped to chip away at the spoiled status. His hard work saw him make his own way to the top, becoming co-CEO in 1960 and sole CEO in 1969.
During his time at the helm, David used his worldwide network to increase the bank’s foreign branches from 11 to 73, with Chase Bank becoming the first western bank to open branches in China and Russia, securing its position as a truly global institution. David was also responsible for re-energising the bank from within, creating HR, planning and marketing departments with the help of none other than the ‘father of management’, Peter Drucker. Though the 1970s proved difficult, David held the role of CEO until retiring in 1981.
When David joined Chase Bank in 1946, it was a $4.8bn institution. By 1981, it was worth $76.2bn in assets. “Well, he was the banker of all bankers”, Cox commented. As a result of two vast mergers, the bank is today the biggest in the US.
Changing the world
There are questions to be asked about how one man – or family – can possibly come to accumulate such incredible wealth as that of the Rockefellers. And yes, there are aspects of John’s strategy that were aggressive and uncompetitive. However, this approach to making mergers and acquisitions is one that has since become a standard business practice – he was just the first to do it with such success. Through his willingness to do things differently, John laid the groundwork for an industry that is integral to the global economy, and an area of commerce that has spurred the development and innovation of countless others.
At a time when oil was expensive and much of it was wasted, John made the production process far more efficient and cost effective, thereby making kerosene affordable for the masses – so much so that it soon overtook whale and coal oil (and even electricity for some time) as fuels, lighting up America street by street. John’s resourcefulness also prompted the development of some 300 oil by-products, ranging from paints and lubricating oils to anaesthetics. In this respect, he changed the nature of doing business, establishing efficiency as the baseline and waste as
anathema for any enterprise.
“He didn’t come from the establishment. He was in very many ways – I suppose this makes the story rather heroic – a self-made man”, said Cox. Indeed, John was the archetypal embodiment of the American Dream. And while he revolutionised business strategy and the oil industry, his grandsons, specifically Laurance and David, went on to shape the US financial market through their keen sense of forward thinking.
More remarkable still is the impact the Rockefellers had on education, medical research, equality, social science and the arts. Their support has trickled down to so many different organisations, helping millions upon millions along the way. John alone gave away $540m throughout his lifetime, but the true cost of the family’s ongoing philanthropy is simply unknown.
Key events in the Rockefeller family history:
1839: John D Rockefeller was born on a farm in Richford, New York on July 8
1859: With $2,000 in funds, John formed a partnership with Maurice B Clark
1863: The two partners entered the oil business, creating a company called Andrews, Clark & Co
1870: The Standard Oil Company was created with a capital of $1m
1874: John Rockefeller’s son, John Jr, was born in Cleveland, Ohio
1890: John’s donation of $600,000 helped fund the establishment of the University of Chicago
1901: The Rockefeller Institute for Medical Research (now Rockefeller University) was founded
1906: John III, John Jr’s son, was born in New York City on March 21
1911: The Supreme Court ordered the dissolution of the Standard Oil Company
1915: David Rockefeller, the youngest child of John Jr, was born in New York City
1946: David joined Chase Bank as an assistant manager in the foreign banking department
1969: David was named Chairman of the Board of Directors and CEO of Chase Manhattan Bank
1994: The David Rockefeller Centre for Latin American Studies opened at Harvard University
2000: The Rockefeller family’s ownership of Rockefeller Centre ended after being sold for $1.85bn
2017: David died at the age of 101 in Upstate New York with a net worth of $3.3bn
In 1821, the eminent political economist David Ricardo remarked: “The substitution of machinery for human labour is often very injurious to the interests of the class of labourers… [it] may render the population redundant and deteriorate the condition of the labourer.” Little over a century later, John Maynard Keynes identified a similar predicament: “Technological unemployment… [is an issue born of] our discovery of means of economising the use of labour outrunning the pace at which we can find new uses of labour.”
Fast-forward another century and you will find yourself in the present day, where once again anxieties regarding automation have captured the world’s attention. ‘Digital refugees’ were a hot topic among leaders at this year’s World Economic Forum, as discussions centred on the role of technological advancements in rising inequality, the deterioration of social cohesion, and the encroaching wave of populism. Meanwhile, many predict the coming ‘fourth industrial revolution’ will have serious implications for job market stability, with one study from the University of Oxford estimating 47 percent of US employment faces a “high risk” of automation in the next 20 years.
The flipside of these fears are the dramatically high returns available to the small elite capable of capturing the rewards of such disruptive technology. The winner-takes-all effect has been aptly characterised by economist Sherwin Rosen, who dubbed it the “economics of superstars”.
Troublesome tech
Recent research published by the IMF in April’s World Economic Outlook report attempted to get to grips with the role technological advancement is playing in reordering our societies. The authors of the research, Mai Dao, Mitali Das, Zsoka Koczan and Weicheng Lian, noted the labour share of national income in advanced economies had been whittled away since the 1980s. In fact, the labour share of income is now four percent lower than in 1970.
Modern skills are in high demand, and those with
them are able to demand a huge premium, while workers incapable of keeping up with technological advancements are left behind
Such a shift indicates the gains from increased productivity are flowing predominantly to the owners of capital – those already positioned towards the upper echelons of the income spectrum. This, however, is not the only troubling trend. As workers continue to lose out overall, labour markets are becoming increasingly polarised, with wages clustered around extremes. Together, these developments provide the backstory for the dramatic increase in inequality across the majority of advanced economies in the same period.
The report labelled technology the predominant driver of these trends, with the rise of global integration also an important factor – albeit half as important as technology. While the two forces are intertwined, this verdict certainly points to the ugly side of technological advancement.
Speaking to World Finance, Dao and Das said: “We were not surprised to find that technology explains about half of the downward trend in labour shares in the US, as the literature has already established this. But we were surprised at how broad-based this result was for other advanced economies, where this question has not been analysed systematically.
“This common pattern further suggests that technology is a global force affecting labour markets similarly across the industrialised world.”
Digital refugees
Rather than being a consistent trend across all sectors, the report found the blow to labour incomes was linked to the combination of two key factors: technological advancement and routinisation. The report identified technological advancement as anything reducing the cost of the employer’s investment and incentivising firms to replace workers with machines, robots or computers. Routinisation, meanwhile, measured the extent to which tasks in a specific sector or country were repetitive and prone to automation. Countries or sectors with the highest share of occupations easily susceptible to both of these factors were deemed the most vulnerable.
Dao and Das noted: “Generally speaking, countries such as Germany, which had a relatively large manufacturing sector, were more susceptible to routine-based technology displacing workers in manufacturing industries than a typical emerging market or developing country, where agriculture and services are still dominant sectors of production.”
According to the report, these same technological forces are driving the polarisation of labour markets, an effect characterised as the ‘hollowing out’ of the middle class. This phenomenon is explained by technological changes eliminating the need for middle-skilled, repetitive tasks, forcing those in the middle-skill bracket to either accept lower wages or find a way to reskill. As a result, labour markets have been profoundly shaken up; developing a greater demand at both the higher and lower ends of the market.
47%
Share of US employment at “high risk” of automation in the next 20 years
4%
Decrease in the labour share of income since 1970
In support of this hypothesis, the report found that middle-skill workers have borne the brunt of the decrease in income shares, while low and highly skilled workers have experienced relatively nominal effects. Furthermore, those sectors most exposed to routine-based technological progress witnessed a more pronounced decline in middle-skilled labour.
Speaking to World Finance, James Bessen, author of Learning by Doing: The Real Connection between Innovation, Wages, and Wealth, underscored that, rather than destroying jobs, technology is redefining them. In fact, Bessen asserted jobs affected by computer technology have often witnessed growing levels of employment.
An illustrative example of this is the graphic design industry, which once consisted largely of the repetitive task of typography. As new software and computers replaced many of the more routine jobs, the number of graphic designers grew, with lower costs driving demand. Bessen explained: “[As] the routine work is being taken over by machines, the more creative and cognitive work is moving to humans.”
The hollowing out effect, therefore, transpires when people struggle to learn the skills accompanying these new roles. Such a struggle has caused a skills gap to emerge, one which means employers are finding it increasingly difficult to hire people with the relevant skills to work with new technologies. As a result, modern skills are in high demand, and those with them are able to demand a huge premium, while workers incapable of keeping up with technological advancements are left behind.
Bessen said: “We are seeing a new digital divide between those who are working with new technologies and those who are not.”
Lifelong learning
As is clear from historical comments by economists such as Keynes and Ricardo, the threat of automation is nothing new; technology has profoundly disrupted labour markets since the onset of the Industrial Revolution. “For some countries where historical data exists, such as England, we do observe similarly pervasive declines in the past, particularly in the aftermath of the Industrial Revolution in the 19th century”, said Dao and Das.
Indeed, when Ricardo wrote of the deteriorating “condition of the labourer”, the UK was in the midst of the first Industrial Revolution, a period that triggered profound disruptions to labour markets and held striking parallels to the plight seen today. “The average wage was stagnant for decades [after the Industrial Revolution]”, Bessen revealed. “Skilled workers fared well, but the average worker didn’t. It took a long time before the benefits of the technology were shared by the average worker.” In fact, it was only after training institutions, business models and labour markets fostered the necessary skills that the average wages of ordinary workers began to rise.
Dramatic advancements in technology are far from over, with artificial-intelligence-based technologies holding the potential to displace innumerable workers and drive the skills gap wider still
In today’s setting, while the technology itself may have changed beyond all recognition, the problem remains familiar. Bessen said: “I think essentially we are seeing a similar thing today. Different reasons – at a different pace or scale, maybe – but a similar problem.”
Worryingly, dramatic advancements in technology are far from over, with artificial-intelligence-based technologies holding the potential to displace innumerable workers and drive the skills gap wider still.
Crucially, to prevent technological advancements from driving inequalities, the skills gap must be addressed. As with the industrial revolutions of the 19th century, this can only be resolved by finding new ways of fostering skills. Learning to adapt to technology and supporting those who become so-called digital refugees will become a constant necessity. “I think that we are going to see a prolonged period where clearly the nature of education is changing… It has already become much more of a story of lifelong learning”, Bessen said.
As such, it seems we will be unable to escape the modern world’s continual call for new and more bespoke skills. Instead, for society to continue to function, we must perpetually adapt, learning to reinvent our skill set as and when the market demands.
Economic uncertainty is always a challenge for businesses, and the pensions sector is certainly no exception. After several years of somewhat slow growth, the events of 2016 shook the industry to its core. Geopolitical tensions, creeping isolationism, market volatility and political upsets have forced the pensions sector to rapidly adjust to a new, unpredictable international business climate. With the industry still recovering from the 2008 global financial crisis, such market unrest is far from welcome.
In addition to this immediate economic turbulence, the pensions industry is also facing its own looming demographic crisis. Rapid advances in medicine, nutrition and sanitation are now seeing people live far longer, with average life expectancy reaching an incredible 85 years in some developed nations. Meanwhile, reduced birth rates and a decline in infant mortality have given rise to a rapidly ageing population in many of the world’s largest economies. With an ever-increasing number of retirees requiring state and private pensions, the pensions sector faces an immense challenge in the decades to come.
The World Finance Pension Fund Awards 2017 provide an insight into these shifting expectations in the pensions market and celebrate the industry’s most innovative players. While the future may present some problems for the sector, this year’s recipients continue to thrive by offering the best services and the most pertinent insights.
The pensions industry is set to embrace technological advances as we look to
2017 and beyond
Growing demand
The world’s population is ageing rapidly. In 1950, people aged 60 and over made up just eight percent of the global population. That figure is now at 12 percent, and is expected to almost double to 22 percent by 2050.
With people around the world living for longer, there are consequently fewer working age citizens for every older person. This inevitably places a significant strain on the global pensions system, with international governments increasingly coming under pressure to ensure pensions remain financially sustainable and workable.
In countries with well-developed pensions systems, the poverty rate among retirees is often the same or lower than that of the general population. For example, pensioners in the UK are now financially better off than working age citizens, with the average pensioner household income overtaking the working age household income for the first time in 2017. However, a failure to adequately deal with the rapidly shifting demographics could result in a rise in old age poverty in even the world’s most developed nations. At present, state pensions tend to come from contributions made by taxpaying citizens, but as the population ages, there will simply be fewer taxpayers to support more retirees.
By 2050, some 40 percent of the population will be looking to claim pensions in various nations, including Japan, South Korea and Macau. While these countries currently boast well-developed pension funds, reforms must be made in order to adequately deal with population ageing. A failure to prepare for this demographic shift could result in rising poverty levels among the elderly, which would in turn place further pressure on healthcare systems and other public services.
While developed nations may be heading towards a future pensions crisis, many countries are still struggling to establish a workable pension system. In some Latin American, sub-Saharan African and Asian nations, pension schemes are almost non-existent or still at a nascent stage. In these regions, many citizens work in the informal economy, meaning they are not covered by social protections and do not pay taxes. As such, many developing nations struggle to provide a state pension for their elderly citizens, and are denied the crucial capital that can be generated from pension funds. The challenges to pension reform may be great, but the rewards will prove invaluable for many of the world’s developing nations.
A challenging year
On a more pressing scale, the pensions industry must now deal with the fallout from 2016’s various economic upsets. With a shock presidential victory for Donald Trump, the UK’s unprecedented decision to leave the European Union and an economic slowdown in China, the global economy has battled through a turbulent 12 months.
As the world adjusts to these new circumstances, economists have warned that inflation is likely to rise sharply in 2017, potentially reaching three percent in the UK and other European nations. Inflation rate changes have a profound effect on pension schemes, as high inflation can erode the value of retirement income.
Pensioners who purchase annuities are on a fixed income, which may not keep pace with rises in inflation. What’s more, cash savings and pension pots are hit hard by even low-level inflation, as the low interest rates on savings accounts simply cannot compete with rising inflation. For example, the value of £100 has more than halved over the past 20 years, thus wiping significant value from cash savings. Meanwhile, interest rates on global retirement incomes have been kept at near-record lows over the past decade in order to support the economy as it recovers from the 2008 financial crash. This means that people retiring today will ultimately receive just half the income of those who became pensioners in 2000.
In order to offset rising inflation in the US, the Federal Reserve has already taken the base interest rate to one percent, and has warned there will be more rate hikes to follow in 2017. With these high levels of inflation and low levels of interest on retirement incomes, 2017 could shape up to be a challenging year for the pensions industry.
Going digital
Like many financial services, the pensions industry is increasingly looking to digitalise its operations. As retirees become more tech-savvy, pension providers are attempting to introduce a new range of digital initiatives, particularly in their advisory services. According to accountancy giant EY: “2017 is set to be the year when so-called ‘robo-advice’ will make a real breakthrough.”
For many middle-income retirees looking to make the most of their pension pots, visiting an independent financial advisor can prove extremely costly. Due to a fear of exposure to future complaints, many advisors demand large fees in exchange for their services, often leaving pensioners with no choice but to make crucial retirement decisions by themselves.
In order to make quality financial advice more readily available, some pension providers are beginning to offer robo-advice services, which combine algorithms and automated online responses to give customers real-time counsel. Offering an effective and less costly alternative to a human advisor, intelligent robotics can help steer retirees towards financial products and pension plans that best suit their needs and savings goals. While such services are still something of a novelty, the pensions industry is set to embrace technological advances as we look to 2017 and beyond.
As the pensions sector prepares for the changes and challenges of the months ahead, the World Finance Pension Fund Awards celebrate the companies setting new standards worldwide. The winners of this year’s awards truly embody the future of the pensions industry, demonstrating adaptability, innovation and excellence in their services. For an insight into the industry’s top performers, take a look at our 2017 winners.
