The 47th World Economic Forum (WEF) annual meeting has cast a spotlight on the societal impacts of rapid developments in technology, with a particular focus on the dawn of the ‘fourth industrial revolution’.
The 2017 WEF Global Risksreport emphasised the role of technological change in the rise of anti-establishment voting, citing the damage it can inflict on labour market prospects as a key driver.
The fourth industrial revolution sees the emergence of technologies with the potential to disrupt workplaces the world over
Addressing such frustrations remains a central thread in the discussions underway at the forum, with the WEF annual meeting overview emphasising the need to address these issues: “Responsive and Responsible Leadership requires recognising that frustration and discontent are increasing in the segments of society that are not experiencing economic development and social progress.”
The discussion was taken further during a panel on the onset of the fourth industrial revolution, which discussed the role of leadership in addressing such anxieties. Vishal Sikka, CEO of Infosys, said: “We have to put in an extra effort so that we don’t create a bigger society of have-nots. That means a deep commitment to education and to addressing the displacements.”
The fourth industrial revolution sees the emergence of technologies with the potential to disrupt workplaces the world over. Such technologies include 3D printing, biotechnologies, artificial intelligence (AI) and robotics. While emerging technologies like AI have a myriad of potential benefits, discussions at the WEF were dominated by concerns about their potential to exacerbate societal frustrations.
Marc Benioff, founder and CEO of Salesforce, said: “We can see advances in AI that are beyond what we had expected… it’s happening at a rate and a capability that we are worrying about how it will impact the everyman, the broad range of workers around the world.”
Benioff also raised concerns that tens of millions of people could be displaced, amounting to the creation of “digital refugees”.
The undeniable need to continually drive profitable customer behaviour, especially in retail banking, has gained a great deal of attention in recent years. In response to this growing trend, in 2015 Standard Chartered announced it would be investing $1.5bn in technology over the course of the next three years. Only one year later, we had completed the first phase of this initiative – an achievement that we are very proud of. This is particularly impressive because the revamp we are pursuing is actually considered to be the most extensive of our digital channels across Africa.
As we ceaselessly strive to be the world’s best international bank, leading the way across Africa, Asia and the Middle East, we have successfully created products and service offerings that are widely accepted in Nigeria and in other markets in which we operate globally. This is largely driven by a robust digital banking strategy, with branches and proximity channels positioned to support the delivery of our services to clients.
With the Standard Chartered Mobile Banking app, our clients are motivated to save time, every time. Our digital transformation is designed to make Standard Chartered the ‘digital main bank’ for product sales and world-class service delivery, and therefore the bank of choice both in Nigeria and worldwide.
Bringing banks to clients
In 2016, Standard Chartered announced the global launch of its award-winning Retail Workbench, a digital tablet-based sales and service tool that brings the bank to the clients. Retail Workbench enables our employees to open an account for a client in any location; it makes banking services like loan approvals and credit card issuance fast, simple and paperless. This is the first of its kind in Nigeria, and we are glad to champion it.
In 2015, Standard Chartered announced it would be investing $1.5bn in technology over the course of the next three years
Retail Workbench will bring many benefits to the clients. First, it will allow customers to complete their banking activities on an iPad or similar mobile device. Second, Retail Workbench puts a set of current and savings account, credit card and personal loan products all on one mobile platform – along with product information and marketing brochures. This means sales staff can conduct needs-based conversations at any time and in any place.
The program will bring customers a truly ‘anytime, anywhere’ type of banking, providing clients with a fully digital service. Through its use, we at the bank can process client requests from anywhere, with data moving straight through to the back-end operations in near real-time. All in all, this will bring greatly improved productivity and efficiency to our operations. There will be fewer errors on applications, while customers will need to make just one visit and the process will be done.
Uplifting the interface
The Standard Chartered online banking platform has also had a user interface uplift, chiefly through a UI/UX revamp. This new revamp will offer easier navigation, a mobile adaptable interface and will be fitted with new and greatly improved utilities. This improved functionality will be applicable for loans, value-added services, wealth management and advisory services.
In addition to the internet banking platform, the bank has also launched its flagship mobile banking app, known as Standard Chartered Mobile Banking (SC Mobile). This exciting new feature promises to bring further benefits to clients, offering a unique omni-channel experience. With SC Mobile, clients can carry out banking transactions using a mobile phone or other mobile device, access his or her account, transfer funds both locally and internationally, manage credit cards, view loans and mortgages, and have access to over 1,000 bill payment options on the mobile device.
The impact of our digital transformation is being acknowledged globally through a variety of accolades for the bank. In 2016, Standard Chartered won the coveted Global Finance Award for Best Digital Bank – Global, beating 262 banks from various countries. In the same year, Global Finance also named us Best Consumer Digital Bank in Nigeria.
Engineering represents 27 percent of British GDP and supports 14.5 million jobs across the country, making it a driving force for both the UK and global economies. In the UK, the sector has been calling on the government to redress the economy towards engineering for years, and to take action to significantly improve the pipeline of engineering graduates and apprentices emerging from British universities and colleges.
Following the UK Government’s announcement of its commitment to creating an industrial strategy, and in the face of a growing global appetite to transform the way we educate engineers, we must assess the biggest opportunities for the engineering industry.
New tactics
An industrial strategy should help the government, industry and society work together to deliver a resilient, productive, sustainable and competitive industrial sector. An industrial strategy must take a long-term approach, which should be both cross-government and cross-party. Fundamental too is a far-reaching strategy for developing future generations of highly skilled engineers who can help to advance innovation and technological change.
The free movement of people is vital to supporting the engineering and technology industries. Policies that hinder this movement could severely damage a thriving and sustainable industrial strategy. Entrepreneurs and start-ups are often cited as the lifeblood of the economy and undoubtedly have been the drivers behind much of the innovation we take for granted. For this reason, they need special attention and investment from the government in order to flourish and reach their potential to support
the wider economy.
There is a growing number of expanding sectors within engineering that will drive future demand for engineers in the UK
Our need for more engineers is well documented. There are simply not enough young people taking up the traditional engineering gateway subjects such as maths, physics and design and technology, and then taking their studies further, whether through an apprenticeship or higher education. Even where we do have engineering skills, our 2016 IET Annual Skills and Demand in Industry survey suggests they are often not the right ones for an industry where technology and innovation is moving so fast.
In the survey, 62 percent of employers said the skills of their new graduate recruits do not meet their business needs, while 68 percent were concerned the education system will struggle to keep up with the skills required for technological change. Momentum is building behind the argument that we need to develop new approaches to engineering education, with greater emphasis on the practical, creative and problem-solving side of things. Globally, universities are introducing new degree programmes based on the premise that a background in creative subjects is as valid a launch pad for an engineering career as a traditional mathematical one.
In May 2017, the IET and Engineering Professors’ Council will host a high-profile global conference to discuss new approaches to engineering education, which will draw on expertise, thought leadership and best practices from the UK and internationally.
As part of championing a new approach to engineering education, there is also a call for more emphasis on the importance of practical work experience for engineering students. The IET has recently published recommendations outlining how industry, government and academia could do more to offer engineering students practical work experience. These recommendations include developing a government-led national work experience framework, and extending the apprenticeship levy to include internships and work placements in order to help students meet the costs of work experience placements.
Grasping opportunities
There is a growing number of expanding sectors within engineering that will drive future demand for engineers and technicians in the UK: space, new power networks, cyber-security, food security and robotics, to name a few. What all of these sectors have in common is an urgent need for relevant skills that can develop and deploy the exciting technology that will solve the defining issues of our generation. Yet ultimately these sectors need greater awareness, understanding and appreciation of the importance of engineering and technology to the wider economy – from the government, from the wider business world, and from the next generation of potential engineers.
In simple terms, the industry must take advantage of the new opportunities the UK Government’s industrial strategy offers. Likewise, it must take advantage of changing attitudes towards engineering education to extend its influence and status, which will drive long-term change and ensure the engineering and technology industry is nurtured and grown – as it should be.
Belgium’s new tax regularisation regime has come into force, offering a permanent programme for voluntary disclosure – available once, and once only, for Belgian tax residents. This is in response to the EU directive on the automatic exchange of information for tax purposes, Jonathan Chazkal explains: better to come clean now and pay a moderate penalty, than risk a more punishing prosecution later. If you’re starting here, you should go back and watch the first half of our conversation with Jonathan, which covers the costs and benefits of the regularisation programme, as well as how to apply.
World Finance: I’m with Jonathan Chazkal from Afschrift Law Firm; we’re talking about Belgium’s new tax regularisation regime.
This is in response to the EU directive on the exchange of information.
Jonathan Chazkal: Exactly. On January 1, 2016, and on January 1, 2017, pictures were taken by the financial institutions of the member countries of the OECD about the accounts and assets of all foreign residents. And the financial institutions will now communicate that information to their authorities. And knowing that the authorities will then start exchanging that information in September 2017 and maybe already in September 2016, Belgian residents know their name will be communicated automatically to the Belgian tax authorities regarding all the accounts that they have abroad.
So if a Belgian resident has already come forward and declared all his assets abroad, when his name will be communicated the local tax authority will know that that Belgian resident has already declared these assets, and therefore will not be subject to any penalties or prosecutions.
World Finance: How detailed is the information that’s being exchanged?
Jonathan Chazkal: Very detailed. The name, the tax identification number, the address, the end year balances, the interest, the dividends of any foreign resident will be communicated to his country.
We are talking about physical persons, but also the economic beneficiaries of every passive, non-financial entity will be communicated as well.
World Finance: So what are the key dates that people need to be aware of?
Jonathan Chazkal: So you have the early adaptor countries, which are the EU countries and other countries like Lichtenstein. They have taken pictures of the assets of their foreign residents on the 1st January 2016, and they will communicate that information in September 2017.
Then you have a second group of countries like Dubai, Israel, and Switzerland. They have taken pictures of the assets of their foreign residents on January 1, 2017; these authorities will communicate with each other from September 2018 and on.
World Finance: And there are potentially negative consequences as a result of this exchange of information; how can those consequences be limited?
Jonathan Chazkal: First if you are an economic beneficiary of an entity, you could make sure that it’s not a passive non-financial entity, but an active one. And then you would not be subject to an automatic exchange.
The second would be to change its tax residence. But then you obviously have to go live in that other country.
Finally, the only good solution would be to file for a tax regularisation procedure at that special office in Brussels, that still allows you one more time during your lifetime to come forward, to come clean, and to pay – maybe high penalties – today, but it will always be much lower than if you get caught in September 2018.
Belgium’s new tax regularisation regime has come into force, offering a permanent programme for voluntary disclosure – available once, and once only, for Belgian tax residents. Jonathan Chazkal, partner of Afschrift Law Firm, explains the costs and benefits of the new scheme, which taxes are covered, and how to file for regularisation. Please click through to watch the second half of our conversation with Jonathan, where he explains how much information is being exchanged, and the key dates that people should be aware of.
World Finance: Belgium’s new tax regularisation regime has come into force, offering a permanent programme for voluntary disclosure. Joining me is Jonathan Chazkal from Afschrift Law Firm.
Belgium has previously offered temporary amnesties; what’s the story behind this new law?
Jonathan Chazkal:Previous laws in Belgium offered tax regularisations, but they were always limited in time. This new law, which has come into effect on August 1, 2016, will remain forever.
As a consequence, Belgium tax residents only have one chance during their lifetime to apply that law. The exchange of information regarding tax matters between all countries will come into effect in a short period of time: Belgium has thought about a solution for those Belgian residents to come clean, find a solution to their accounts and assets that are still hidden abroad.
World Finance: So what are the costs and what are the benefits?
Jonathan Chazkal: The costs are quite high. For incomes like interest and dividends, professional incomes, you will have to pay the legal rates, with a penalty of 20 percent.
The period that you have to regularise is seven years; the main issue of the new law is, however, that you will have to pay 36 percent on the capital that existed seven years ago. If you want to avoid to pay, you will have to prove that capital already has been taxed, either in Belgium or abroad. And that the capital does not find its origins in any inheritance – because any inheritance tax would be due, and that law is not applicable.
The benefit is that it will give you a certificate that will state that you have a civil and a criminal immunity. And that certificate will avoid to the tax resident issues and problems they could face if they do not regularise today.
The costs might be high, but the automatic exchange of information regarding tax matters will come into effect less than a year and a half from now. Then the local authorities, the public prosecutor, could prosecute you for these accounts that you did not regularise; and then the penalties would be much higher.
World Finance: Is something being done to address the inheritance tax gap?
Jonathan Chazkal: Yes. The federal government reached agreements with all the regional authorities in order to allow Belgian tax residents that still want to regularise inheritance tax, for instance, to meet their regional authorities, and then they could file for such a demand.
World Finance: What’s the procedure?
Jonathan Chazkal: So any Belgian tax resident is eligible to file a tax regularisation. A special office is established in Brussels where you can file these demands.
However, some exclusions are to be taken into consideration. This law is only applicable for federal taxes: income tax, professional income, VAT.
Second of all, if you are aware of any judicial or tax investigation against yourself, you cannot apply.
Finally, if the funds that are subject to the tax regularisation find their origin in a non-tax infraction, you will be excluded to file such a tax regularisation at that special office in Brussels.
For more on the automatic exchange of information, please click through to our next video. And please subscribe for more insights from World Finance.
With the pharmaceutical industry under substantial political and public scrutiny, many drug makers are finding themselves forced to justify their pricing methods. The Organisation for Economic Co-operation and Development (OECD) has now added to the debate, releasing a new report criticising the value for money offered by many new drugs.
In the New Health Technologies: Managing Access, Value and Sustainabilityreport, the OECD claims that while the price of newly developed drugs has substantially increased, the relative benefits for patients have not. Additionally, with healthcare’s future focusing on specialised and tailor-made treatments, insurers and public healthcare providers are struggling to afford new and expensive custom medications. For less specialised and more general drugs, the high prices are making it difficult to afford the large volumes required.
There needs to be a rebalancing of power
between the organisations paying for healthcare and
drug manufacturers
The OECD concludes these factors have ultimately made many new drugs poor value for money. One specific example is the price for oncology medication in the US. The cost-per-year gained for patients has quadrupled in less than two decades, and now exceeds $200,000.
Ultimately, the report suggests there needs to be a rebalancing of power between the organisations paying for healthcare and drug manufacturers. This could be achieved through greater transparency and cooperation between the countries and organisations that purchase drugs, using deals like international purchasing agreements.
Another potential solution offered by the report is the adoption of pricing agreements based on the effectiveness of medications, as used in the UK and Italy. This would preserve competition and innovation within the industry, while making sure the pricing of drugs effectively represents their value.
The price of drugs has been a controversial issue recently. A particular example that captured the media’s attention was the price of an EpiPen in the US. After the price surged to over $600 for two doses, public outcry pushed manufacturer Mylan to offer a cheaper generic alternative. The pharmaceutical industry has also been undergoing a transformation, with Reuters predicting Donald Trump’s policies could potentially result in a slew of mergers.
Rich in natural resources, the vast, landlocked nation of Kazakhstan today boasts the largest economy in central Asia. From its enormous oil reserves to its abundance of minerals and metals, the former Soviet republic has incredible economic potential.
Over the past decade, the Kazakh economy has grown rapidly, bolstered by profitable trade with neighbouring Russia and China and heavy investment in the nation’s oil sector. According to the World Bank, the rapid rise in Kazakhstan’s oil production and exports has seen the nation’s GDP per capita increase sixfold since 2002 (see Fig 1), enabling the country to transition from lower-middle income to upper-middle income status in less than two decades.
Despite recovering steadily from the 2008 global financial crisis, Kazakhstan has suffered from a slowdown in economic growth since 2014, as dwindling oil prices and the ongoing fallout from the Ukrainian crisis have negatively impacted the country’s exports. With international sanctions in place against Russia, Kazakhstan’s main trading partner, and the oil market facing an uncertain future, the National Bank of Kazakhstan responded to this economic pressure by devaluing the national currency: the Kazakh tenge was first devalued by 19 percent in February 2014, and was then allowed to float freely in August 2015, resulting in a further 22 percent devaluation.
Yet in the midst of this challenging economic climate, Kazakhstan’s financial services industries have continued to evolve and grow. Over the past two years, the nation has been looking to adapt to a changing financial landscape, and in 2015 the Bloomberg Innovation Index listed Kazakhstan among the world’s top 50 most innovative economies.
Leading the way for innovation in the financial services sector has been the nation’s relatively modest life insurance industry, which has recorded significant growth over the last 10 years. According to the business information service Timetric, the value of Kazakhstan’s life insurance market is expected to more than double from KZT 56.6bn ($169m) in 2013 to a predicted KZT 132.7bn ($396m) in 2018, fuelled by an increase in life expectancy and a growing urban population, among other factors. As the demand for life insurance products grows, the industry is fast becoming of one of Kazakhstan’s most promising financial services.
A new market
Historically, Kazakhstan’s life insurance industry has been modest, making up just a small portion of the nation’s overall insurance market. At present, between eight and nine percent of the population is covered by insurance, marking a relatively low level of penetration.
“In Kazakhstan, the life insurance market is still very new, compared with the insurance industry in Europe, for example”, Oxana Radchenko, Chairman of the Board at JSC Kazkommerts Life, told World Finance. “Only a very small fraction of the population considers private insurance to be a viable tool for financial protection on par with deposits and other investment instruments.”
This trend may, however, be set to change. Demographically, the nation is experiencing something of a transformation, with a rapidly growing urban population. Between 2008 and 2013, migration to the cities saw Kazakhstan’s urban population grow from 57.9 percent to 59.5 percent, with this figure only set to increase. Given urbanisation tends to have a positive effect on life insurance demand, this move towards city living may indeed fuel further growth in the life insurance market. Furthermore, life expectancy in Kazakhstan has been rising steadily in recent years, with the World Health Organisation predicting an updated average life expectancy of 66 years for men and 75 years for women as of 2015. With its people now living for longer, Kazakhstan may also see an increase in demand for life insurance products such as pensions and endowment policies.
As public awareness of life insurance services grows, insurance firms across the nation are looking to create products that are both easy to understand and financially affordable for new customers, in the hope of dispelling the belief life insurance is a non-essential investment. JSC Kazkommerts Life, a subsidiary of Kazakhstan’s largest bank, Kazkommertsbank, has been leading the way for innovation in the life insurance market since it was founded in 2006.
In 2015, the life insurance provider solidified its leading position in the market, completing a merger with the life insurance arm of fellow Kazakh bank, BTA Bank. “This merger was a global event, and a significant moment for the life insurance market as a whole”, Radchenko explained. In bringing together two of the biggest players in the Kazakh life insurance market, the merger has seen the combined company take first place in insurance reserves, and second place for assets, establishing a dominant position in the growing insurance industry.
Digital innovation
While the BTA merger successfully opened Kazkommerts Life up to a host of new customers, the insurance provider is now looking for new ways to engage with a wider client base. In recent years, technology has been transforming the financial services industry, with customers expecting a range of digital banking services and on-demand assistance from their banks as standard.
The value of Kazakhstan’s life insurance market is expected to more than double by 2018
While mobile banking and instant-pay services have changed the face of personal banking as we know it, the life insurance industry has been somewhat slow to digitalise its services. However, Kazkommerts Life has recognised the importance of modernising the life insurance market, and has made the digitalisation of its services one of its key priorities in its future development plan.
According to Radchenko: “Over the coming years, we will be expanding all of the digital services on offer at Kazkommerts Life. As we increase our online potential, our customers will be able to remotely access information about their insurance policies, and will be able to make quick and easy payments from the comfort of their own homes or offices. Our specialists have observed that over the past year more than 50 percent of visitors to our website are using mobile devices and tablets, demonstrating a growing interest in accessing our services remotely.”
Indeed, as potential customers shop around for the best available services, a broad range of digital products can prove to be a decisive factor when they are choosing an insurance company. The company believes its rapidly expanding portfolio of digital services will set Kazkommerts Life apart from its competitors in the market, offering a new style of life insurance that’s compatible with the busy pace of modern life.
In 2016, the insurance provider launched its first online assistance service, allowing customers to receive real-time advice from an expert without having to make a trip to their local branch. In an ongoing effort to offer more time-effective services, the company also provides its customers with a wide range of convenient payment methods, allowing clients to efficiently pay their insurance premiums in a way that suits them.
Thanks to Kazkommerts Life’s updated payment systems, insurance premiums can now be paid online via credit card, or through a network of instant payment terminals, which can be found in most large banks throughout the country.
Ahead of the competition
Although Kazkommerts Life’s new digital strategy has certainly bolstered the company’s position within the market, the insurance provider also benefits from Kazakhstan’s strict regulatory supervision, which has kept competition low. As a result of the nation’s uncompromising requirements, weaker players are simply unable to enter the market. At present, there are just seven companies offering life insurance services in Kazakhstan, giving Kazkommerts Life a significant share of the growing industry.
“Today, Kazkommerts Life is one of the largest life insurance companies in the market”, said Radchenko. “We are the current market leader in cumulative life insurance, signing more than 29,000 insurance agreements in this area. Furthermore, one in every three pension annuity customers are insured with Kazkommerts Life, while the company also holds a leading position in terms of insurance reserves and assets among life insurance companies.”
In addition to these successes, in 2016 the company reported its largest profit to date, and paid out more than KZT 900m ($2.69m) to its customers in the form of dividends from life insurance agreements. Through careful, strategic navigation of the financial landscape following the devaluation of the national currency, the company has managed to remain profitable despite testing economic conditions. In 2016, for the very first time in the history of the life insurance industry in Kazakhstan, Kazkommerts Life was able to pay dividends to its shareholders – an unparalleled success in the face of an adverse economic climate.
As Kazkommerts Life looks towards a promising future, the insurance provider hopes to build on its recent success, continuing to improve the quality of its products and customer service through innovation and digitalisation. As the company ramps up its ambitious development plans, it aims to challenge preconceived ideas about life insurance, showing it to be a practical investment for modern Kazakh citizens.
For many countries, securing inward investment is becoming increasingly difficult in a global economy troubled by low growth and low oil and commodity prices. In this context, countries such as Angola – sub-Saharan Africa’s third-largest economy – have a job on their hands in achieving sustainable growth through economic diversification. At the very heart of this challenge is trust, transparency and reform in financial markets. In recent years, much has already been done, but there remain several critical economic tools that can (and should) be used.
One of the best recognised hurdles is foreign exchange restrictions in the country, a problem that has dogged the national economy and concerned financial markets. The devaluation of the Angolan kwanza and the withdrawal of two major banks’ supply of dollars have made it more difficult for investors to repatriate capital, and more expensive to import essential equipment. It also acts as a psychological barrier to those who may be looking at Africa as a place to invest.
The National Bank of Angola’s decision to shield the kwanza by imposing foreign currency restrictions – while necessary in the short term – has obviously exacerbated this issue. So what should the central bank do now?
A balancing act
There are no easy answers, and the government’s priority must continue to be balancing the need to grow the economy with the need to protect ordinary Angolans from further economic shocks. So far, the government has managed to maintain priority spending on key services and on infrastructure development, alongside opening mega-projects to private equity and PPPs. This has enabled it to maintain a relatively low debt-to-GDP ratio of 36.5 percent in 2015, compared to an average of 48.28 percent over the 2000-15 period and an all-time high of 110 percent in 2000. This should give reassurance to all stakeholders, including aid bodies such as the IMF, that Angola’s economy is in comparatively strong health, given the circumstances.
The new generation of African innovators present opportunities for investors, but they need to be financed
However, the time has come for foreign exchange restrictions to be loosened. This is a fine balancing act, and politics also plays its part. Elections are looming in 2017, and the Angolan Government must demonstrate steely fiscal prudence in the run-up. Inflation must be controlled, which means that any loosening in foreign exchanges needs to happen gradually.
Economic policy must also be accompanied by reform, so as to engender trust from the international community and for the country to increase its competitiveness. Adherence to international best practice is crucial. The war against money laundering has been a particular focus for the central bank in Angola over recent years, most recently issuing an anti-money laundering compliance code in 2015, which reflects the standards issued by the Basel Committee on banking supervision.
All Angolan banks are now mandated by law to issue an annual independently audited report, laying out their actions on implementing Financial Action Task Force (FATF) and Basel standards. In February 2016, as part of its ongoing review of compliance in African nations, FATF recognised Angola’s ‘significant progress’ in improving its anti-money laundering policies and combating the financing of terrorism regime. It also recognised Angola has established a more effective legal and regulatory framework to meet its commitments – a direct response to deficiencies identified by FATF in June 2010 and February 2013. This is an important commitment by the National Bank of Angola in its work towards fostering a strong and transparent financial sector. As a result of these improvements, FATF has now removed Angola from its AML/CFT monitoring process.
The future of Africa
In parallel to regulatory reform, the government has also been working towards incentivising foreign investors by creating a more competitive tax regime, aimed at simplifying the tax system, broadening the tax base and reducing tax evasion. In addition, we have seen Angola’s retail banking sector expand over recent years with banks extending physical branch and ATM access to urban and rural areas, which has helped increase the banked sector of the population. A more diverse range of electronic payment options is now available, providing new opportunities for businesses and ordinary people to access basic financial services, including savings accounts. These moves support social development, as well as help the banks themselves to grow.
These measures are as important in attracting investor confidence as policy and regulatory reform. Private finance is important as it enables the private sector to lead Angola’s economic growth. The continent is experiencing a surge in innovation and support for young entrepreneurs, with initiatives coming from the African Development Bank, World Bank and organisations such as the African Innovation Foundation, which holds a regional innovation competition with prizes of $150,000 for the most innovative ideas. With a young population and so much economic potential, the new generation of African business leaders and innovators present opportunities for investors – but they need to be financed.
The continued fostering of a strong financial sector and a business-friendly environment is critical to encouraging savings and private investment, which will form the basis for private sector-led economic diversification.
In June 2016, the US Treasury Department (hereafter Treasury) and the Internal Revenue Service (IRS) released the much-anticipated final regulations for country-by-country reporting (CbCR). Since the proposed regulations were released in December 2015, the Treasury has received voluminous comments from taxpayers, coalitions, trade and professional associations, tax advisors, non-governmental organisations, social activist groups and religious organisations. Nonetheless, it is apparent that no substantial changes were made as a result of the comments, even as 2016 drew to a close. All told, the final CbCR regulations are generally consistent with the proposed regulations. And so, what follows is a recap of the changes, non-changes and various clarifications included in the final regulations.
Constituent entities
Among the most notable changes and clarifications in the final regulations is, “Constituent Entities/Persons Required to File”. Although no change was made to the proposed definition of “constituent entity”, the final regulations instruct that CbCR information is not required for foreign corporations or partnerships if those entities are not mandated to furnish information under IRC Section 6038(a).
The final rules also clarify that a permanent establishment includes a branch or business establishment of a constituent entity that is treated as a permanent establishment under an income tax convention to which that jurisdiction is a party; liable to tax in the jurisdiction in which it is located; or treated in the same manner for tax purposes as an entity separate from its owner by the owner’s tax jurisdiction. This is in accordance to Treas. Reg. §1.6038-4(b)(3).
Foreign insurance companies that elect to be treated as domestic corporations will be treated as entities resident in the US
In addition to allowing a US territory’s ultimate parent to designate a US business entity as surrogate filer, the final rules also clarify that stateless entities are reported in aggregate, and each stateless entity’s owner, reports its share of revenue and profit in tax jurisdiction of the owner. According to the preamble, this could result in some degree of double counting. Furthermore, distributions from a partnership to a partner are not included in the partner’s revenue, while foreign insurance companies that elect to be treated as domestic corporations will be treated as entities resident in the US. Likewise, decedents’ estates, individual bankruptcy estates and grantor trusts are not subject to CbCR.
Some clarification
The proposed regulations defined a tax jurisdiction as a “country” or a “jurisdiction that is not a country but that has fiscal autonomy”. Though “fiscal autonomy” is not defined, the final rules do clarify that US territories and possessions qualify as tax jurisdictions for the purposes of CbCR. The final rules also clarify that a business entity will not be resident in a tax jurisdiction if the entity is only subject to tax in the jurisdiction by reason of a tax imposed on gross receipts with a reduction for expenses, provided the tax is applied with respect to income from sources or capital situated in the jurisdiction.
Treasury indicated in the regulations that Form 8975 may provide guidance on determining tax jurisdiction in cases where a business entity is resident in more than one tax jurisdiction. One final clarification in this area is an entity is not considered stateless merely because its tax jurisdiction of residence does not impose an income tax on corporations.
It is also important to note that the effective date for compliance has not changed; multinational entities (MNEs) headquartered in the US will need to comply with US CbCR regulations starting with fiscal years that begin on or after June 30, 2016, as reflected in the proposed CbCR regulations. The final regulations unveiled the IRS form number (Form 8975) for CbCR; the due date of Form 8975 remains unchanged and must be filed at the same time as the ultimate parent entity’s income tax return, which includes extensions.
However, what has changed is that Treasury and the IRS plan to soon issue a procedure that will allow for earlier voluntary filing. Such voluntary filing should allay any “secondary reporting” concerns caused by the effective date discrepancy between the US and countries with a January 1, 2016 effective date.
Finally, in spite of comments suggesting that CbC reports be made public, the final regulations still do not provide for public disclosure of CbC reports. In the preamble, Treasury went a step further and reiterated that US MNEs will indeed benefit from confidentiality requirements, safeguards and appropriate use restrictions provided in the competent authority arrangements between the US and foreign jurisdictions.
Final act
Further regulations indicate that the period covered by the CbC report is the period of the ultimate parent entity’s applicable annual financial statement that ends with or within the parent entity’s taxable year. If the parent entity does not prepare annual financial statements, the reporting period covered is the 12-month period that ends on the last day of parent entity’s taxable year.
Data sources were limited to certified financial statements, books and records maintained with respect to each constituent entity, or records used for [reporting] tax
Under the proposed regulations, data sources were limited to certified financial statements, books and records maintained with respect to each constituent entity, or records used for tax reporting purposes. The final regulations, which more closely align with the Organisation for Economic Cooperation and Development’s (OECD) recommendation, offer a more expansive set of data sources, including both regulatory financial statements and internal management accounts.
In the proposed regulations’ definition of revenues, dividend payments were excluded, provided they were also treated as dividends in the jurisdiction of the constituent entity (or payor). The final regulations clarify that this exclusion also applies to imputed earnings and deemed dividends. Moreover, the final regulations indicate that for tax-exempt entities, revenue only includes unrelated business taxable income.
The proposed regulations called for MNEs to report, or reasonably estimate, the total number of employees on a full-time equivalent (FTE) basis (with the option of including independent contractors) in the relevant tax jurisdiction in which they performed work as of the end of the accounting period. The final regulations adopt an approach consistent with the OECD recommendation that employees be reported in the jurisdiction of tax residence of the employer, not where work is performed. The final regulations’ definition of tangible assets was expanded to expressly exclude intangibles and financial assets.
Three readiness questions
The final CbCR requirements add new levels of complexity to tax data management activities; as such, MNE tax departments should now take the time to evaluate how they will respond to CbCR.
Addressing certain questions can help, starting with: can we separate our financial data by-entity and by-country? This may include aggregating financial data by country, converting business unit financial data into legal entity data, separating the data by country, as well as reconciling local statutory statements and local tax returns.
The second pertinent question that MNE tax departments should ask is, do we have control over our data? This involves ensuring that enterprise resource planning (ERP) and related financial and tax-automation systems can organise, consolidate and deliver the data required to populate Form 8975.
Finally, they must ask whether it is necessary to implement new processes and new tax technology. New processes may be required to supplement currently available data, while new technology may also be needed so that MNEs can easily reconcile CbCR data to their audited financial statements, legal entity books, local country tax returns and transfer pricing documentation.
As MNE tax departments engage in evaluating CbCR, they should keep in mind the same prominent details in the final regulations’ preamble: compliance is necessary; a thorough effort is required; and tax data management challenges and risks still loom.
Nancy Manzano, CPA, M.S. Tax Manzano’s expertise includes US federal, state and local corporate income taxation and accounting for income taxes, with a particular focus on tax for the financial services industry. Before joining Vertex Inc to develop new income tax solutions, Manzano served as a Tax Director at 21st Century/Farmers Insurance and MBNA America Bank, as well as Supervising Tax Analyst in the Philadelphia office of KPMG.
On January 16, French lens producer Essilor announced it will merge with Ray-Ban designer, Luxottica, in a deal worth €50bn ($53bn) – creating a powerhouse in the global eyewear market.
[The merger could] substantially shake up the international eyewear industry… with the combined company operat[ing] in over 150 countries
Leonardo Del Vecchio, Chairman of Delfin and Executive Chairman of Luxottica Group, said: “Finally, after 50 years, two products which are naturally complementary, namely frames and lenses, will be designed, manufactured and distributed under the same roof.”
Luxottica, which is based in Milan, is a world leader in the design, manufacture and distribution of glasses – housing internationally recognised brands such as Ray-Ban, Vogue Eyewear and Oakley. Meanwhile, Essilor is a market-leading designer and manufacturer of lenses, boasting a revenue of more than €6.7bn ($7.1bn) in 2015.
Del Vecchio is to become the single largest shareholder, and will share “equal powers” with Essilor’s Chairman and Chief Executive, Hubert Sagnières, according to a press release issued by Essilor. Del Vecchio will hold the official role of executive chairman and CEO while Sagnières will serve as executive vice-chairman and deputy CEO.
The combined firm – operating under the name EssilorLuxottica – is expected to achieve revenue and cost synergies of up to €600m ($635.4m) in the medium term, according to the preliminary analysis published in Essilor’s statement. At present, the combined revenues of the two companies is over €15bn ($15.9bn), and together they employ more than 140,000 people.
The merger aims to take advantage of the fast growing demand in the eyewear market, which is being propelled by increases in corrective glasses, as well as a growing taste for sunglasses. The industry has seen substantial growth over recent years as a result of such trends, with a rapid compound annual growth rate of 2.5 percent predicted between 2015 and 2020.
“Our project has one simple motivation: to better respond to the needs of an immense global population in vision correction and vision protection by bringing together two great companies”, said Sagnières.
The merger can be expected to substantially shake up the international eyewear industry, particularly as the combined company operates in over 150 countries. As such, EssilorLuxottica will be well positioned to seize opportunities generated from an industry that looks set to further expand in the coming years.
The subject of numerous wildly successful films, books and television shows, organised crime has always been a fascination of the general public. Despite the bloody violence that distinguishes such tales, we have long held a strange interest in their unlikely heroes, so enthralled are we by stories of their egocentricity, ruthlessness and lavish lifestyles.
Of course, as with all art, inspiration comes from reality. Though there have been several successful crackdowns on organised crime syndicates over the years – those in Colombia immediately coming to mind – mafioso groups are still very much in play and at large.
While movies may have given us quasiromantic notions about such factions, the truth is organised crime groups cause mayhem, death and destruction. They threaten communities with violence and partake in appalling activities such as human trafficking and extortion. To survive, criminal organisations snare youths – particularly those living in areas with few employment opportunities – thus feeding into a continuous tide of criminality that lasts through the generations. Such criminality seeps into various industries and sectors, bringing forth economic repercussions of global proportions.
Loosely defined
The definition of organised crime is somewhat fluid, but pertains to a group of any number of individuals that is involved in any type of criminal activity. Anonymous syndicates can be based in one region, span an entire country, or can even be dispersed around the globe.
Organised crime groups have a hierarchical structure. They often appear to be legal, but are run in illegal ways
It is quite common for one group – or family, as they are sometimes called – to collaborate with another, particularly in exploits such as drug trafficking between continents. Through such partnerships, organised crime groups have become increasingly complex, and can generate billions of dollars each and every year.
As gangs are often engaged in selling narcotics and firearms, with many also involved in human trafficking, the social impact they have is immeasurable. Further, these organisations often participate in racketeering, money laundering, the sale of counterfeit goods and extortion, meaning they also have a direct effect on their respective economies, which inevitably spills over into the international system as well. This, however, is impossible to accurately quantify.
“It is hard to measure the economic impact of organised crime because it is very hard to collect data on their economic activities. When members of a criminal organisation are arrested, they are generally unwilling to cooperate”, said Nadia Campaniello, an economics lecturer at the University of Essex.
That said, there are methods to tackle this challenge. “One has to come up with clever ways to estimate such impact”, Campaniello told World Finance. “There is one paper by Paolo Pinotti that addresses the issue of the costs imposed in a region by the presence of the mafia. He uses two southern Italian regions, Apulia and Basilicata, as a case study and estimates that the presence of the local mafia has decreased GDP per capita by 16 percent over a period of 30 years. Moreover, he finds that resources have not been reallocated from the formal to the informal economy, but that private capital has been substituted by less productive public investment.”
Though it is difficult to calculate the global impact, there are bodies that attempt to do so – figures, however, are few and far between. In 2009, the United Nations Office on Drugs and Crime (UNODC) estimated that transnational organised crime generates $870bn a year, which is close to around seven percent of the world’s merchandise exports.
Of all the illegal exploits conducted by criminal organisations, drug trafficking remains the most popular and lucrative. UNODC estimates this trade has an annual value of around $320bn, with the global cocaine market earning around $85bn of that sum alone and the estimated global production of opium having reached an all-time high in 2014 (see Fig 1).
Even harder to quantify are the vast sums made from human trafficking, the illegal movement of people for the purpose of sexual exploitation and/or forced labour. In 2014, the International Labour Organisation estimated around 21 million victims are trapped in modern-day slavery, earning the criminals involved roughly $150bn. Meanwhile, UNDOC estimates that, in Europe alone, the trafficking of women and children for sexual exploitation (see Fig 2) brings in around $3bn in revenue each year.
Local impact
Campaniello provided two scenarios when asked about the microeconomic impact organised crime can have. The first involved a local legal business for which a criminal organisation offers ‘services’. “What the mafia does is to offer the business a monopoly or oligopoly by restricting access to the market. Of course, the business has to pay for this kind of protection. This is [noted social scientist] Diego Gambetta’s view of what the mafia does – it offers ‘protection’… from competitors.”
The second involves a legal business that operates on a larger scale in a competitive market, and so cannot be restricted. “In this case, having to pay for protection will make the business’ life very difficult, because it has to pay a hidden tax that its competitors do not have to pay. From the point of view of the consumers, in both scenarios, prices are bound to go up. The consumer surplus drops. The economic welfare decreases”.
It has become increasingly difficult to identify businesses that are linked to mafia groups. This is largely due to the similarities criminal organisations share with legal businesses, including their configuration and the appearance they give to the world. “They have a hierarchical structure and, oftentimes, they appear to be legal, but they are run in illegal ways. They force legal companies to do business with them using the threat of violence”, Campaniello explained.
When violence subsides and feuds die down, it would seem to the outside world that such groups no longer exist – yet exist they do. “Probably the only way to track their activities is to follow the money. That was the famous investigative strategy of Borsellino and Falcone, the two judges who were killed after the maxi processo (maxi trial) against the mafia”, Campaniello continued. “Unfortunately [their] methodology cannot be easily replicated to study the economic impact of organised crime in other areas and for other criminal organisations, because to isolate the causal effect, [they exploited] some historical events and geographical characteristics that are unique and just characterised the areas [they had] investigated.”
Adaptive organisation
As the authorities become more experienced and skilled at tracking down members of organised crime groups, these members become better at eluding the law. “New technologies are an important driver of this increasing sophistication ”, said Campaniello. “In the last few years, we have seen the rising of new types of crime that are difficult to identify, prosecute and measure: cybercrimes, money laundering [and] sophisticated
white-collar crimes.”
$870bn
The estimated value of transnational organised crime
$320bn
The estimated value of the international drug trafficking trade
$85bn
The value of the global cocaine market
21m
people are currently victims of human trafficking
Technological developments have also aided the transnational nature of organised crime, which has become ever more active in recent years. Campaniello used the example of the Italian Mafia, which is known for pouring foreign investment into various countries.
“We also know that with the recent recession and with [the] stock market drop, the mafia has a great advantage because they use cash and they invest in legal businesses the money that they get from illegal activities for money laundering.”
Dealing in illegal waste is another lucrative business for criminal organisations, and it is one that is aided by today’s integrated global economy. Italian mafia group Camorra, for example, frequently wins contracts from governments around the world for toxic waste disposal by underbidding the competition. With the contract in hand, it then disposes of untreated waste illegally in the Italian region of Campania, causing dire environmental damage.
Finally, it would be remiss not to mention perhaps the newest criminal activity, which is being aided by new technology: cybercrime. Though our increasingly digitalised financial, social and political systems may offer us greater efficiency and convenience, they also offer criminals opportunities to engage in fraudulent activities with greater ease and bigger consequences than ever before.
Networks can be maintained and expanded to the furthest corners of the Earth with a click of a button, while financial institutions, individual bank accounts and client databases – no matter how big or small – can be hacked and compromised, earning criminals millions in a very short space of time.
The transportation of illegal firearms is rife among organised crime factions
Structural nuance
The principal differentiator between the biggest criminal organisations is their structures – which is also a major factor in their success. On one end of the spectrum there are highly centralised and structured organisations, the best example being Japan’s Yamaguchi-gumi, known commonly as the Yakuza. On the other, there are decentralised systems in which power is divided among various factions, such as Russia’s Solntsevskaya Bratva. Because of the vast differences between the two, both structures work in different ways to contribute to the success of their criminal enterprises.
The Yakuza owes much of its prosperity to a strict hierarchy that has come to define the group. Jake Adelstein, a writer and an expert on the Yakuza, explained: “This is why the Yamaguchi-gumi has been called Japan’s second largest private equity group by Robert Feldman, an economist at Morgan Stanley. The thugs at the bottom generate revenue, which goes up the franchise pyramid, and the elite invest it in legitimate and illegitimate companies… They are also a meritocracy, where non-Japanese can reach the very top: Korean-Japanese, Taiwanese-Japanese. This has allowed them to attract some very smart people.”
Being so structured, the Yakuza is actually out in the open, and the identities of its members are no secret. “Their headquarters are listed on the national police agency website. They have offices, business cards, fan magazines and comic books about them”, Adelstein told World Finance. The reason for this lack of secrecy is the fact that being a member of the Yamaguchi-gumi is not actually illegal: Japanese authorities believe that in regulating the group instead of banning it they ensure its activities are not driven further underground, which would only increase the level of violence, make the problem bigger, and thus harder to control.
Regulating criminal organisations instead of outright banning them has helped to alleviate the problems they cause socially
Power in the Solntsevskaya Bratva, on the other hand, is highly dispersed, aiding in the anonymity of its members. As such, this group operates in a far more clandestine manner, leaving a far greater trail of destruction wherever it goes.
Campaniello explained: “Whenever the syndicate is decentralised, there is more violence because different groups want to conquer as much ground as possible. This is what happened in the 1930s in the US, in Campania in the 1970s, and in Sicilia in the 1980s.” While bloodbaths are common for the Solntsevskaya Bratva and Camorra, in Japan murders committed by the Yakuza are very rare.
Although the leaders of centralised organisations have much greater control, decentralised systems are more prone to internal feuds and destruction from within. Order is thus better maintained within the Yakuza – in fact, the group operates similarly to a legal company, which also makes it easier to quantify its economic value. In contrast, groups such as Camorra and Solntsevskaya Bratva remain hidden in the shadows, making it incredibly difficult to identify the full extent of their activities and the effect they have both locally and internationally.
Understanding the economic impact of organised crime is imperative in order to tackle an increasingly complex issue that continues to plague the global economy. If international organisations and local governments hope to work together and stamp out transnational illegal activities, there must be greater understanding of how they operate. By understanding the stakes involved for these individuals and the true reasons for their membership, root issues can be identified and, eventually, resolved.
Though in recent years the US has been putting pressure on the Japanese authorities to take a harder stance on the Yakuza, there is something to be said for regulation. Regulating criminal organisations instead of outright banning them has helped to alleviate the problems they cause socially, while also turning the gang into an entity that can be dealt with in a way that is tangible. The Yakuza’s conspicuousness also helps to curb its violence. In stark contrast, the Russian and Italian mafias continue to cause death and destruction, making their influence on society both intimidating and inestimable.
As with any practice, knowledge is power. Keeping organised crime groups above ground may be the best way to tackle their impact, both socially and economically, until a long-term solution is found that will rid the global system of the illegal activities these groups conduct.
Donald Trump’s administration is bullish right out of the gate. He’s chosen a cabinet made up of oil business tycoons like former Exxon chairman Rex Tillerson, so the agenda is clear: boost US big business and jobs. It’s less clear, however, what Trump plans to do about the national debt – currently just shy of $20trn and 103 percent of GDP. The debt is a red flag challenge that has the bulls in the White House lowering their horns for battle.
In the 10 years since the real estate sub-prime and financial crises, US debt has more than doubled. The $700bn it cost to bail out the crippled financial sector in 2008 was just the beginning. A costly – but necessary – quantitative easing (QE) programme supported US treasuries throughout the recession and recovery. QE combined with low interest rates helped to restore investor confidence. The Federal Reserve’s cautious monetary policy nursed the economy through the worst period. But government debt overheated dramatically, going from $9trn in 2007 to nearly $20trn in 2017.
It’s likely that the national
debt will skyrocket under
Trump’s presidency
National debt
It’s likely that the national debt will skyrocket under Trump’s presidency. Trump swears he will “Make America Great Again” through a number of aggressive fiscal policies. He has pledged to accelerate growth and create jobs, wasting no time in rallying his network of mega business owners. During his pre-inauguration conference, Donald Trump said he was proud that Ford had decided to expand its factory in Michigan instead of building one in Mexico. Meanwhile, he is pressing General Motors to build its factories in the US instead of abroad. The president-elect promised that Big Pharma would be pressured into bidding for government contracts, believing this would save billions of dollars over time. In short, Trump wants to run the federal government like a business, and make it more efficient. Trump wants to be the ‘greatest job creator’ ever seen.
The president-elect’s rhetoric is all very well, but common sense says that money – especially debt – speaks louder. Even with savings on government contracts, at some point in the near future, taxes on business and households will have to be increased so the Treasury can service, and even reduce, US debt. This is unlikely to appeal to the Republican agenda of low taxes and less red tape – which is why Trump wants to raise import taxes instead.
The alternative to reducing the national debt is even less appealing. There is a risk of the US losing investor confidence in its bonds. This could lead to a huge rise in the cost of financing the massive debt and the threat of default. The end result: another prolonged recession. This scenario is highly likely if Trump goes ahead with high tariffs on imports from China. There are an increasing number of risks linked to alienating China and the other emerging countries that play a big role in lending to the US.
International trade
As it stands, import tariffs slapped on top of a strong dollar will have a cost of their own. The increasing strength of the dollar and higher interest rates will start pricing US products out of the export markets; meaning lower export revenues. Higher import costs due to increased taxes will increase inflation. This would make goods less affordable for consumers, and reduce importers’ overall revenues. Higher import taxes might bring in money for the US Treasury. But at the same time, reduced demand for exports would mean lower tax revenues from domestic exporters. Nonetheless, it can’t be denied that there is an upside to protectionism for domestic energy companies. If there are increased taxes on imported commodities like crude oil, it would increase local demand and revenues for US suppliers. In that case, US companies, like Exxon, would theoretically be able to boost the number of jobs on their payroll.
The increasing strength of the dollar and higher interest rates will start pricing US products out of the export markets
On the market’s side, Trump’s rhetoric has a motivating effect, with Wall Street picking up the bullish tone. Everyone wants to see a return to a strong economy and a move away from the pain of the recent recession. But a return to pre-2007 economic conditions may still be a long way off, especially if Trump’s gamble on protectionism backfires.
The bottom line for investors is that dollar crosses, US share prices and commodity prices still face a period of uncertainty. Gold is likely to remain an attractive hedge, and a great deal depends on GDP performance in the US. The outlook isn’t particularly optimistic. The World Bank forecasts a modest US economic growth of 2.2 percent in 2017. Equally modest is its global growth forecast of 2.8 percent in 2017. This is accompanied by downside risks in emerging and mature economies. Clearly, both local and global supply and demand are still not as bullish as Donald Trump’s rhetoric.
The bulls in the White House are ready to do the kind of mega business that made America great, that much is clear. But calibrating an entire economy is a challenge on a much larger scale – especially one that’s only just back on the road to growth. Until Trump deals with the question of the national debt, investors will have to see it as a significant risk to their portfolios.
According to data released by Spain’s Office of National Statistics on January 13, Spanish inflation jumped to a three-year high in December 2016. The annual change in the consumer price index reached 1.6 percent in December, up 0.9 percent from the previous month. Meanwhile, the annual change in the Harmonised Index of Consumer Prices hit 1.4 percent – a substantial boost on the below zero figures posted in the last two years.
[Spain] has continued to struggle with high unemployment levels since the Global Financial Recession
The nation has continued to struggle with high unemployment levels since the Global Financial Recession, with rates currently around 19 percent. While wage pressures remain low, inflation has seen a boost as a result of rises in the cost of travel and housing.
The European Central Bank’s (ECB) recent decision to maintain a loose monetary policy and extend its stimulus programme is likely to be a key factor in supporting inflation across the eurozone – which is currently at a three-year high of 1.1 percent. However, the ECB’s target of just under 2 percent remains distant.
When ECB President, Mario Draghi, announced the policy in December, he signalled the stimulus programme could be extended – in either size or duration – should the outlook turn “less favourable”. However, the prospect of Spain or the wider eurozone being hit by high inflation is unlikely. When asked whether the ECB might reduce the size of the programme should developments fair better than expected, Draghi all but dismissed this possibility: “We haven’t discussed that at all today. We seem to be fairly far away from any such high-class problem.”
Governing Council member, Francois Villeroy de Galhau, reaffirmed this view on January 12, telling Bloomberg: “Some people seem to be worried about a return of inflation… that’s greatly exaggerated.”
“Assessing and reporting major risks does not mean becoming involved in politics; rather, it would be political to suppress important judgments”
Mark Carney
Mark Carney’s departure from the Bank of England looks to be a much less celebratory affair than his initial appointment to the role. When it was announced he would take over the position in 2012, he was lauded as “the outstanding central banker of his generation” by then-Chancellor of the Exchequer George Osborne. Since then, many have come to view him much less favourably.
Carney’s fall from grace appears to be yet another consequence of the UK’s decision to leave the European Union. While the timeline for the withdrawal process remains elusive – if even guaranteed – the vote in June last year has already claimed its fair share of political causalities. Former Prime Minister David Cameron resigned immediately after the vote, while key figures of his cabinet were soon culled from office by his replacement, Theresa May.
Carney is another victim of the vote, albeit delayed. While not forced out by Brexit itself, the referendum and the politics surrounding it changed the feeling towards him and the style of administration he represents. Carney has now confirmed he will be leaving his post as the Governor of the Bank of England in June 2019.
Before the bank
Born in the Northwest Territories of Canada in 1965, Carney carved out a long career in the world of economics and finance. Although he attended high school in his native Canada, he pursued his higher education south of the border, in the US. In 1988, he graduated with honours from Harvard University, having majored in economics, before crossing the Atlantic to attend another elite, English-speaking university: Oxford. Through the early 1990s he pursued first a master’s degree and then a doctorate, both in economics, from St Peter’s College, Oxford.
With the conclusion of his studies, he first pursued a career in the private sector, working for Goldman Sachs. His 13 years at the firm took him all over the world, working in Tokyo, London and Toronto. His various roles saw him involved in the process of bringing post-apartheid South Africa to the international bond market, as well as guiding post-Soviet Russia through its 1998 financial crisis.
Many celebrated his appointment… yet, after Carney dared to wade into the divisive politics of 2016, his popularity soon waned
Carney, however, soon departed from the world of private finance. In 2003, he became the Deputy Governor of the Bank of Canada, and between November 2004 and October 2007 he served as Senior Associate Deputy Minister and G7 Deputy at the Canadian Department of Finance. In 2008, he went on to serve as the Governor of the Bank of Canada, before leaving the role in 2012 and assuming his current position as Governor of the Bank of England.
Many celebrated his appointment at the time – yet, after Carney dared to wade into the divisive politics of 2016, his popularity soon waned. Over the space of a year, he went from someone generally viewed inoffensively, to the subject of mounting political attack. Leaving the EU, he claimed, would result in the UK seeing two consecutive quarters of negative growth. According to James Bartholomew, writing in The Spectator: “He appeared to be going beyond any formal Bank of England forecast. Effectively he was supporting the Remain campaign by backing ‘project fear’. He gave up the political neutrality expected of governors.”
Brexit bother
Carney has always maintained he had not broken central bank independence, claiming his warnings on the potential outcome of a British withdrawal from the European Union were just a part of his job; he had a duty to inform the public of the likely results of such a momentous decision. Yet, if a Bank of England governor were to offer up his prognosis of a political party manifesto in an election, it would be classed as a serious offense and breach of central bank independence. Surely, some argued, Carney’s actions were no different.
Carney defended himself by saying the UK’s EU referendum was different from a general election; it was a “single binary decision”. He argued: “As with the Scottish [independence] referendum, we will communicate as much as is prudent about those plans in advance of any risk materialising and as comprehensively as possible once risks have dissipated.” Speaking to a House of Lords committee before the EU referendum, he noted: “Assessing and reporting major risks does not mean becoming involved in politics; rather, it would be political to suppress important judgments.”
Yet for many, Carney’s foray into politics cast a dark shadow over the Bank of England. Most vocal in his condemnation was the Conservative MP Jacob Rees-Mogg. In a Treasury Committee meeting soon after the referendum, Rees-Mogg – a well-known Eurosceptic – suggested Carney had damaged the reputation of the Bank of England by making forecasts concerning the economic consequences of Brexit: “Did the Bank of England consider whether it was in the public interest to risk its reputation for impartiality?” Carney attempted to brush off the attack by noting that those who had criticised his handling of Bank of England policy before the referendum should “consider their own motivations and their judgements”.
[Mark Carney’s] departure will come at the same time as the UK’s departure from the EU… the date is, in many ways, symbolic
Yet Carney’s foray into this divisive political question cannot be named the single cause of his being cast out of favour. The politics that is often seen as having driven the Leave campaign is at odds with Carney’s views: a through-and-through technocrat, his expert-style managerialism and post-national ethos is out of step with the new political environment in which the UK finds itself.
Central bankers are supposed to be independent; free from politics, adhering only to a strict doctrine of technocratic management. Many have often dismissed this as fantasy, but of late the very foundations of central bank independence appear to be cracking.
Independence no more
Since 1997, the Bank of England has officially enjoyed political independence. Indeed, this independence is a part of the reason a non-national such as Carney was able to hold the role without controversy. But now, both in the UK and beyond, this doctrine is coming under fire. Central bank independence is increasingly questioned, and, as a result, the very sort of central banker Carney was once lauded as may no longer be the ‘ideal type’. If Carney really is the outstanding central banker of his generation, as Osborne proclaimed upon his appointment, then his generation’s understanding and practice of central banking comes under question, and so too will Carney’s
own reputation.
In the case of the UK, the clearest example of central bank independence being undermined has been carried out by Prime Minster Theresa May. Speaking at the Conservative Party’s annual conference, the newly crowned prime minister decried low interest rates as working in the benefit of already-wealthy asset owners, driving inequality. With Carney’s Bank of England a steadfast defender of loose monetary policy, it could only be interpreted as a dig at him and his role as the bank’s governor. In the same speech, May also criticised the arrogance of the supposed “international elite”. The post-national idea of being a ‘global citizen’ was ridiculed: “If you believe are a citizen of everywhere, you are a citizen of nowhere.”
In a world where citizenship and national loyalty once again matter, questions have been raised over the viability of a non-national acting in such an important national role. However, as long as the idea of central bank independence is adhered to or believed in – and while it is accepted a governor is just a technocratic manager, making his or her decision on a purely objective basis – nationality should not matter.
Changing winds
Writing in The Telegraph, William Hague, the one-time Conservative Party leader and former Foreign Secretary, argued: “Central bankers have collectively lost the plot. They must raise interest rates, or face their doom.” Even the architect of the UK’s central banking independence is reviewing the issue: Ed Balls, the erstwhile advisor to Gordon Brown and former Shadow Chancellor, has, alongside Anna Stansbury and James Howat of Harvard University, argued the Bank of England needs greater political oversight to ensure it does not fall victim to groupthink.
Mark Carney in numbers:
2012
The year Carney was appointed Governor of the Bank of England
1st
non-Briton to take the position in the bank’s history
$900,000
Carney’s estimated annual salary
$5m
Carney’s estimated net worth
They claimed: “After the centralisation of prudential regulation – both of the micro and macro variety – and systemic risk monitoring inside the Bank of England, there is a danger that the UK money-credit constitution is too concentrated in the central bank, leading to the possibility of groupthink, a lack of oversight and ultimately risks to central bank independence.”
Internationally, too, the trend is for politicians to either question or outright ignore the doctrine of central bank independence. In September, the German Parliament heavily criticised the European Central Bank’s (ECB) Mario Draghi over the wisdom of his bank’s negative interest rate policy. Even the German finance minister questioned the central banker’s decisions. Bloomberg noted at the time: “Finance Minister Wolfgang Schaeuble, the most prominent member of Chancellor Angela Merkel’s government to question ECB policies, has criticised the impact of low rates and suggested that Draghi shares the blame for the rise of the populist Alternative for Germany Party. Schaeuble told lawmakers in the lower house, or Bundestag, to push Draghi to defend the ECB’s policies.”
During the US presidential campaign, Donald Trump also attacked the US central bank’s independence. He regularly chastised the chair of the Federal Reserve, Janet Yellen, for keeping interest rates low. At one point he said she should be ashamed for the Fed’s low interest rate policy, accusing her of creating a false economy. Going one step further by questioning not only the doctrine of central bank independence but its very practice, Trump at one point accused Yellen of working with President Barack Obama in some sort of conspiracy.
The future for Carney
While Theresa May’s jibe over international citizenship was not explicitly directed at Carney, the Canadian governor must have felt its impact – and adding insult to injury was the fact his very policy was also attacked in the same speech. In what must have felt like a general loss of confidence in his ability to function in a post-Brexit world, it was rumoured Carney had seriously toyed with the decision to step down. Indeed, many media outlets urged him to do just that.
Although he has not bowed to pressure to leave his post early, his departure will come at the same time as (according to UK Government’s ambiguous plans) the UK’s departure from the EU in the first half of 2019. While having a practical reason (Carney stressed the importance of maintaining continuity during the exit negotiations), the date is, in many ways, symbolic.
Carney is now operating in a world that is increasingly turning against the values he represents and holds: a technocrat who disavows ideology; a transnational figure who feels citizenship in one state doesn’t preclude service to another; an expert who imagines himself to be engaged in science, not politics; an appointed official who feels he should be insulated from the passions of public opinion. As a Davos man in a world where the values of Davos are increasingly sneered at or attacked by electorates, Mark Carney is now set to have his own personal Brexit.
Curriculum Vitae
Born: 1965, Fort Smith, Canada | Education: Harvard University
1965
Carney was born in Fort Smith in the Northwest Territories, Canada. He attended high school in Alberta before moving to the US to study economics at Harvard University.
2004
Following 13 years working at Goldman Sachs, Carney served as Senior Associate Deputy Minister and G7 Deputy at the Canadian Department of Finance from 2004 to 2007.
2008
After working as an advisor to the retiring Governor of the Bank of Canada for several months, Carney took up the position himself in February 2008, serving in the midst of the financial crisis.
2011
Carney took up the part-time role of Chairman of the Financial Stability Board. He credited his appointment at the international body to “the strong reputation of Canada’s financial system”.
2012
In November, George Osborne announced Carney would be the next Governor of the Bank of England; Carney would be the first non-Briton to hold the post.
2016
After being accused of making pro-Remain remarks during the UK’s Brexit campaign, Carney announced he would be stepping down from his position at the Bank of England in 2019.
In the 21st century, the US housing market has both been one of the key drivers of economic growth and one of the major causes of the economic misery of millions. High household prices fuelled a construction boom and a lending boom gave the 2000s strong growth and prosperity, while the post-2007 collapse has led to a stagnant 2010s. The collapse of the housing market resulted in a nationwide wave of housing foreclosure, while creating a knock-on effect for the rest of the economy.
Great Recession
The sources of the pain caused during the 2007-08 financial crisis are many. Those on the left lambast financial market deregulation, while those on the right aim fire at Alan Greenspan’s loose credit policies. Some blame the moral failings of banks, while others see institutional faults. There are an untold number of explanations for the cause and source of the crisis.
[The shared responsibility mortgage] would protect against the sharp downturn in aggregate demand that follow falls in the housing market
However, the central role played by the collapse of the housing market, and its ability to tank the rest of the economy, has many raising questions over the nature of the mortgage industry and how it can be reformed. Rather than repeat well-worn desires for more regulation or less, depending on one’s position on the political spectrum, many are now proposing the creation of a new type of mortgage: the shared responsibility mortgage (SRM).
Weak architecture
According to the Princeton economist Atif Mian in his testimony to the Committee on Banking, Housing and Urban Affairs in 2013: “The key weakness of our financial architecture today is the inability of standard mortgage contracts to adjust to a changing macro environment.” It is this issue, it is hoped, the SRM model might remedy. As Mian noted, this could be achieved with “two relatively minor adjustments to the standard 30-year fixed-rate mortgage”.
To illustrate the matter, Mian gave the example of a homeowner who purchases a $100,000 home using a $80,000 mortgage. In times of a dip in the housing market, the price of the house could fall to $80,000, “but the interest payments on the mortgage and the mortgage balance remain the same”. In the worst cases, this can lead to homeowners finding themselves in negative equity. Ultimately, due to a fall in household wealth, such homeowners end up spending less, and this results in a fall in aggregate demand, sending “the economy into a tailspin”.
Share the load
The alternative, Mian and co-author Amir Sufi argued in an article for the Washington Centre for Equitable Growth, is the SRM. “In this mortgage, the principal balance of the mortgage and the interest payments are linked to a local house price index that measures the average value of houses in the zip code of the purchased home.” Therefore, if house prices in the neighbourhood fall, “the principal balance and interest payments automatically adjust downward”. This would provide relief to homeowners’ mortgage payments exactly at the time when it is needed most.
This, the authors contended, would protect against the sharp downturn in aggregate demand that follow falls in the housing market. While a crash in the housing market will have other knock-on effects, such as reduced employment in the construction industry and ancillary industries, SRMs will go some way to alleviating these effects, whereas standard mortgages tend to aggravate them. “Had such mortgages been in place when house prices collapsed, the Great Recession in the US would not have been ‘great’ at all”, Mian and Sufi argued. “It would have been a garden variety downturn with many fewer jobs lost.” At least that’s what the proponents of SRM argue. Whether or not it will work as well in practice is yet to be seen.
Yet in the midst of this challenging economic climate, Kazakhstan’s financial services industries have continued to evolve and grow. Over the past two years, the nation has been looking to adapt to a changing financial landscape, and in 2015 the Bloomberg Innovation Index listed Kazakhstan among the world’s top 50 most innovative economies.
Though it is difficult to calculate the global impact, there are bodies that attempt to do so – figures, however, are few and far between. In 2009, the United Nations Office on Drugs and Crime (UNODC) estimated that transnational organised crime generates $870bn a year, which is close to around seven percent of the world’s merchandise exports.
