Just a few years ago, the idea would send shivers through the market. Raising the debt ceiling prescribed by the Stability and Growth Pact, a set of rules governing the eurozone, from 60 percent to 100 percent of GDP would spark a new round of questions over the solvency of highly indebted countries such as Greece and Italy. And yet, it came from the most unlikely source: the European Stability Mechanism, an institution tasked with supporting eurozone members under financial distress.
Faced with a pandemic that sent debt levels to unprecedented heights, the eurozone has launched a consultation process to revise rules hitherto seen as sacrosanct, particularly among fiscally frugal northern members. However, the idea of overhauling the debt ceiling still faces an uphill task to be adopted. “It’s a politically ‘feel-good’ measure, but it would change neither the existing level of debt nor the fact that interest rates have to remain low for it to be sustainable,” said Rui Soares, an investment analyst at FAM Frankfurt Asset Management.
Europe’s debt conundrum
Eurozone budget rules were suspended during the pandemic to offer governments some leeway to deal with the impact of lockdowns, but will come back into force in 2023. However, the crisis has brought even more radical ideas to the table. In November 2020, Riccardo Fraccaro, an aide to the then Italian Prime Minister Giuseppe Conte, suggested that the European Central Bank (ECB) should cancel government bonds it bought during the pandemic, effectively writing off a large chunk of sovereign debt. The idea was picked up by a group of prominent economists and politicians who argued in an article published by Euractiv that debt forgiveness of ECB-held sovereign debt would provide fiscal space for a quick and green-orientated recovery. “The post-Covid era must not be a return to what was ‘normal’ before the crisis, but a profound transformation that the current stimulus programmes do not guarantee,” Jézabel Couppey-Soubeyran, an economist at Panthéon-Sorbonne University and one of the article’s signatories, told World Finance.
Proponents of debt cancellation invoke the massive bailouts of private banks during the global financial crisis in the early 2010s as a precedent that justifies a sovereign debt write-off of similar magnitude. However, it is another crisis that still haunts European policymakers. Those who still remember the long saga of Greece’s near default in 2015 fear that opening up such a politically fraught debate would be a distraction from Europe’s more acute problems. When ECB President Christine Lagarde was asked about the prospect of debt forgiveness, she starkly dismissed it as a violation of EU treaties: “I don’t even ask myself the question – it’s as simple as that,” she said. Many analysts also note that investors are more worried about historically high levels of private debt, with highly indebted ‘zombie companies’ becoming increasingly vulnerable after the end of pandemic relief programmes. “The problem is not public debt, but high levels of private debt,” Soares said. “Even if you restructure public debt, you can’t normalise monetary policy. If interest rates were to increase significantly, many private borrowers would collapse.”
One reason why debt forgiveness remains controversial is the risk of moral hazard. Europe’s fiscal hawks fear that it would incentivise debt-addicted countries such as Italy, whose public debt surpassed 154 percent of its GDP in 2021, to keep borrowing without implementing necessary reforms. “You have some pressure for the system to reform, which is better to do without debt restructuring. You see it in Greece, Spain and Portugal, whose economies are structurally on a better footing compared to 2010,” Soares said.
Even if you restructure public debt, you can’t normalise monetary policy. If interest rates were to increase significantly, many private borrowers would collapse
At the centre of the debate is the key tool of central banks in tackling growing debt levels: quantitative easing (QE). During the pandemic, the ECB launched a €1.85trn bond-buying programme that is due to expire in March. Its critics argue that QE is a form of indirect financial assistance to states that creates social tensions, as it benefits rich asset holders and causes asset price bubbles. Debt cancellation would help governments increase public investment and allow central banks to taper off QE harmlessly, according to Couppey-Soubeyran. Sceptics retort that extreme times require extreme measures. “The solution is quantitative easing at infinity – keep low interest rates forever,” Soares said, adding: “What is ‘back to normal’? Why wouldn’t the ECB be able to keep quantitative easing forever? Japan’s had quantitative easing for over 25 years and is not going back to the so-called normal.”
Another line of criticism of debt cancellation focuses on its practicality. In an article published last March, several prominent French economists argued that cancelling sovereign debt would be a form of accounting gimmickry that would change little, since it would cancel sovereign bonds already held by national central banks. Governments, they argued, should instead gain fiscal room by taxing high-net-worth citizens and multinationals. “If you were one of the wealthiest people in Europe, you would be happy to see that policymakers want to cancel debt, rather than tax you,” said Anne-Laure Delatte, an economist and researcher at Paris Dauphine University.
America’s student debt crisis
In the US, the pandemic has added a new twist to a debate that has been raging for several decades: what to do with the over $1.7trn of student loans owed by 43 million Americans. The Biden Administration has approved over $9.5bn of student loan relief, allowing borrowers to skip payments, accrued interest and default for approximately two years, with payments expected to restart in February.
However, critics claim that this does not go far enough. During his campaign, Biden supported the idea of student loan forgiveness, but so far he has resisted calls from leftwing Democrats to cancel student debt up to $50,000, stating that he will only support cancellation of loans up to $10,000. Other government officials, including the Secretary of Education Miguel Cardona, have signalled that broader debt forgiveness is still under consideration. Blanket debt forgiveness would be counterproductive, according to Sandy Baum, a senior fellow at the Washington DC-based Centre on Education Data and Policy and author of a book on student debt: “Borrowers with high levels of education generally worked remotely through the pandemic. They are not the people who are struggling economically now. Most borrowers can and should repay the money the federal government gave them to help finance their educational expenditures.”
What makes student debt a political hot potato is its correlation with another issue dominating US politics over the last two years: race. African American graduates owe on average $25,000 more than their white counterparts. “The burden is disproportionately borne by borrowers of colour, especially women who are paid less for the same work and frequently have to drop out of the workforce to provide care. The Biden Administration has also given up on offering free community college in its ‘Build Back Better’ agenda, which could potentially halve the cost of a college degree,” said Elizabeth Shermer, an academic at Loyola University Chicago and author of Indentured Students: How Government-Guaranteed Loans Left Generations Drowning in College Debt.
A tool to tackle climate change
Strangely enough, the pandemic is putting to rest the idea that rising public debt is a problem that has to be addressed at all costs. Many hope that higher inflation will slowly kill it off, as happened with massive levels of debt following WWII. The healthcare crisis has also rekindled the debate on whether there is a specific debt/GDP ratio over which public debt is not sustainable. Although this was assumed to linger around 120 percent during the European sovereign debt crisis, many economists point to massive increases of public debt during the pandemic as proof that chasing specific debt targets is a chimera. At the height of the pandemic last year, eurozone government debt ballooned from an average of 86 percent to close to 100 percent of GDP (see Fig 1); France’s debt is approaching the 120 percent threshold, while even traditionally fiscally prudent countries such as the UK have come close to surpassing 100 percent. “Financial markets are short-sighted and have very short-term memories,” said Delatte. “In the past, many countries have quickly recovered from credit events. There is no empirical evidence about the level of debt/GDP ratio above which public debt is not sustainable.”
What makes the idea of debt restructuring more appealing to those who were until recently opposed to it is the battle against an enemy deemed more dangerous than COVID-19: climate change. The Brussels-based Bruegel think tank found in a recent study that EU countries will need to sacrifice up to one percent of their annual GDP to meet EU goals to cut carbon emissions, justifying changes in EU rules that would exempt green projects from debt calculations. The bloc is also considering a plan to grant developing countries relief from bilateral debts in reward for green investment, including an initiative to forgive $8.5bn of South African debt on the condition that the country will close most of its coal plants. “The world is not getting back to normal,” said Delatte. “We will need more public spending and investment in green innovation to protect citizens against climate change. So the main risk is not taking up more debt, but not spending enough.”
In April 2020, as the impact of the coronavirus crisis took hold, the IMF predicted “the worst recession since the Great Depression.” It stated that “the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around $9trn,” forecasting a global economic contraction of three percent over the year. Two months later, the World Bank said we could expect a 5.2 percent contraction across the world.
In the UK, GDP ended up declining 9.8 percent in 2020, the steepest plunge since records began in 1948, and the biggest in more than 300 years, according to estimates. In the US, the economy shrank by 3.5 percent, marking the worst year since 1946. The average unemployment rate in the country meanwhile hit 8.1 percent – the highest annual rate since the wake of the financial crisis in 2012.
Hope on the horizon
Thanks in large part to vaccine rollouts, the outlook has improved significantly since 2020; in a Global Economic Prospects report in June 2021, the World Bank projected global growth of 5.6 percent this year, indicating the fastest post-recession rebound in 80 years.
Unemployment in the US fell to 4.8 percent in September, and businesses are fast recovering; for the first time since July 2004, half of respondents in a recent McKinsey Global survey said they expected their company’s workforce to grow over the next six months. Those businesses also anticipate being more resilient; nearly three-quarters said their organisations were more prepared for future crises now than they were before the pandemic.
Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale
And the world has learnt a few lessons too, according to Dennis Carroll, Senior Advisor in Global Health Security at the University Research Co. (URC). “The COVID-19 response has shown us that in order to prevent future pandemics, we need to embrace as a core guiding principle the idea that a threat anywhere is a threat everywhere,” he told World Finance. “Only through a coordinated global response will we be able to ensure a newly emerged threat can be stopped before it becomes a pandemic. Addressing issues of trade also cannot be solved at the national level.”
It’s far from over, of course; recovery is unevenly spread, swayed towards countries with greater access to vaccines (90 percent of advanced economies are expected to regain their pre-pandemic per capita income levels by 2022, according to the World Bank report, compared to only a third of EMDEs).
Countries will need to work together to get trade back up and running and deliver vaccines to a larger portion of the world if the global economy is to recover on a more even scale. It’s also difficult to predict how the virus will fare in the coming months and beyond. “The recovery is not assured,” reads the World Bank’s report. “The possibility remains that additional COVID-19 waves, further vaccination delays, mounting debt levels, or rising inflationary pressures deliver economic setbacks.”
How exactly things pan out remains to be seen – but while coronavirus might be the biggest pandemic we’ve experienced in our lifetime, it’s not the only one history has witnessed. So what can we learn from previous outbreaks and the economic effects they’ve brought about? From Spanish Influenza to Zika, SARS to Swine Flu, we’ve sought out some of the biggest epidemics and pandemics from the past century, and explored just how much they cost national and global economies at the time.
Spanish Influenza
Timeline: 1918–1920
Origin: Unknown
Considered the deadliest pandemic in history and claiming an estimated 20–50 million victims – while infecting a third of the world’s population – Spanish influenza didn’t only devastate lives; it brought down cities across the globe in a way not dissimilar to COVID-19, with many public places shut down in the US and beyond in early 1919.The pandemic caused widespread labour shortages, exasperated by the fact a disproportionate number of its victims were of working age (15 to 44). Manufacturing output in the US fell by 18 percent, while real GDP per capita dropped 6.2 percent across the globe.In the US, grocery sales fell by a third and sales at merchants and department stores dropped 40–70 percent, according to an article in the Arkansas Gazette in October 1918. A report in the Commercial Appeal meanwhile found that coal mine production in Tennessee had dropped by half.Spreading in three waves in 1918 and 1919, and accelerated by the return of First World War veterans from overseas, the effects on both lives and economies were to last for many years. While the exact numbers are hard to quantify, partly due to a lack of historical data and partly its convergence with the war, the pandemic has since been called the fourth most adverse macroeconomic shock since 1870, after World War II, the Great Depression and World War I.
SARS
Timeline: 2002–2003
Origin: China
Roll on nearly a century – via the Asian Flu of 1957 and the Hong Kong Flu of 1968, among several other outbreaks – and SARS was born. When the virus emerged in China in 2002, rapidly spreading to Australia, Brazil, Canada, China, Hong Kong, South Africa, Spain and the US, concerns over its impact on both lives and economies were immediate. While it was contained within a year, registering around 10,000 infections and less than 1,000 deaths in total, the economic costs were stark. The outbreak reduced global GDP by $33bn, according to the World Bank, while China alone is estimated to have lost around $14.8bn, the US more than $7bn and Canada around $5bn.Airlines were among those hardest hit, with Asia-Pacific airlines losing $6bn on the back of a dramatic drop in the number of business and leisure travellers flying, according to the International Air Transport Association (IATA), and North American carriers registering $1bn in losses. Tourism was another victim; net revenue of Park Place Entertainment, which owns Las Vegas’ Caesar’s Palace and other hotels, tumbled more than 50 percent year-on-year in the second quarter of 2003 as the Asian market slumped, while bars, shopping centres, cinemas and other indoor public places closed in Beijing amid a country-wide lockdown.A 2008 study; The economic impact of SARS: How does the reality match the predictions? concluded that China lost out on an estimated $3.5bn in domestic tourism that year, while Hong Kong’s restaurant sector saw estimated losses of $260m.But authors of the study, Marcus Richard Keogh-Brown and Richard David Smith, are cautious of over-estimating the impact of SARS alone, pointing to other influences at the time that added to the economic burden – not least the conflict in Iraq – and noting the rapid recovery seen after the outbreak ended. “SARS did have a notable effect on certain sectors of some East Asian and the Canadian economies,” they wrote. “However, these losses correspond only to the relatively short period of the disease outbreak, after which consumer confidence returned and many stocks that had diminished were replenished and some purchases which were forgone at the height of the outbreak were made after the perceived risk was reduced.”
That presents some hope for a post-Covid recovery and one that’s already being seen; in June, the World Bank forecasted “the most robust post-recession recovery in 80 years in 2021,” with global growth expected to accelerate 5.6 percent this year thanks to the loosening of restrictions and reopening of venues across the world. How reality plays out in the coming months and years remains to be seen, however.
Swine Flu
Timeline: 2009–2010
Origin: North America
If SARS taught the world lessons in how to mitigate a potential global pandemic, H1N1 – or Swine Flu, named for its origins with North American pigs – was the ultimate test. First documented in Mexico on March 17, 2009, the virus quickly spread throughout the country and the US, circulating the globe in two waves before officially ending in August 2010. The last disease to have been declared a global pandemic by the WHO before the coronavirus crisis, it gave economists a brief insight into the damage COVID-19 could cause – albeit with a less fatal profile, killing an estimated 150,000 to 575,000 people and infecting between 700 million and 1.4 billion across the world.While its convergence with the financial crisis makes its real impact hard to quantify, data from the World Bank estimates that global losses likely totalled somewhere between $45bn and $55bn. Those costs stemmed from multiple factors, including direct costs as well as significant declines in several industries, including food, transport and tourism. Mexico alone registered a million fewer visitors in 2009, according to the data, leading to more than $1bn in lost tourism, while stock markets crashed and economists feared an extension to the global recession. In Canada, the virus is estimated to have cost the economy $1.6bn, according to a 2010 report by the Canadian Institute for Health Information, including $162m in care of hospitalised patients and $40m in emergency department visits. Other estimates put lost GDP in affected countries at between 0.5 percent and 1.5 percent.But preparedness, sparked partly by SARS, helped in containing the virus; the US, UK and Australia closed schools, while Canada witnessed the biggest vaccination programme in its history, investing $400m in buying 50 million doses of the H1N1 vaccine. Those school closures might have been costly – a study in New York found that closures meant at least one adult had to miss work in 17 percent of households – but they likely paid off.Research early on in the outbreak by Warwick McKibbin, a senior fellow at the Brookings Institution, found that a worst-case ‘ultra scenario’ could shave $4trn off the global economy. Thanks in part to efforts against contagion, that didn’t happen. But researchers Patrick Saunders-Hastings and Daniel Krewski warn against complacency. “Overall, the 2009 H1N1 pandemic was a mild, albeit costly, global virus,” they wrote in a study, Reviewing the History of Pandemic Influenza: Understanding Patterns of Emergence and Transmission.“While it has reinforced optimism about pandemic preparedness, it should not necessarily be seen as predictive of future pandemic severity.” And indeed it wasn’t; estimated losses from COVID-19 have already reached the trillions, at least rivalling the ‘ultra scenario’ feared for Swine Flu, and it isn’t over yet. But if it wasn’t for the lessons taught by outbreaks like H1N1, the world might be in a far worse position still.
Ebola
Timeline: 2014
Origin: Guinea
In October 2014, the World Bank said the Ebola outbreak – concentrated in Guinea, Liberia and Sierra Leone – could cost the economy $32.6bn by the end of 2015 in a worst-case scenario. The following month, forecasts had been reined in to $3–4bn, and the following year, total losses were estimated to have been a significantly smaller $2.8bn.But a study published in the Journal of Infectious Diseases in 2018, taking into account social effects and longer-lasting impact as well as the direct losses, put the figure up to a staggering $53bn. It found the biggest losses were for deaths caused by other diseases as Ebola took healthcare resources and hospital beds. Healthcare costs totalled $26m, while mitigation measures came in at $67m.Among the biggest blow, though, was the loss in trade as borders closed (totalling $2.8bn, according to the study). Guinea’s trade with Senegal and Sierra Leone – which relies heavily on cocoa exports – was shut off, while Liberia’s trade with the Ivory Coast was also curtailed. International border closures, flight restrictions (many countries suspended flights to the three worst affected countries) and declines in exports, taxes and business exacerbated the impact. Sierra Leone’s mining industry – the mainstay of the economy, accounting for 75 percent of the country’s 20 percent growth in 2013, according to the IMF – was meanwhile dealt a blow due to restricted movement of workers.While direct costs were clearly unavoidable, what’s interesting is that mitigation measures, restricted movement, border closures and other behaviours driven by concern caused the biggest financial drain, according to the World Bank. “The analysis finds that the largest economic effects of the crisis are not as a result of the direct costs… but rather those resulting from aversion behaviour driven by fear of contagion”, reads a statement in September 2014. “This in turn leads to a fear of association with others and reduces labour force participation, closes places of employment [and] disrupts transportation.”
That’s the central crux of almost every epidemic – the World Bank attributes 80 to 90 percent of the economic impact of recent epidemics to behavioural factors rather than to the diseases themselves. More than 11,000 lives were lost to Ebola, but many more were impacted by its devastating economic toll. That’s a story that clearly rings true in the coronavirus crisis, and striking the balance between saving lives and saving the economy has been one of the biggest debates of our time. Governments will likely need to continue walking a very fine line for years to come.
Zika
Timeline: 2015–2016
Origin: Brazil
In February 2016, the World Health Organisation declared the Zika virus – which began in Brazil and is mosquito-borne – a public health emergency of international concern. The virus, which can cause microcephaly and other congenital conditions in babies of pregnant women, soon spread to the surrounding region and beyond, leading the World Bank to foresee an economic impact of $3.5bn in Latin America and the Caribbean that year. But adding in social impacts, researchers from the John Hopkins Carey Business School put the figure somewhere between $7bn and $18bn.It wasn’t only Latin America and the Caribbean that had cause for concern – a study published in the journal PLOS Neglected Tropical Diseases by Dr Peter Hotez looked at the potential economic toll on the US if the epidemic were to spread. It concluded that costs could range from $183m to more than $1.2bn depending on infection rates in Florida, Alabama, Texas and other southern states at risk. In response to concerns, Obama requested $1.8bn from Congress in federal funding for prevention, $1.1bn of which was authorised.While loss of worker productivity, public perceptions of Zika and the costs of action needed were all taken into account in the World Bank’s estimations, by far the biggest portion once again came from its potential impact on tourism – the analysis predicted a 1.6 percent drop in GDP for countries reliant on overseas visitors, explaining why Mexico, Cuba, the Dominican Republic and Brazil stood to lose the most ($744m, $664m, $318m and $310m respectively, according to the forecasts). Many feared its impact on the Rio Olympics, but the WHO rejected a call to postpone the games on the grounds that it would “not significantly alter” the spread of the virus (and it didn’t; no cases of Zika were reported by foreign visitors following the event). The impact on tourism was smaller than expected as a result; 410,000 foreigners still came for the games – falling only slightly short of the 480,000 originally projected by the Olympic Committee – accounting for seven percent of the country’s annual tourism volume.Tourism to the Caribbean was also less heavily impacted than feared, according to Travel + Leisure magazine editor-in-chief Jacqui Gifford, who put it down to the fact that only a small sector of the market was affected by the virus. “There was a little bit of a dip when it came to the Caribbean and Brazil,” she told CBS News in 2019. “But we’re really talking about a specific market and a specific type of traveller – pregnant women obviously and couples that were thinking of conceiving.”
In the end, the number of cases was significantly smaller than initially feared; from 2015 to 2018, the Americas registered 220,000 confirmed cases and 580,000 suspected cases, according to data from the Pan American Health Organisation and the WHO. That’s compared to initial forecasts of up to four million cases in Latin America and the Caribbean, and up to 117 million globally. Mainland US registered 224 cases in 2016 and only seven in 2017, while Europe escaped unscathed. If that proves anything, it’s that epidemics can be as financially unpredictable as they are potentially devastating – and weighing up potential risk with reality is where the true challenge lies.
Boasting traffic of 750 trains and 25,000 passengers on a typical pre-pandemic day, the city of Salzburg’s award-winning central railway station is a symbol of the revival of rail that promises to gather speed in the next few years. The beneficiary of a massive, 15-year reconstruction project that only ended in 2014, Salzburg Central has been transformed from an impressive but unsuitable monument of mid-19th century, steam-powered rail into a modern transport hub that encourages citizens to jump on a train.
A connection point for long-distance and commuter trains, the station is spread over 18 tracks serving points north and south. Covered mainly by glass roofs, the atmosphere is airy and light. Passengers can while away their time until their train departs in nearly 4,000 square metres of shopping area. And there’s plenty of space, a pre-requisite of the new era of rail. As passengers steadily return to rail travel following the pandemic, the entire rail industry is engaged in a fundamental reform that is transforming stations into people-friendly hubs, applying low-emission technologies and slashing ticket prices in a looming battle with aviation.
And hubs like Salzburg Central are pivotal to the recovery of rail. Authorities all over the world are pouring public funds into stations – many of them historic – that draw people to trains. Turkey’s transport ministry, for instance, has just called tenders for the reopening of a rail link that will take passengers into the historic European terminus of Sirkeci near the Topkapı Palace in Istanbul. Opened in 1872, it was closed in 2013 but will now have a new lease of life. Among many other examples of the revival of great stations, in Paris the long-neglected Gare du Nord, Europe’s busiest station, has finally been approved for a €587m renovation that will bring it into the 21st century. Serving 700,000 passengers a day before the pandemic, the station has been overdue for a remake, but locals, including the city, blocked the rail authorities with a series of legal actions arguing that the project would spoil the surrounding ambience by turning it into a giant shopping mall.
In truth, the Gare du Nord project embraces a fresh view of rail stations that sees them as hubs for the community as well as for transport. The renovation will provide spaces for concerts and rooftop gardens as well as for shopping and offices, along similar lines to Frankfurt and other top-rated hubs like the central stations in Leipzig, Vienna, Amsterdam, and Moscow’s Kazansky.
However, it’s a race against time to have the work done before Paris hosts the 2024 Olympics. It’s a comment on the belated change of attitude towards rail that second-placed St. Pancras in London is housed in a towering historically protected building that would have been pulled down a few years ago and replaced by apartments but for a campaign by conservationists.
Better than air
Driven by concerns about climate change, authorities in many countries are taking unprecedented measures to encourage travel by rail rather than by air. In an action that is certain to be followed by other governments, France is moving to ban flights under two hours, a step that will provide a massive boost to domestic rail travel. The ban is justified by overwhelming evidence of the ecological benefits of rail – numerous studies show that emissions from long-distance rail journeys – approximately two hours or more – are 20 times lower than the average commercial flight. The European Commission would certainly approve of the ban – it declared 2021 to be ‘year of the rail’ and is backing a wide range of projects that are designed to restore trains to their glory days of the early 1900s when the coal-fired steam locomotive, followed by diesel-fuelled trains, transformed travel all over the world. One of the most loved rail journeys of yesteryear, the night train, is making a comeback in Europe on routes between capital cities. Austrian Railways is increasing its Nightjet trips with affordable fares and a wider choice of accommodation including private cabins, while a French start-up, Midnight Trains, plans to open routes from 2024 under the slogan ‘hotel on rails.’
Next stop: hydrogen trains
A technological revolution underpins the revival of rail. Pittsburgh’s Wabtec group has rolled out a battery-electric, hybrid-powered train that reportedly slashes emissions by 11 percent. Hydrogen-powered trains that emit only warm water vapour are already being trialled with promising results – two of them have carried passengers for 180,000km in Germany. In regular operation since 2018, the hydrogen train is the 150-seat Alstom Coradia iLint. Combined, the fuel cell and batteries can power the train to a maximum speed of about 90mph for a range of up to 500 miles.
In the coming years hydrogen fuel cell trains will appear on 10 railways around the world
Zero-emission is the holy grail of rail travel. As Railway Age reported in early 2021, “based on emerging technologies in batteries, hydrogen fuel cells and renewable natural gas, zero-emission is a possibility.” In fact, it could be inevitable. The powerful US Environmental Protection Agency (EPA) and the EU have both mandated much tougher future standards for trains and locomotives. From 2025, the EPA’s tier-5 would force emissions of nitrogen oxide to almost nothing and emissions of particulate matter to absolutely nothing. This is not pie in the sky. “Already today, prototypes and many production locomotives have been manufactured that meet these requirements,” Railway Age reports. “In the coming years hydrogen fuel cell trains will appear on 10 railways around the world. Most of these have already been contracted.”
Taking all the developments into account, it looks inevitable that the major stations will welcome low or zero-emission fleets of trains within the next two to five years as more polluting technology is phased out.
But will the passengers come back in the aftermath of the pandemic? Mobility experts, who are watching developments closely, believe that this is a near certainty, though not as before. Although passenger levels have been creeping up, they remain well below pre-pandemic levels in New York, whose routes were some of the hardest-hit anywhere. The New York Metropolitan Transportation Authority estimates passenger numbers on its two commuter lines in September were down by as much as 70 percent on weekdays. If numbers stay this low, it would be a financial disaster.
But US authorities are working on allaying commuters’ fears by introducing a variety of measures that reduce congestion, such as making thoroughfares one way and managing crowds better on platforms. Many transport-watchers predict that the days of peak commuter congestion could be over as office workers pick their time to go into the city in a trend that would make rail travel more enjoyable. However, fears that commuter travel faces a long-term decline look to be wrong – British research finds that around 70 percent of people expect to return to the office.
Logical logistics
Invisible to the general public, many of the great ports of the world are rapidly adopting rail to shift goods off the wharves as a cleaner alternative to lorries. The booming Port of Valencia in Spain, for instance, sees more than 4,000 trains a year at a rate of 80 convoys a week, all transporting a wide variety of goods in and out of the country. But that’s not good enough for the port authorities. Under a policy called ‘intermodality,’ Valencia is following Rotterdam, Barcelona and other maritime hubs in switching rapidly to rail in order to slash lorry movements, especially for delivery into the hinterland.
“The railway is key in our present and future strategy because it allows us to reduce costs in the logistics chain, to improve the services we offer in the terminals, and to take loads off the roads and put them on the railways,” explained the port’s president Aurelio Martinez, citing trains as crucial in the decarbonisation route targeting zero emissions by 2030. The ports’ transition is backed by shipping giants such as France’s CMA CGM, which has adopted a fundamental strategy called ‘switch to rail.’
Faster than a jet plane
Already rapid before the pandemic, the rate of innovation in rail travel is accelerating. What’s next? Although it’s still an experimental technology, hyperloop travel at speeds of 1,200km per hour could be around the corner. A company called Nevomo in Poland has raised funds to take the first step that would carry passengers at over 400km per hour as early as 2023, slashing the travel time from Gdansk to Krakow, a distance of nearly 600kms, from the current six hours and 10 minutes to little more than 90 minutes. Based on magnetic technology applied to existing tracks, ‘magrail’ is seen by some as the future of all rail transport.
But this may not be what rail travellers want. New research suggests that commuting by rail is good for us and even improves passengers’ work ethic. A project by University College London and the rail industry has found that taking the train significantly improves a passenger’s workday, including their productivity, motivation, cognitive performance and wellbeing. Released in September just as seasonal and peak travel in Britain was on the rise, the study bodes well for rail in the long run.
Move over, millennials: Gen Z is here, and is ready to spend. Generation Z – or those born between the years of 1997 and 2012, for the uninitiated – now account for a staggering 40 percent of consumers worldwide, wielding a mighty global spending power of $200bn a year, according to research carried out by Bloomberg. And with many Gen Zers still living at home, they also influence what their parents are spending money on – to the tune of a cool $3trn per year. No wonder brands are desperate to win over this lucrative new audience.
Every generation is different to the one that came before it, with new characteristics and spending habits. Members of Gen Z are arguably among the first generation of true digital natives, having been exposed to the internet from the very moment that they were old enough to hold a smartphone. But it’s not just their ease at using digital channels that sets Gen Zers apart from generations past – they are also unique in where they choose to spend their time online. Showing far less interest in ‘traditional’ social media sites such as Facebook, members of Gen Z are much more likely to be found scrolling through 15-second videos on TikTok.
All of those 15-second clips quickly add up, however, with 20 percent of Gen Zers reporting that they spend more than five hours per day on the app, according to research carried out by Joy Ventures and getWizer. With young consumers investing so much time into TikTok, the app is fast becoming one of the most potentially lucrative marketing tools that brands have at their disposal, representing a new way to engage with a spend-happy audience.
Gen Zers are now spending more than they did pre-pandemic, with many of these purchases fuelled by online trends and viral videos. Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales – but what is the secret to achieving this coveted 15 seconds of fame?
The TikTok effect
Just four years on from its international launch, TikTok’s influence is undeniable. Even those who are unfamiliar with the app itself will have perhaps felt its impact in the offline world. If you have visited a book shop lately, you may well have seen a stack of books neatly arranged in a designated ‘as seen on TikTok’ section. Or perhaps back in March of this year, you may have found yourself suddenly unable to get your hands on any feta cheese at the local supermarket – well, blame TikTok. A viral ‘feta pasta’ recipe was said to be responsible for causing a global shortage of the popular Greek cheese, as TikTok users quickly cleaned up the dairy aisle in their rush to recreate the dish.
Just one breakout TikTok video can propel a brand to overnight stardom and skyrocketing sales
From feta cheese and books to eye cream and cleaning products, TikTok has the power to make everyday products ‘cool.’ While the app might be best known as the home of funny comedy skits and viral dance routines, there is also a strong consumerist element to TikTok.
Clothing hauls and in-depth product reviews regularly amass millions of views and many thousands of likes, with all of this online engagement very quickly translating into real-life sales. Indeed, 49 percent of TikTok users have confessed to purchasing a product after seeing it reviewed, promoted or advertised on the app, according to a 2021 Adweek survey on consumer behaviour. This gives TikTok users – approximately one billion of them, at the last count – an incredible spending power, and an ability to propel a business to record-breaking sales. Take trendy mochi ball company, Little Moons, for example. After going viral on TikTok, the company saw its sales shoot up by 700 percent in a single week at UK supermarket Tesco, leading its founder, Vivien Wong, to give credit to the app for helping the company to reach sales of £26m in the year to June.
Elsewhere, skincare company Peter Thomas Roth was forced to ramp up production of its eye cream after a product-testing video racked up over 50 million views, causing a surge in demand across the globe. In the fast-moving viral video world, views mean sales, and sales mean success. Simply put, brands can’t afford to dismiss TikTok as just a fad. The video-sharing app is here to stay – even toppling tech behemoth Facebook from the top of the official list of most-downloaded apps for 2020 (see Fig 1). If brands are able to successfully harness the power of TikTok, then the rewards are both plentiful and immediate.
Tapping into the Gen Z mindset
Of course, success is by no means guaranteed for brands seeking TikTok fame. For years now, companies have thrown vast sums of money at social media marketing campaigns, with rather mixed results. When it comes to social media platforms themselves, some have fared better than others – advertising has made Facebook into a trillion-dollar company, for example, while Twitter has famously struggled with monetisation. It has taken much trial and error for social media companies to get their advertising strategy right, and even today, many sites still have much to learn. In just four short years, however, TikTok has managed to establish itself as the social media marketing tool of the future.
According to research carried out by Kantar, users are less likely to perceive ads negatively on TikTok compared to other social media platforms, and find ads on the app to be more trendsetting than those featured on other sites. Significantly, 72 percent of those surveyed said that they felt that ads on TikTok were inspiring, while a further seven in 10 research participants said that they found adverts on the platform to be enjoyable to watch.
But to understand why TikTok ads are seemingly so successful, we first have to consider the app’s main user base: Generation Z.
Firstly, as digital natives, members of Gen Z are familiar with online marketing tools and tactics, and have been from an early age. As such, they are unlikely to be drawn in by ‘traditional’ social media ads, and have a low tolerance for anything that feels hackneyed, derivative or unoriginal. In many ways, Gen Z has seen it all before, and are drawn to fresh takes on advertising – such as the high-energy, informative and experimental ads that can often be found in TikTok feeds.
The second key to success is also linked to Gen Z’s unique position as true digital natives. Coming of age in the internet era, Gen Zers are used to the constant distraction that digital devices offer. It’s no secret that our smartphones are having an impact on our attention spans and our ability to concentrate. In 2015, Microsoft released a study concluding that the average human attention span has shrunk to just eight seconds – down from 12 seconds in the year 2000, making us more distracted than the famously forgetful goldfish.
Increasingly, social media companies have sought to exploit our desire for distraction, designing their feeds to be deliberately addictive to users – the ‘pull-to-refresh’ feature common on many social media apps has been compared to a casino slot machine, in the way that users will pull the metaphorical lever in hopes of a reward. The very nature of TikTok’s platform, which rolls from one short-form video straight into the next, appeals to users accustomed to distraction. In keeping ads both attention-grabbing and, more importantly, short, brands can use TikTok to successfully tap into the splintered attention spans of the permanently online.
The third, and perhaps most important, factor behind TikTok’s marketing success is the way in which ads on the platform successfully appeal to Gen Z’s desire for community and connection. As the most connected generation in history, it is perhaps unsurprising that Gen Zers place a priority on their relationships with others – both offline and online. More than any generation before them, Gen Z are hyper aware of their identity, and are keen to find a tribe with which they belong.
For Gen Zers, products and brands are another way in which they can express their identity and show their belonging to a particular community, making them particularly susceptible to TikTok trends. Viral products and TikTok-famous brands can quickly amass a cult following online – with users quick to purchase any item that will make them feel part of the trend. It doesn’t matter if that trend is cooking, cleaning or reading: the important part is that the purchase brings the user closer to a coveted sense of community.
If brands were ever in any doubt over the influence that TikTok has over consumer behaviour, the evidence is simply overwhelming: videos with the hashtag #TikTokMadeMeBuyIt now boast over 4.6 billion views and counting. For an app that is still so early in its lifespan, it has completely disrupted the world of social media marketing. It’s high time that brands sit up and pay attention to the TikTok phenomenon – well, for 15 seconds or so, at least.
Convoy is a Seattle-based transport technology innovator, working to fix the inefficiencies in one of the largest industries in the US – trucking. Worth an estimated $800bn a year, it is the lynchpin of American logistics – but, explains Convoy’s Juliet Horton, it hasn’t evolved in decades, and is rife with inefficiencies. She outlines Convoy’s approach to disrupting the industry: using automation to match shipper loads with carriers, reducing the number of empty miles travelled, and slashing the carbon cost of trucking.
World Finance: Why is digital transformation so critical for this sector?
Juliet Horton:Thanks for having me, Paul. Trucking is an $800bn a year industry in the US, that powers every aspect of our economy. Something that’s only become more clear in recent years, throughout this global pandemic.
Yet despite how critical this business is, it is riddled with inefficiencies, and hasn’t evolved very much in the last several decades. This is a problem for shippers, because it doesn’t allow them to have full access to the capacity across the country, and as a result doesn’t give them the best prices and the best scheduling options. Conversely for carriers, inefficiencies in this market cost them the ability to find the best jobs that would work for their schedule and allow them to optimise their earnings for themselves.
Secondly this has major consequences for our environment. In the US truckers log 175 billion miles every single year, a third of which are driven empty. That results in 87 million metric tonnes of carbon emitted needlessly into our environment.
So we see this as such a critical industry to innovate in, both for the benefit of our customers, and our environment.
World Finance: You’re creating what you call a digital freight network – what does this mean, and what does it achieve?
Juliet Horton: A digital freight network is an open, fully connected freight marketplace that uses software, automation, and machine learning to streamline every step of the process.
So we’re thinking about building products and services for our customers that hit two key areas that they need. The first is efficiency: that means every aspect of the shipment lifecycle we’re looking to automate and drive efficiency in, and as a result pass our savings along to our customers.
The second piece is around transparency. This means giving shippers better insights into the health of their network, the status of their shipments, and allowing them to most efficiently run their businesses. And for carriers that means giving them the transparency into every opportunity that exists in their market for them to optimise their schedules and earn as much as possible for themselves.
We see our business as a flywheel, meaning that we can become more efficient the bigger that we get. The more shippers we bring into our network, the more loads that are available for carriers: that attracts more carriers onto our network, and the more truck drivers that we have available, the more likely we are to match that load to the best driver at the best price possible, saving shippers money.
World Finance: How does your technology actually achieve that efficiency and transparency?
Juliet Horton:We’re using technology in two key ways. The first is to automate every necessary step of a shipment lifecycle. So when you think about everything that has to happen from when a producer creates a good before it gets into the hands of consumers, there are countless steps in that process. And we’re looking to automate each and every one of them. Currently we’re able to automate 100 percent of our pricing and matching decisions in our target markets. So we’re looking at everything that has to be done and trying to make it as fast and efficient as possible. And the second way is that we’re building new businesses to rethink how the freight industry works.
One of our businesses is called Convoy Go, which is our drop-and-hook service, that allows us to decouple the loading of a trailer and the transportation of a trailer. This means shippers are able to load up a trailer on their own schedule, at their own convenience. And the carrier only has to be on site to actually transport that trailer.
So there’s less downtime for the carrier, they’re able to fit in more shipments into their schedule and maximise their earnings. And within our Convoy Go network, these are our trailers that we’re able to equip with smart technology. That means we have great insights on the status of shipments that we’re able to send back to the shipper, give them transparency into where everything in their network stands, and allow them to optimise their business.
It is tough being a small and medium enterprise (SME) in Africa, a continent where the SMEs sector is quite fragile. Nothing has exposed the apparent quicksand foundations of the sector more than the COVID-19 pandemic. With the crisis dragging the continent into its first economic recession in 25 years, SMEs bore the brunt with a majority sinking into oblivion. For those that have survived the pangs of the pandemic, rebuilding is bound to be torturous.
“COVID-19 had a knock-on effect for SMEs, forcing many to close or curtail operations,” says Manuel Reyes-Retana, International Finance Corporation (IFC) director for Africa. He adds that although the sector has demonstrated a zeal for resilience with many SMEs finding ways to stay in business, the damage has been substantial with a majority struggling to regain momentum.
For SMEs in Africa, the one challenge that has remained constant, and one that COVID-19 has yet again blatantly exposed, is how lack of access to finance makes the sector vulnerable. In fact, it’s been obvious that SMEs with relatively weak financial muscles have faced the most risk. Experts believe that for the sector to recover and build shock absorbers for long-term survival, adequate access to stress-free financing is paramount.
Hybrid finance is emerging as the ultimate solution in offering to achieve this. In Africa, the concept of combining debt and equity features into a single financial instrument is yet to set down roots. However, on a continent where SMEs are in desperate need of recovery and growth capital, hybrid finance has the potential to accelerate recovery of the sector and offer it a strong foundation going into the future.
“Hybrid financing is a more flexible tool for SMEs,” states Conor Savoy, senior fellow, project on prosperity and development at the Centre for Strategic and International Studies. He adds that development financial institutions (DFIs) have the ability to lead the way in creating financial instruments through which SMEs can access hybrid financing, thus giving the sector a more solid backing to pursue growth. DFIs have proved they can be an important source of equity in developing countries. Some are already investing as much as half of their portfolios in equity. “In exchange for a certain degree of ownership, equity investments provide an essential source of capital for firms without burdening them with loan repayments,” he notes.
Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation. Ironically, they face significant financing gaps that stifle innovation and growth. The World Bank estimates that across emerging markets and developing economies, over 21 million SMEs constitute 45 percent of employment and 33 percent of gross domestic product (GDP). Despite their importance, they are grappling with a $4.5trn credit gap.
In Africa alone, according to the African Development Bank (AfDB), SMEs account for more than 90 percent of businesses and almost 80 percent of employment. Yet, the sector is facing a $421bn financing gap. In retrospect, this means that roughly half of small businesses on the continent cannot access the financing they need. The situation is even worse for micro enterprises, which are mostly informal.
Addressing the SME finance gap
Over the years, bank financing has been the traditional source of external financing for SMEs. Though to the extent banks have tried supporting SMEs, their rigidity in providing credit means that only a few qualify. Banks still cling to the mantra of SMEs being riskier than large firms. In Rwanda, for instance, a country where SMEs face a finance gap of $1.2bn, the share of total bank lending to SMEs stands at 17 percent compared to 60 percent for corporates. What makes this statistic more startling is the fact that SMEs comprise 98 percent of businesses in the country. In other countries like South Africa, Nigeria and Kenya, banks are more comfortable lending to the government, a strategy to stay away from risks associated with SMEs.
“Financial institutions will be more reluctant to provide additional credit to SMEs under the current conditions of COVID-19 given how cumbersome it will be for them to determine the extent and adequacy of collaterals, identify which borrowers are facing longer-term financial difficulties and be able to adequately cover monitoring costs,” states an AfDB report.
In effect, this means that COVID-19 has made it even more difficult for SMEs to access bank financing. Hybrid finance, however, can fill the vacuum. In the developed world, the concept has been instrumental in offering SMEs the lifeblood that has made the sector vibrant and given it the ability to withstand shocks. Instruments like subordinated loans/bonds, silent participations, participating loans, profit participation rights, convertible bonds, bonds with warrants and mezzanine finance provides SMEs with financing packaged in the form of debt and equity.
For SMEs, the packaging of products that are essentially debt with equity-like features comes with many benefits. First, the products are ideal because they allow SMEs to borrow long term and with limited or no collateral. This is because they align the profile of the debt repayments to the profit of the borrower.
Across emerging markets, Africa included, SMEs are the engine for economic growth, job creation and poverty alleviation
Second, the products include clear mentoring that is crucial in helping SMEs successfully run their businesses. For SMEs in Africa, lack of technical capacity is a key factor in the high rate of mortality. Third, and equally important, is the fact that they provide SMEs with stability. This is because the products are better suited for SMEs that have reached a high growth phase.
“We want to make this model replicable and expand it across Africa because of the products’ many benefits, which include diversified sources of funding, lower financing costs, greater flexibility compared to traditional bank loans and improved loan terms and conditions,” notes Reyes-Retana. The need to drive growth of hybrid finance aligns well to IFC’s commitment to being at the forefront of helping SMEs access financing. As of June 30, the financial institution’s committed SME finance portfolio was over $12.3bn worldwide, which represented a growth of 42 percent from financial year 2010. Of this amount, Africa’s portfolio stood at $2.6bn.
The right environment to thrive
Unlike other parts of the world, Africa is facing a herculean task in creating an enabling environment in order to attract hybrid finance. Top on the list is the need for SMEs to formalise their operations. It is near impossible for hybrid finance to flourish in an environment where businesses lack sophisticated financial records and proper governance structures. The fact that a majority of SMEs on the continent are family-owned means that the majority continue to pay lip service to accountability, transparency and governance.
“Making SMEs in Africa more formal is key in helping the sector become more sustainable,” avers Savoy. He adds that formalising the sector is critical in building a wider pool of businesses with the right capabilities to attract hybrid financing. Under the current setup, the available financing is competing for a limited number of companies. The companies become even more unattractive because other credit providers like banks, private equity and microfinance institutions among others are also courting them.
The continent must also resolve the challenge of lack of early stage financing. Hybrid finance is not really designed for startups. In essence, it means that governments and policy makers in Africa must provide financing to SMEs in their early stages and help them get to a point where they have the right structure to attract a blend of debt and equity. This is important considering the high rate of SMEs mortality. In South Africa, Africa’s second largest economy, research has shown that over 70 percent of SMEs fold within the first five to seven years of inception. In Uganda, about a third of new business startups do not go beyond one year of operation.
Another important factor is providing exit channels. Injecting capital in a business for an equity stake is undoubtedly a complex process. Exit opportunities are among the complex factors that investors must consider when assessing the viability of deals. In Africa, however, the tragedy is that the continent does not offer many suitable exit opportunities. Lack of well-developed and vibrant financial markets means that equity investors cannot take the option of an initial public offer (IPO) to exit from a business that has hit the maturity stage.
Work to be done
The state of the financial markets in Africa does not inspire confidence. According to the Absa Africa Financial Markets Index (AFMI) 2021, financial markets across the continent’s 23 top economies continue to score poorly across fundamental pillars like market depth, access to foreign exchange, market transparency, tax and regulatory environment, capacity of local investors, macroeconomic opportunity and enforceability of financial contracts.
“A vibrant capital market is one of the primary issues with equities,” explains Savoy. He adds that foreign investors are often reluctant to take up equity stakes in Africa’s SMEs because stock markets are relatively underdeveloped. This makes it hard to float an IPO and exit. “Deepening of the financial markets is critical because it creates opportunities for equity investors to exit,” he notes. An important aspect of making financial markets more vibrant is building the capacity of local investors, particularly retail investors, to participate in market activities. In a majority of the countries in the Absa index, foreign investors dominate about 70 percent of trading.
It is evident that it will take years before hybrid finance can take root in Africa. However, the enormous financing gap means that SMEs in the continent are in desperate need for additional financing solutions. Given the importance of the sector, it means the continent has little option but to create an environment for debt and equity instruments to thrive.
Starling Bank completed its first acquisition earlier in the summer, giving a strong indication that the fintech soon plans to offer domestic mortgages. Surprisingly though, the purchase was of buy-to-let specialist Fleet Mortgages. If Starling is planning to be the first entirely digital bank to offer mortgages and loans in the UK, why go for a more niche acquisition first – were they just dipping a toe in the water or is there more to it than that?
Starling’s recent 600 percent increased revenue report and doubling of customer numbers demonstrate how firmly it has established itself in the UK’s mainstream money consciousness. Now, it has acquired a mortgage lender and suggested moving into the mortgage lending space. If the bank’s mortgage offerings are as progressive and user-friendly as its app, they will surely see unprecedented uptake. It would also make Starling the first wholly digital mortgage lender, placing them ahead of other digital rivals Monzo and Revolut, and more in line with the traditional high street banks it seeks to better.
If the bank’s mortgage offerings are as progressive and user-friendly as its app, they will surely see unprecedented uptake
Fleet Mortgages’ customer base is professional or semi-professional buy-to-let landlords. Perhaps knowing that the BTL market has become increasingly onerous for landlords in recent years, Starling wishes to offer a simple digital product that makes life easier. Perhaps it knows that its own core customers – adults who lead digital lives – are likely to have multiple streams of income, some of which may come from property.
Whatever the reason, Starling itself has confirmed that the move is part of a wider plan at the bank to expand lending through a mix of strategic forward-flow arrangements, organic lending and targeted M&A activity.
A strategic manoeuvre
Anne Boden, CEO of Starling, said: “The acquisition of Fleet Mortgages is the start of our move into mortgages as an asset class and builds on a number of forward-flow arrangements that we’re doing with leading non-bank lenders.” Moreover, the acquisition of lending facilities and the development of its own capacity to lend on mortgages and take a share of the UK domestic mortgage market will build Starling’s balance sheet and stand it in even better stead for its much-anticipated possible IPO in the next year or two. This had once been rumoured for late 2021, but with the pandemic stalling everyone’s plans, the bank has remained steadfast in its commitment to do banking better, and Boden will not be rushed. No public date for flotation has yet been announced by the bank, but its acquisition activities and expansion of offering such as BaaS for Europe and joint accounts all suggest that the organisation is taking its time to optimise its position before it goes for any flotation.
This goes for both the disruptor tech that made it famous as well as the need for ‘traditional’ banking provisions; ‘Banking. But better,’ as the firm’s strapline goes. Starling’s IPO success will come from three things: first and foremost its tech. It has clearly positioned itself as a technology company and has built its own world-class technology from scratch. This is an incredibly complex and difficult thing to do and having developed this technology and become the market leader, it is rightly proud of its achievements as a disruptor and challenger.
Secondly, in positioning itself as a real bank, not just an app (Starling gained its banking licence in 2014), it gains legitimacy and captures the idea of a traditionally reliable business that will make money for investors. Third, it has enormous appeal to customers due not only to its ease of use and impressive technology, but also due to its ethical credentials. Banking as an industry has somewhat fallen out of favour with young investors at least, and several banks have fallen under fire in recent times due to their investing in industries that in turn fund arms production, climate breakdown, and human trafficking. Traditional funds and individual investors alike are more and more concerned with companies’ business practices and ESG credentials when investing, and Starling has aligned itself with this public mood in its ethics statement.
This should serve to increase confidence further still that any IPO when it does happen will lead to success for the bank. From its beginnings as a disruptor bank, to its slew of ‘best British bank’ awards, TV ads encouraging customers to ‘break free’ from traditional banking, and a brand new sponsorship deal with the UEFA Women’s Euros 2022, Starling is clearly resolute in its goal of ‘Banking. But better.’ A continued focus on M&A activity and optimising its position while growing its ranks of happy customers could be a winning combination. No wonder industry insiders are keen to know when they can muscle in and get a piece of the action.
Once dominated by national space agencies, private companies are revolutionising the technology-constricted space travel industry. Exciting scientific developments are funded by impressive levels of investment: in 2017, 120 venture capital funds put $3.9bn into commercial space companies. While most private aerospace companies are research-focused, a market for sending non-astronauts to space is emerging, as flights become autonomous and no longer require a trained astronaut to operate the craft. This year, the success of the first tourist spaceflights has been a breakthrough.
Whether space tourism can generate enough turnover to make a profit, considering the high costs, is a major barrier to this yet unproven market becoming sustainable. The successful development of reusable launch systems is a big step towards lowering costs enough to make it a viable market: Elon Musk, whose aerospace company SpaceX was founded with this goal in mind, has claimed that “the cost of access to space will be reduced by as much as a factor of 100.” In the next decade, the value of the space industry as a whole is expected to double, from $400bn to $800bn. According to UBS, the space tourism market alone could be worth $3bn by 2030.
New horizons
An important distinction in space tourism is between suborbital spaceflight – which usually peaks approximately 60 miles above sea level at the Kármán line (the boundary between the Earth’s atmosphere and outer space), where passengers experience a view of the Earth and a feeling of weightlessness – and orbital spaceflight, in which a spacecraft ventures beyond the Kármán line and into orbit. Jeff Bezos’ Blue Origin and the Richard Branson-founded Virgin Galactic are both developing suborbital flights.
Blue Origin sent its first crewed mission of private travellers into space in July 2021. The New Shepard rocket – named in honour of Alan Shepard, the first American astronaut to fly into space – is just over 18 metres tall (around the height of a four-storey building), consisting of a booster rocket and a 15 cubic metre pressurised crew capsule. The rocket flies up to the Kármán line and the capsule separates from the booster near the peak of ascent; the former deploys several parachutes to return safely to the Earth’s surface, while the latter undertakes a powered landing.
The flight lasts just 11 minutes and is thought to require one day of training. Blue Origin’s first paying customer was 18-year-old Oliver Daemen, replacing an anonymous buyer who purchased the seat at auction for $28m. As well as Jeff Bezos and his brother Mark, the crew was completed by trained astronaut Wally Funk, who, at 82, became the oldest person to fly to space. Her record was quickly surpassed when, in October, 90-year-old Star Trek actor William Shatner was on board Blue Origin’s second successful crewed flight. It has been reported that Blue Origin has sold almost $100m worth of tickets to tourists for future trips.
While Bezos was expected to be the first of the private space entrepreneurs to board a suborbital flight, he was beaten by Richard Branson. Virgin Galactic is primarily focused on tourism, and the Virgin brand experience is a selling point of Virgin Galactic’s offering, which prioritises photo opportunities and is advertised on luxury experience websites.
For $250,000, a Virgin Galactic space tourist can expect a 90-minute tour after three days of training. Unlike Blue Origin’s New Shepard, SpaceShipTwo – which has been specifically designed for space tourism – is a spaceplane, a class of vehicle intended to function like a fixed-wing aircraft in the Earth’s atmosphere, and like a spacecraft beyond. The spaceplane is carried by WhiteKnightTwo to an altitude of 8.5 miles, where upon release its hybrid rocket motor propels it to the Kármán line before it glides back to Earth.
Virgin Galactic also has plans to revolutionise tourism in another way: by replacing long-haul flights, which usually cruise at an altitude of around seven miles, with high-speed travel via space. UBS predicts that this form of high-speed travel could be a $20bn annual market in 10 years’ time. Virgin Galactic went public in 2019, and has a market cap of $6m. Since it was founded in 2004, Virgin Galactic has raised more than $1bn in funding.
Above and beyond
While both Blue Origin and Virgin Galactic are offering suborbital experiences, Elon Musk has his sights set higher. SpaceX became the first private company to send a spacecraft to the ISS when its unmanned Dragon One docked in 2012, and last year became the first private company to send astronauts to the ISS in Dragon Two. This spacecraft has two variations: Cargo Dragon, an update on Dragon One, and Crew Dragon, which can carry up to seven passengers. While Crew Dragon’s primary function is to transport astronauts to and from the ISS as part of Nasa’s commercial crew programme, it will also be used for space tourism.
In September 2021, SpaceX facilitated the first orbital space flight of only private citizens, in association with payment processing company Shift4. The mission was in aid of raising money for a children’s research hospital in Memphis, Tennessee. Crew members – including Shift4 CEO Jared Isaacman – had extensive training over a six-month period, including a 30-hour simulation in a full-size replica.
Crew Dragon begins its journey atop a Falcon Nine launch vehicle; the two stages of separation occur within minutes of lift off, leaving the capsule on its own in space. The capsule is 9.3 cubic metres, with reconfigurable black racing-style seats in a clean, white interior. Sleek design has been considered alongside comfort and experience as well as function: a touchscreen interface replaces the switchboard; for the September flight, the docking station was replaced with a glass dome to allow its passengers a panoramic view.
The September flight did not dock with the ISS but orbited the Earth for three days, reaching an altitude of 364 miles. During this time, the crew conducted medical tests, including monitoring blood oxygen levels, heart rate and ECG activity, for research into the effect of spaceflight on people who haven’t been carefully screened and benefitted from the extensive training required of professional astronauts.
When you’re a high-net-worth individual, it’s all about being the first, trying something new
If docking with the ISS – which resides around 250 miles from the Earth’s surface and is reached within 24 hours – Crew Dragon can perform this manoeuvre autonomously. Nasa announced that the ISS was open for private space missions in 2019: it is thought to receive $35,000 for each night a tourist spends on the ISS. In partnership with Space Adventures, SpaceX will shuttle tourists to and from the ISS in a joint venture with infrastructure developer Axiom, with each seat coming with an estimated $55m price tag. The long-term plan is for tourists to visit Axiom’s proposed private space station, planned to be completed by 2030. Earlier this year, Axiom announced it received $130m in funding, and suggested that its valuation had surpassed $1bn.
The descent from the ISS takes around two days. Once the capsule re-enters the Earth’s atmosphere, travelling at a speed of around 17,000mph, parachutes deploy to assist a safe splashdown landing in the Atlantic Ocean. SpaceX has raised more than $6bn in equity to date. It has recently been valued at $100bn.
A changing landscape
Blue Origin, Virgin Galactic and SpaceX were all founded in the years following the first space tourist flight in 2001, when entrepreneur Dennis Tito became the first private space traveller. At the time, Nasa was strongly opposed to touristic space travel, objecting to the heightened burden of care placed on crews accompanied by a non-professional. As a result, Tito flew as part of a Russian mission. Daniel Goldin, then Nasa’s administrator, criticised Tito at a government hearing in 2001, claiming that he “does not realise the effort of thousands of people, in the US and Russia, who are working to protect his safety and the safety of everyone else.” On April 28, 2001, the Soyuz TM-32 mission launched with Tito on board; two days later, they docked with the international space station. Tito spent seven days, 20 hours and four minutes in space, orbiting the Earth a total of 128 times. He reportedly paid $20m.
Though much has changed in the 20 years since Tito’s flight, the barrier to entry remains high. For now, space tourism will remain the privilege of the super-rich. A 2020 Cowen survey found that 39 percent of individuals with a net worth of about $5m were interested in Virgin Galactic’s $250,000 space trip, estimating the addressable market to be almost 2.5 million people. “When you’re a high-net-worth individual, it’s all about being the first, trying something new,” Barry Shanks, director of space travel agency RocketBreaks told World Finance.
Infrastructure, from specialised travel agencies such as RocketBreaks to space ports, hotels and space stations like that planned by Axiom, will also be a key part of the landscape of commercial space tourism. Businesses such as RocketBreaks could form an important part of that infrastructure: “With the large amount of different experiences on offer, the need for a specialist travel agent will be a must,” Shanks said. Though COVID-19 saw the slowest quarter for space infrastructure since 2009, last year was the largest on record for investment in infrastructure, reaching over $5bn. In the first quarter of this year, space infrastructure companies raised a combined $3.6bn (see Fig 1).
Despite numerous obstacles, from cost to safety to technological restrictions, space tourism is a sector that is set to develop rapidly over the next decade. “We are finding it’s experiences that matter,” Shanks said. “A voyage into space is a trip of a lifetime that you will never forget.”
“On March 19, 2020, as COVID-19 swept across the world, I challenged everyone at Pfizer to ‘make the impossible possible’: to develop a vaccine more quickly than anyone ever had before.” Those were the words of Albert Bourla, Chief Executive of Pfizer, as he recounted one of the greatest scientific feats in recent history in an article for Harvard Business Review earlier this year. And it worked; under Bourla’s – seemingly demanding, at times bullish – leadership, Pfizer and BioNTech produced one of the world’s most talked-about Covid vaccines in the space of just nine months, smashing the previous record of four years (the mumps vaccine in the 1960s), and slashing the average timeframe of 10 years.
Together with vaccines from the likes of Moderna, AstraZeneca, Johnson & Johnson and other pharma firms, the mRNA jab helped to dramatically reduce Covid-related hospitalisations, pull nations out of lockdown and bring economies across the world back from the brink – all while boosting the company’s profile like never before, and leading to projected sales of $34bn this year alone (on the back of an estimated three billion global doses).
At the same time, Pfizer has continued to home in on other areas of science, putting the focus on innovation and R&D by spinning off certain sectors of the business (namely Upjohn, the unit behind ‘the little blue pill,’ Viagra), and witnessing eight percent growth in operational revenue in products outside of the vaccine in 2020. So who is Bourla, how did the new CEO rally teams across the world to achieve ‘the impossible,’ and what else can we expect from his wider business strategy?
Bourla’s background
Born in Thessaloniki, Greece – a place he still refers to as the “epicentre of his life,” according to Greek Reporter – Bourla apparently didn’t set out to become a businessman. Instead he trained as a veterinarian, graduating with a PhD in reproduction biotechnology from the Aristotle University of Thessaloniki before working briefly as a vet. But in 1993, he accepted a job as Technical Director of the Animal Health division at Pfizer – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.
From there, however, he quickly climbed the ranks. In 2001, he moved to New York to serve as Group Marketing Director for the US, before becoming Area President of Animal Health Europe, Africa and the Middle East in 2006. He then led the company’s off-patent portfolio, and from 2014 headed up its Global Vaccines, Oncology and Consumer Healthcare division, gaining experience that would become instrumental to his success several years later.
From 2016 to 2017 he served as Group President of Pfizer Innovative Health, overseeing R&D in consumer health care, vaccines, immunology and other sectors, and creating the Patient and Health Impact Group – focused on developing solutions for increasing patient access.
In January 2018, he was named Chief Operating Officer, and in January 2019 he became Chief Executive, winning the award for the ‘Preeminent Greek Leader’ in the global pharmaceutical industry by the US Ambassador to Greece a few months later.
Diverse experience
During those 27 years, Bourla said he gained a “patient-first mentality.” Elaborating; “Throughout my career, my focus has always been on the end users of our products, whether they are animals and their caregivers or general consumers,” he wrote in the Harvard Business Review. “I have encouraged the entire organisation to adopt the same patient-first mentality, measuring outcomes by people (or animals) served rather than drugs sold.”
He believes international experience – including positions in New York, Athens, Warsaw, Brussels, Paris and beyond – also helped to shape his outlook. “My exposure to so many cultures, my background as a scientist, and the diversity of roles I had taken on across Pfizer helped prepare me for my new responsibilities, as did my Jewish upbringing in Greece,” he wrote. “Coming from a country that’s a small player on the world stage and being a religious minority taught me to fight for what I believe is right and to never give up.”
Indeed, fighting seems to be in Bourla’s blood; he is a descendent of Thessaloniki’s few Holocaust survivors, and his mother escaped being shot by a firing squad after being captured. “I don’t want it to become folklore because, it may be inspirational or not, but she was the one who was arrested, she was sexually abused, and physically abused at 17, 18 years old,” he told the Financial Times.
That instilled a sense of resilience, according to Bourla. “‘Life is miraculous,’ she told me. ‘I was in front of a firing squad seconds before they pulled the trigger, and I survived [she said]. And look at me now. Nothing is impossible. You can do anything you want.’”
Rob Kaiser, President of Kaiser Leadership Solutions, believes those experiences have indeed helped to define his attitude today. “A history of overcoming personal hardships and a long career of varied and challenging roles helped Bourla to cultivate versatility in his leadership,” he said. “He repeatedly stepped outside his comfort zone and learnt how to do what did not come naturally.”
A ‘new Pfizer’
It’s perhaps that background that also gave Bourla a penchant for challenging the status quo. When he stepped into the CEO role in early 2019, his ambition was to create a more innovation-focused, ‘new Pfizer’ that would put R&D first. As part of that strategy, in July 2019 the company announced plans to combine Upjohn – its off-patent drugs business, behind the likes of Viagra, Lipitor and Chantix – with pharma firm Mylan to form a new spin-off company, Viatris. “With the separation of Upjohn [completed in November 2020], we created a company that was 20 percent smaller but more focused than ever on delivering first-in-class science for the benefit of patients,” Bourla said in the company’s 2020 Annual Review. “We saw the culmination of a bold, decade-long transformation of Pfizer from a large, diversified enterprise to a smaller, science-driven, innovative biopharma company.”
We did not want our decision to be driven by the need for financial returns alone. Saving lives—as many and as soon as possible—would be our top priority
That ‘new Pfizer’ would focus on “cutting-edge science” to prevent and cure serious diseases; a strategy regarded by some as risky (“clearly, it’s higher risk, higher reward,” Bourla told the Financial Times. “But if I felt that R&D was lacking, I wouldn’t have taken that bet. I’m not suicidal.”)
That higher-risk approach differed from his predecessor Ian Read, according to Kaiser. “Read was focused on a strategy of growth through acquisition,” he said. “Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology.” Bourla set out plans to home in on areas such as targeted cancer and gene therapies, and to put a bigger emphasis on digital. The company took on new Chief Digital and Technology Officer, Lidia Fonseca, to lead its tech strategy, and shook up other parts of the leadership team. A new Chief Human Resources Officer was hired “to drive a culture of courage, excellence, equity and joy,” along with four new board members.
The vaccine race
And it was against this backdrop that, just a year later, the company found itself facing both one of the biggest challenges and one of the biggest opportunities in its entire history. “COVID-19 first came onto our radar screen in January 2020, when we began hearing reports of severe respiratory illness and deaths in Wuhan, China,” wrote Bourla in the Harvard Business Review. “By February it was clear that this virus would spread to many parts of the world, and we knew Pfizer would have to play a pivotal role in stopping it.”
The company had already been working with German firm BioNTech since 2018, with the aim of developing a different kind of flu jab using the smaller company’s innovative mRNA technology. No mRNA vaccine had ever been approved before, but the process is quick; to develop a Covid vaccine, BioNTech could theoretically just plug the new virus’s genetic code into the software to synthetically trigger an immune response, instead of having to spend months growing weakened or dormant forms of the virus, as with the traditional method. Researchers did exactly that, and in the space of less than two months, BioNTech had come up with 20 versions of the vaccine. But the firm needed a bigger partner – so the founders called Pfizer on March 1, and on March 16, the collaboration began.
Speeding up the pace
That month, the Pfizer team presented an 18-month plan – a timeline that would be faster than the development of any previous vaccine – but Bourla wanted it to be cut by more than half. “This will not work,” he said, as reported by the Wall Street Journal. “People are dying.” He asked for a vaccine to be ready by October the same year, with the goal of staving off a wave of winter infections. “Everyone knew it would be an enormous, perhaps unattainable, task, but we all knew it was one we were obligated to take on,” wrote Bourla. “We isolated our scientists from financial concerns and freed them from excessive bureaucracy. Our board accepted that this was a high-risk endeavour but understood the significance of success and gave us the leeway to spend as needed,” he continued. “We did not want our decision to be driven by the need for financial returns alone. Saving lives – as many and as soon as possible – would be our top priority.”
To speed things up, Pfizer decided not to use state funding (unlike rival Moderna, which was part-funded by the US and encountered a three-week delay in its own mRNA trial because of federal requests). Self-funding involved significant risk; Bourla told the board they could lose up to $2bn if they failed in their mission, according to Business Insider. And indeed it was a costly endeavour; for a start, Pfizer didn’t have any mRNA kit. The company spent $500m in March to buy and design the equipment, then another $1.4bn on giant, garage-sized machines in April.
Other decisions were taken to help accelerate the process, including running tests on animals and humans simultaneously (as approved by the US Food and Drug Administration and the German regulatory authority) and combining phase two trials (involving hundreds of subjects, and normally lasting one to three years) with phase three trials (up to thousands of people, usually over one to four years). Those decisions paid off. Roll on several months, and on November 8, 2020, during a WebEx call between Bourla and the team, the results came in; the independent committee had “highly” recommended seeking regulatory approval, with phase three trials indicating a vaccine efficacy rate of 95.6 percent. The UK became the first country in the world to authorise use, shortly followed by the US, where the first doses were administered in December – only two months after the October target initially set by Bourla. By the end of the year, Pfizer and BioNTech had released more than 45 million doses.
Demanding leadership
Throughout the process, Bourla was heavily – perhaps unusually, for his position – involved, participating in twice-weekly WebEx calls. Some have pointed to his apparent pushiness on those calls; in June 2020, he told President of Global Supply Mike McDermott that he wanted manufacturing to increase at least 10-fold, with 100 million doses by the end of the year, according to the Wall Street Journal. “Why can’t we make more and why can’t we make it sooner?” Bourla asked – to which McDermott reportedly replied, “what we’re doing already is a miracle. You’re asking for too much.”
The following month, McDermott floated the idea of reining production in to 80 million doses by the end of the year. Bourla reportedly told him to “find a way” to hit the 100 million target. McDermott did, modifying the manufacturing process to produce an extra five million more doses per week. A shortage in raw materials led to a three-week hiccup, however, causing production to be scaled back to 50 million in the end. But 50 million doses by December 2020 – less than a year after the virus was first reported – was a remarkable feat; and one that some believe wouldn’t have been achieved if it wasn’t for Bourla’s pushy, certainly forthright, attitude.
Among them is Kaiser. “Pfizer’s remarkable, record-breaking development of a COVID-19 vaccine is the result of ingenuity, agility, and a relentless CEO who pushed a global team to do more than it thought was possible,” he wrote in an article for Talent Quarterly. “It brings hope to a world desperately in need of it while offering an instructive lesson on the need for demanding leadership – and the versatility it takes to walk that fine line between pushing for more, better and faster for a noble cause, and just being pushy.” Kaiser said what made that approach successful was Bourla’s ability to balance an ability to encourage his teams to go above and beyond with “credibility, strong personal connections and a compelling mission.”
“He had earnt trust and followership and had plenty in the relational bank account to draw from,” Kaiser told World Finance. “He also led with purpose and he kept his ego in check. Literally saving the world is an incredibly powerful way to galvanise an organisation. All of these are key ingredients in crisis leadership.”
Future challenges
If those qualities drove Bourla’s success in helping to bring the world’s first Covid vaccine to market, they might just help him to overcome the next challenges facing Pfizer, too.
Bourla refocused the strategy on organic growth with his expertise in drug discovery and R&D, coupled with a passion for technology
For his job is far from over; while booster shots and continued global demand for Covid jabs are likely to keep the company’s coronavirus business going for some time, Pfizer faces several sticking points moving forward; not least losing patents and market exclusivity on medicines that represent up to $20bn in sales in the latter half of the decade. Top-selling drugs including Lipitor, Chantix and Viagra have already lost their patent protections. In March, stock was trading at roughly the same level as pre-pandemic, as investors waited to see how Pfizer delivered in areas beyond the vaccine.
But Bourla seems well aware of the need to diversify, emphasising the work done in 2020 outside of the jab. “While we invested significant time, resources and brainpower to find medical solutions to the pandemic, tens of thousands of Pfizer colleagues continued to advance equally important work across all of our therapeutic areas,” he wrote in a 2020 letter to shareholders. “We believe that science will win the battle against not only COVID-19, but many other diseases as well.”
Outside of Covid efforts, the company has said it is forecasting new revenues of $15bn by 2025. And alongside gene therapy for rare diseases, immunotherapies and targeted cancer treatments, Pfizer is expanding its vaccine business beyond the coronavirus jab. In June, the FDA approved the company’s next-generation anti-pneumonia vaccine (pneumococcal conjugate), which offers a promising new revenue stream – Pfizer’s previous pneumonia jab, Prevnar 13, brought in nearly $6bn in sales in 2020 – while marking another heroic, life-saving effort under the company’s ‘Breakthroughs that change patients’ lives’ tagline.
And Bourla has spoken about plans to develop the mRNA technology used in the Covid jab to fight other viruses too. “There is a technology that has proven dramatic impact and dramatic potential,” he told the Wall Street Journal. “We are the best positioned company right now to take it to the next step because of our size and our expertise.” He said Pfizer was ready to go it alone with the technology and was increasing its R&D in the sector, hiring at least 50 new employees to help in the mission to produce more mRNA vaccines.
Purposeful vision
How that unfolds in reality, and where the company goes from here, remains to be seen. Kaiser believes the real challenge for Bourla and the wider company will be in remaining “focused and hungry – to neither get complacent with success, nor carried away with a sense of invincibility that can lead to overreach.” But if the past year and a half is anything to go by, Bourla doesn’t look like one for complacency. His approach might have garnered criticism, but it’s hard to refute the achievements made under his leadership – a feat that acts as a testimony to the power of a purposeful vision, and one that is likely to prove inspirational to many in the years to come.
“It took a moon-shot challenge, out-of-the-box thinking, intercompany cooperation, liberation from bureaucracy, and, most of all, hard work from everyone at Pfizer and BioNTech to accomplish what we did in 2020,” Bourla wrote in Harvard Business Review. It also took relentless ambition, sheer determination and undefeatable optimism. Bourla is living proof of the power of a transformative CEO – and if 2020 is anything to go by, something tells us he isn’t quite done in making the “impossible possible” just yet.
In November, McDonald’s began rolling out its McPlant burger in the US, following its launch a month earlier in the UK. The same month, Cadbury introduced its plant bars, while in May, milk alternative Oatly surpassed all expectations with a $1.4bn debut IPO. All of these point to one thing: vegan living is now firmly the province of the mainstream, and it’s opening up a whole raft of opportunities for investors – while simultaneously rocking the food industry at its core.
A recent report by Barclays estimated the alternative meat market could be worth £100bn by 2029 – up from £10bn in 2019 – replacing 10 percent of the global meat industry. Credit Suisse went even further, suggesting its value could hit $1.4trn by 2050. More than 40 percent of consumers in the US now opt for non-dairy milk, according to research by the Plant Based Foods Association and the Good Food Institute, while one in six households choose plant-based meat. That’s led sales growth in vegan meat, dairy and eggs to outpace that of animal products for the third year running in the country.
Joining the bandwagon
It’s not only McDonald’s, Cadbury and Oatly getting in on the trend, of course; research by Mintel found that more than one in 10 meat, fish and poultry launches in the UK are now positioned as meat alternatives. Plant-based California brand Beyond Meat – which collaborated with McDonald’s on its latest vegan addition and is backed by celebrities including Bill Gates and Leonardo DiCaprio – raised $36.8m in net proceeds at its IPO in 2019, with stock prices surging 163 percent on the first day. Kellogg’s vegetarian brand MorningStar Farms is estimated to generate around $450m each year in revenue, while Danone is targeting $6bn in plant-based sales by 2025 and recently bought Earth Island – producer of vegan mayo Vegenaise – following its $12.5bn acquisition of plant-based manufacturer WhiteWave Foods in 2016. IKEA has meanwhile pledged to make half of its restaurant meals plant-based by 2025, while Nestlé has just re-introduced its Garden Gourmet range in the UK in response to growing demand. Aldi, Lidl, Tesco, Sainsbury’s, Unilever and Marks & Spencer are just a few of the other big-name brands to have added vegan sidekicks, counting among the world’s top 10 companies to be investing in the sector, according to Mintel GNPD.
Eco-conscious consumers
The trend is being driven by a number of things – not least environmental issues, according to Sophie Moule of PI Data Metrics, which found a 77 percent increase in online searches for ‘vegan’ from 2018 to 2019. “If we analyse where the spikes are in consumer searches for vegan products, they undoubtedly align with key documentaries being released on Netflix and other streaming platforms,” she told World Finance. “Shows like Cowspiracy: The Sustainability Secret and David Attenborough’s A Life on Our Planet definitely influence people to research what they can do to reduce their impact on growing issues surrounding climate change.”
We need to change what we eat, how much we eat, and how we produce our food
Research by Mintel found that 36 percent of consumers who switched from dairy to plant-based products were indeed driven by environmental concerns, while health and animal welfare were the biggest motivations for those participating in Veganuary. The environmental impact animal rearing can have is no secret; traditional animal farming accounts for around 18 percent of greenhouse emissions and uses 70 percent of the world’s water, according to the Food and Agriculture Organisation of the United Nations (FAO), taking up 47,000sq miles of land each year. A much-quoted study by the University of Oxford declared that veganism was the “single biggest way” to reduce environmental impact and could cut an individual’s carbon footprint from food by up to 73 percent.
Meat demand
Despite this, global meat consumption has grown at an alarming rate in recent decades; according to World In Data, across the globe we now produce more than three times the quantity of meat and more than double the amount of milk compared to 50 years ago. In China, production has surged by more than 10 times, from 7.7m tonnes in 1968 to 88.1m tonnes in 2018, making the country now the world’s biggest meat producer. In the US, production has more than doubled from 20.3m to 46.8m tonnes, while in Brazil it has surged from 2.8m to 29.3m tonnes.
The 2014 documentary, Cowspiracy, explored the impact of animal agriculture on the environment
Many believe these levels are simply impossible to sustain. According to Credit Suisse, current trends combined with an exploding population – expected to hit more than 10 billion by 2050 – could see food-related emissions grow by another 46 percent by 2050, while demand for agricultural land could rise by 49 percent. “This is incompatible with the need to achieve a net-zero emission environment globally by 2050,” wrote the authors. “If we are to meet this goal, we need to change what we eat, how much we eat, and how we produce our food.”
David Yeung, Hong Kong-based co-founder and CEO of Green Monday, agrees. “There’s absolutely no doubt that plant-based is the future, because from the macro point of view, there’s just no way our current way of eating and our current way of consumption can be sustained,” he told World Finance. “So it’s only a matter of time before we shift towards that direction, whether from mainstream consumers, corporates or governments, who I believe will start to make very clear guidance.”
That guidance is starting to trickle out; the BBC recently reported on a leaked UK government research paper that had recommended people “shift dietary habits” towards a plant-based future. The Behavioural Insights Unit, who wrote the paper – which was quickly deleted after publication and highlighted as academic research rather than official policy – reportedly recommended taxing producers or retailers of high-carbon foods to encourage consumers to buy plant-based and local food in a similar way to the sugar tax introduced in 2018.
Cultural barriers
But there are several challenges to overcome before a plant-based future really does become a global phenomenon – not least in China, according to Yeung. “In Hong Kong, the readiness for a more plant-based diet is there,” he said. “But in mainland China, from both a climate change and animal welfare standpoint, the level of awareness is not the same. For many years, people did not have as much access to meat, so it’s kind of a symbol of affluence now, and it’s not immediately easy for the country to change course,” he said.
China currently consumes 28 percent of the world’s meat and half of all its pork, data from the OECD shows, with a meat market worth $86bn. Annual per capita consumption is still significantly below Europe and the US – in the US it was 102kg in 2020, compared with only 26.9kg in China the previous year – meaning there’s potential for consumption in the country to rise even more in the coming years.
China’s government has taken steps to prevent this; in 2016, the state released dietary guidelines to help halve the country’s meat intake with the aim of meeting its goal to become carbon neutral by 2060. Other green shoots are starting to appear – the country’s plant-based market is forecast to grow at 20 to 25 percent annually, according to research by the Good Food Institute, up from an estimated 6.1bn yuan (£675m) in 2018.
But shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set mindset and culture. Research by Mintel found that in China, “consumers still perceive animal protein as a critical part of their daily diet, providing essential nutrition,” for example. That’s not a sentiment unique to China. While many tout the health benefits of a plant-based lifestyle, others point to potential deficiencies in a meat-free diet (in 2016, the German Society for Nutrition even recommended against vegan diets for children, pregnant women and adolescents).
Perhaps partly for these reasons, only 46 percent of over 65-year-olds asked in a study, Older Consumers’ Readiness to Accept Alternative, More Sustainable Protein Sources in the European Union, considered plant-based protein an acceptable alternative to meat protein (and only 12 percent considered it ‘very acceptable’). “The high acceptance to eat meat, dairy and seafood among our sample of older adults underscores the important status of animal-based protein in the habitual Western diet,” wrote the authors. A separate survey in the UK by OnePoll found that the cost and effort associated with plant-based alternatives were among the key barriers to meat-eaters going vegan – alongside simply liking meat too much, which accounted for more than half of responses.
A lab-grown future?
These obstacles suggest that worldwide veganism might still be some way off yet – but there are other sustainable alternatives coming into the limelight. Among the most talked-about of the moment is cultured meat, produced from animal cells in labs, without the need to raise and kill livestock.
Consulting firm AT Kearney estimated that by 2040, 35 percent of the $1.8trn global meat market would be grown in labs (compared to 25 percent being replaced by vegan alternatives). A report by Facts and Factors meanwhile predicted the sector could be worth $248m by 2026, up from $103m in 2020, while the Good Food Institute found the industry experienced its best investment year ever in 2020, with more than $366m in funding received. Consumers are open to the idea, according to research; in a survey published in May by the Foods journal (US and UK Consumer Adoption of Cultivated Meat: A Segmentation Study), 80 percent of respondents in the UK and US said they were either moderately or highly likely to try cultured meat.
There are several challenges to overcome before a plant-based future really does become a global phenomenon
And as with the plant-based trend, big-name companies are getting in on the game. Bloomberg recently reported that Nestlé was in talks with Israeli lab-meat startup Future Meat Technologies (FMT), which famous US meat producer Tyson Foods has already invested in – and which claims to emit 80 percent fewer greenhouse gas emissions than traditional meat production. Nestlé confirmed in a statement to Bloomberg it was indeed evaluating “innovative technologies to produce cultured meat or cultured-meat ingredients with several external partners and startups.”
FMT is far from being the only company scaling up; in February, Israeli firm Aleph Farms hit the headlines for having produced the world’s first ribeye steak through 3D bio-printing. A few months later, the company raised $100m in funding to help bring its beef to market as early as next year – marking one of the industry’s biggest financing rounds to date – with new supporters joining existing investors such as food giant Cargill.
In September, Chinese startup CellX meanwhile unveiled its lab-grown pork and said it was aiming to be producing and selling cultured meat by 2025, while in July, US firm Wildtype opened a pilot plant in San Francisco to produce cell-cultured salmon. The startup plans to open a cell-based sushi restaurant next to the plant and is currently seeking regulatory approval from the US Food and Drug Administration (FDA). Upside Foods – formerly Memphis Meats – also hopes to roll out its lab-grown produce in the US this year pending regulatory approval, and counts Bill Gates, Richard Branson and Cargill among its investors; the company raised $161m in 2020.
Ongoing obstacles
But there are still obstacles to overcome before cultured meat can come to market across the world – not least affordability, practicality and regulation, according to Green Monday’s Yeung. “Because most of these lab-grown products will require bioreactors, how fast can they scale?” he said. “How affordable would the products be? And when will these kinds of products get approved? Those are the key barriers, but I’ve no doubt that ultimately cultured meat could become one of the solutions.”
Some governments have already taken action – in December 2020, Singapore became the world’s first country to give the go-ahead on cultured meat, granting regulatory approval to cell-cultured chicken nuggets made by Californian startup Eat Just.
Private members’ club 1880 soon became the first restaurant on the planet to serve lab-grown meat. And Qatar might soon follow in Singapore’s footsteps; Eat Just is building a cultured meat factory in the country, marking the first of its kind in the Middle East, with $200m in backing by sovereign wealth fund Qatar Investment Authority (QIA). The company said in a statement it was expecting regulatory approval “very soon” and was identifying restaurants in the country where the products could be sold. There’s nothing to say other nations across the globe might not soon start to follow suit.
Impacting agriculture
For many, it’s therefore a case of when, rather than if, both lab-grown and plant-based alternatives start eating their way into the traditional meat market (see Fig 1). Impossible Foods CEO Pat Brown, for example, recently said he wanted the company’s vegan products to replace all animal farming by 2035.
But while that might well bring about huge environmental benefits, what would it mean for the conventional agriculture industry and the people within it? Transitioning to a new dietary model means uprooting one of the world’s biggest sectors from the bottom up – and that impact is not to be undermined.
Indeed the effects are already starting to be felt by farmers in the US, according to Jeri Devereaux of JD Consulting, who specialises in helping farms transition from animal to plant-based agriculture. “As more people embrace a plant-based diet, the effect is experienced in every area of farming and ranching, including the farm owners, their workers, animal truckers and meat and dairy processors,” she said.
“If farmers don’t embrace regenerative measures and diversify their agriculture production to include non-GMO food crops for humans, the reduction in consumption of meat, dairy, chicken and other animal products will absolutely affect their bottom line and their ability to meet new market demands,” she said.
“The USDA’s Economic Research Service found a 22 percent decrease in the consumption of dairy milk beverages from 2000 to 2016, and in the same time period, the consumption of plant-based milk increased by triple digits,” she added. “We are already seeing small family dairies collapsing into bankruptcy along with major producers like Dean Foods and Borden Dairy Company filing for Chapter 11.”
Transition period
The obvious solution for farmers would be to make the transition from animal to plant-based agriculture – but how easy this would be is up for debate. A research paper by the Breakthrough Institute looked at exactly that and found three groups whose livelihoods would be most at risk; those growing soy and corn for animal feed (which accounts for around 95m acres of farmland in the American Midwest, according to the USDA), contract farmers growing pork or poultry, and meatpacking plant workers.
But while the report highlighted several threats, it also found potential new opportunities; animal feed farmers could possibly switch to farming plant-based ingredients such as peas (used in meat substitutes by the likes of Beyond Meat), oats and other products, or continue producing feedstock for cultured meat, for example. Animal farmers could meanwhile still raise small numbers of livestock for cellular agriculture.
There could be several advantages to these changes, according to the report: “First, some of these crops could be more profitable. Second, production could represent a chance for farmers to diversify their income sources, in turn offering greater resilience. Third, because many leguminous crops can be incorporated into rotations with double-cropping, they could represent an additional rather than an alternative source of income.”
Several players in the industry are attempting to help farms make the transition; Cargill has invested around $100m in US pea protein producer Puris, which works with farmers in the US to get its ingredients. In Sweden, Oatly began purchasing oats from a livestock farmer in 2017 that had previously been growing them for animal feed. The company has since worked with several other animal farmers to do the same.
Farming constraints
Yet there are still likely to be significant challenges in making the change, according to Devereaux. “Because of contracts and loans on animals usually tied to production contracts, farmers cannot and should not simply leap from their current business model to new, plant-based models,” she said. Governments could play their part in helping to make the transition – for example by introducing a subsidy system that supports the switch from animal to plant-based farming. The Breakthrough Institute report points to other potential areas of focus, including “regulatory clarity” on alternative-meat products, incentives such as tax credits for rewilding unused land and programmes to support the transition such as “debt forgiveness, compensating for losses incurred, and funding re-training initiatives.”
Even then, however, there are further constraints; geographical factors limit what can actually be grown where, for example. In the US, almonds (often used for plant-based milk) can only grow in warmer regions such as Florida and Southern California, excluding farmers in other parts of the country from getting involved. Contract chicken and pig farmers meanwhile don’t necessarily have enough land to grow the relevant crops. Then there are cultural and psychological barriers. “This will require farmers and ranchers to leave an often generational way of life and an understanding of the business of agriculture,” said Devereaux. “Farmers will need to educate themselves while moving into new product areas and embracing new ideas around farming.”
A sustainable balance
Of course, it’s unlikely conventional farming is going to suddenly disappear overnight – it’s likely to be a gradual transition, and many believe that even as alternatives come to bear, there will always be a place for it. Where pressure is likely to mount, however, is on the way that agriculture is done. Research shows that regenerative agriculture – essentially crops that capture carbon in the soil – can help to limit carbon emissions, and the US is already taking action to encourage these practices. Carbon credits have been introduced under Biden, providing payment to farmers who grow carbon-capturing crops, and other initiatives are currently under discussion.
Meanwhile in the UK, the National Farmers Union has set a goal to achieve net zero carbon emissions from food production by 2040. Deputy President Stuart Roberts is quick to point out that greenhouse gas emissions from beef production in the UK are half that of the global average. “When people buy British meat and dairy they are buying sustainable, local food, often produced in areas where it is difficult to grow other foods,” he told World Finance. “The same cannot always be said for plant-based proteins. People should know that if they want to reduce their carbon footprint at the same time as continuing to enjoy meat and dairy products, they can.”
Demonising agriculture is therefore only one side of the argument; and even plant-based eating can take its environmental toll if it’s not handled carefully and sourced locally. As with everything, there’s no silver bullet to a please-everyone, perfectly sustainable future – but the answer likely lies in striking a balance between moderate, sustainable meat rearing, lab-grown alternatives and plant-based living.
Shifting to a plant-based lifestyle requires more than just accessibility to vegan products – it’s about a change in deep-set mindset and culture
That’s exactly what the EAT Lancet commission set about to do in its science-backed ‘planetary health diet,’ released in 2019 with the goal of feeding a future population of 10 billion, while simultaneously addressing climate change issues. The diet includes cutting global consumption of red meat and sugar by half, while doubling vegetables, fruit, pulses and nuts in a 2,500-calorie-a-day flexitarian model.
While that kind of model might sound like a distant dream, it might be closer than we think. With more and more consumers adopting a flexitarian lifestyle, more and more companies offering vegan options and an ever-greater awareness around both health and environmental issues, it’s not a totally unachievable target – and one we might have no option but to accept in the coming decades as the true impact of an exploding population, a rising global middle class and a current food system that’s impossible to sustain all come to bear.
After the 2020 pandemic lockdowns, 2021 introduced us to Brexit-induced food, fuel and CO2 shortages, ongoing supply chain problems and scarcity of everything from lorry drivers to Christmas turkeys. Like it or not, daily life frequently feels as though it’s coming close to standstill.
As responsible business owners, at what point should we stop mitigating for ‘disasters’ given that you cannot plan for every possible eventuality? COVID-19 has taught us that if a company’s HQ was shut down in an emergency – flooded or targeted by wrongdoers, say – staff can of course find the agility and flexibility to ‘keep calm and carry on’ in the short term. But with wave after wave of nationwide difficulties to tackle in the domestic sphere, perhaps it’s time for bosses to take business continuity planning (BCP) up yet another level.
Take an example from the US. Grim though the thought may be, before the Columbine high school massacre in 1999 it would have been unthinkable to consider that an active shooter situation might need to be covered in a school’s emergency drill procedures. Twenty years later, thanks to the proliferation of extremism of all stripes, a gun accessibility culture that is at odds with the rest of the western world, and crucially, an exponential increase in actual firearm attacks, the sad reality is that now every school in the country has a plan and a drill for if a gunman shows up. Mercifully, the possibility of armed intruders in a US school is still not likely, but it is statistically possible enough that the smart thing to do is to prepare for it. Such preparedness has been a common part of US school life for a generation in the hopes that the worst will never come to pass, but that people will know what to do if it does.
Striking the right balance
New stories about uncommon occurrences becoming possible or even probable beg the question of just how far strategy and governance now need to go to protect businesses from catastrophe. A balance needs to be struck without a doubt, but it is worth asking the question of how long work could – or should – continue as normal if fuel or power supplies take a severe hit. What are the most important aspects of your business, how can you ensure their continued delivery no matter what, and is there a scenario when that is no longer feasible? And it is not only the details of the plan that are important to consider; it is crucial to win the hearts and minds of the staff delivering that service when they might also be facing significant difficulties outside of the job if the worst comes to the worst.
Against the current political and socio-economic landscape, perhaps it is time to review that line, and approach planning for it head on. When the pandemic first struck, it was the businesses without a plan that were left panicking and whose staff were overloaded, trying to navigate lockdowns and stay safe while muddling through their work as best they could.
When the pandemic first struck, it was the businesses without a plan that were left panicking and whose staff were overloaded
Of course, a contract is a contract and we can all be flexible and adapt, changing our lives short term to overcome business road bumps, but what if the country is headed for food shortages or power cuts that last for months on end? Disaster recovery and business continuity are linked, but they are not one and the same. I’d wager that if things really get ugly, not many people would place their employer’s strategic or financial objectives over basic household survival.
Most boardrooms can be crudely divided into ‘hawks’ and ‘doves’; those who take risk with a pinch of salt, and those who are more cautious. But like gas masks being carried in WWII, earthquake and tsunami drills in Pacific countries, or fire drills the world over, with any insurance policy, you prepare for the worst and hope for the best. Office workers being issued laptops rather than desktops as standard to enable working from home in any scenario does not seem overkill by comparison.
Back on UK soil, it certainly feels like the needle is moving in the more extreme direction all the time. Against a backdrop of COVID-19, Brexit and climate disaster, perhaps levelling up what we consider the worst-case scenario is not as paranoid as it may seem. It’s one thing having your server backed up and work-from-home policies sorted, but what use is that BCP if someone simply turns off the nation’s lights?
In January 2009, as the world was reeling from a financial meltdown of near unfathomable proportions, a new currency was born. A decentralised digital currency for the post-crisis age, bitcoin promised an alternative to the mainstream financial system for those who found themselves suddenly suspicious of the traditional banking institutions of decades past. From its earliest days of trading, bitcoin had its fervent supporters. While some dismissed it as an underground fad, others believed that bitcoin was truly the future of money, and imagined a utopia where crypto replaced cash. These voices have only grown stronger over the course of the last decade, as bitcoin has enjoyed a meteoric rise, moving rapidly from the financial margins into the mainstream.
Now a $2trn industry (see Fig 1), cryptocurrency is no longer an underground phenomenon. In September of this year, El Salvador made history by becoming the first country in the world to adopt bitcoin as legal tender. On the other side of the Atlantic, Ukraine is said to be hot on its heels, with plans to adopt bitcoin as legal tender, according to reports. For early proponents of bitcoin, this feels like a landmark moment, confirming what they always believed to be true: that the future of currency is crypto.
However, while bitcoin has its supporters, it is not without its sceptics. Many economists view cryptocurrencies with suspicion, with regulators in both Europe and the US issuing warnings on the dangers of trading with crypto. Its highly volatile nature means that El Salvador’s bitcoin experiment is something of a gamble – and we are yet to see whether it will pay off. But with one country paving the way with crypto, others may soon follow suit. For better or for worse, El Salvador could be the start of a digital currency domino effect.
Brave new world
Big problems often require radical solutions. El Salvador has long been plagued with a number of very particular economic woes: a small, central American country of just 6.5 million citizens, the nation’s economy is heavily reliant on remittances – money sent home from the two million Salvadorans who are currently living and working abroad. With expatriated Salvadorans sending more than $4bn back to their home country every year, remittances make up one fifth of El Salvador’s total GDP. Within El Salvador itself, meanwhile, two-thirds of citizens work within the informal economy, and 70 percent do not have bank accounts.
A desire to tackle this unique set of economic circumstances seems to have driven El Salvador’s decision to embrace cryptocurrency. President Nayib Bukele – who at the age of 40 is often described as Latin America’s first millennial President – has championed crypto as a path to both financial inclusion and independence for Salvadoran citizens. It is his hope that the move could save Salvadorans up to $400m a year in transaction costs on remittances, while giving access to financial services to those who are currently unbanked.
“In El Salvador, we are trying to start the design of a country for the future,” Bukele said in a video message broadcast to the Bitcoin 2021 conference in June of this year, where he first announced his plans to formally adopt the cryptocurrency as legal tender. “In the short term, this will generate jobs and help to provide financial inclusion to thousands outside the formal economy. In the medium and long term, we hope that this decision can help us push humanity at least a tiny bit into the right direction.”
Legal tender
Following the announcement of Bukele’s crypto-vision for El Salvador in June, a bitcoin bill was passed, requiring all Salvadorian businesses to accept payment in bitcoin as well as the US dollar – the nation’s existing legal tender – effective from September 7. To mark the launch of the nation’s new bitcoin era, all Salvadoran citizens were gifted a digital wallet called Chivo (Spanish slang for ‘cool’), with $30 of credit pre-loaded for each user to spend.
While this may all sound very promising, the reality proved to be rather more challenging than perhaps anticipated. The country’s landmark bitcoin adoption day was beset by technical difficulties – the Chivo digital wallet was forced offline for hours after government servers were overwhelmed by an influx of sign-ups, and President Bukele took to social media to complain that app stores on Apple and Huawei devices were not yet hosting the government-backed app. Elsewhere, it was reported that ATMs were running out of money, as citizens rushed to convert their $30 bitcoin holdings into cash. In the capital city, more than 1,000 people took to the streets in protest of the bitcoin adoption, setting off fireworks and burning a tyre in front of the Supreme Court building in an impassioned display of opposition to the law change.
“Like all innovations, El Salvador’s bitcoin process has a learning curve,” Bukele said in a tweet, reflecting on the rollout. “Not everything will be achieved in a day, or in a month.”
While there may have indeed been noble intentions behind El Salvador’s bitcoin experiment, it’s clear that creating a crypto-utopia is going to be a very hard task for tech-savvy Bukele to pull off. Opinion polls show that the overwhelming majority of Salvadorans remain unsure as to how bitcoin actually works, while the currency’s extreme volatility is yet another source of anxiety for many. At a time when pandemic-related economic uncertainty remains rife, it is understandable that bitcoin feels like too large of a gamble for some sceptics. And yet, despite the many teething troubles that El Salvador has encountered, it looks like a number of other countries are now looking to follow in its digital footsteps.
Nayib Bukele, President of El Salvador, the first country in the world to adopt bitcoin as legal tender
The path to financial freedom?
El Salvador is one of a growing number of developing economies that have been gravitating towards cryptocurrencies. In Mexico, Cuba and Venezuela crypto transactions are fast becoming a part of daily life, allowing for fast, cheap and reliable cross-border transactions in countries that also rely heavily on remittances. Just one day after El Salvador officially adopted bitcoin as legal tender, Panama introduced a draft bill that aims to recognise bitcoin as an alternative payment method – suggesting that the cryptocurrency domino effect may already be underway.
The phenomenon isn’t unique to Latin America, either. In developing economies across the globe, crypto appears to be gaining mainstream appeal. Each year, leading blockchain data company Chainanalysis publishes its Global Cryptocurrency Adoption Index, listing the world’s top 20 countries for crypto adoption (see Fig 2). In the 2021 ranking, 19 of the 20 countries listed are emerging and frontier markets, reflecting a surge in usage in developing markets. From South-East Asia to Sub-Saharan Africa, cryptocurrencies are gaining a significant foothold – and are quietly filling gaps in the market that traditional financial services were never able to penetrate.
It should perhaps be unsurprising that crypto has enjoyed such success in the developing world. After all, many developing countries were also early adopters of mobile payments, with citizens both urban and rural leapfrogging traditional financial products and moving straight into the world of remote, cashless payments. The best-known success story is Kenya’s M-Pesa, a mobile-money platform that has recently hit 50 million users across Africa, and that has been credited with expanding financial inclusion across the continent by enabling payments and transfers among the traditionally unbanked. While it goes without saying that cryptocurrency is an entirely different world to that of mobile payments, the early success of such technologies may have paved the way for the digital currencies of today.
Developing nations
As is the case with El Salvador, crypto’s potential to enable cheap cross-border transactions is central to its appeal in developing nations around the world. Migrant remittances are a significant source of income for low- and middle-income countries, totalling approximately $554bn worldwide at the end of 2019, according to the International Organisation for Migration. That said, sending money back home can be a slow, complex and above all, costly exercise for many migrants living abroad. The UN estimates that currency conversions and fees on international transfers eat up approximately seven percent of the total amount sent through remittances every year – a considerable percentage of what is a crucial source of income for some of the world’s most economically vulnerable people.
The Salvadoran government is currently exploring options to mine bitcoin using geothermal power
In areas of instability, conflict or hyperinflation, meanwhile, crypto is proving to be something of a safety net to many. In Afghanistan, cash all but dried up following the Taliban takeover in September, forcing banks to close and seeing citizens struggle to purchase food and other basic necessities. A freezing of foreign aid has aggravated the unfolding humanitarian crisis in the country, while money transfer services MoneyGram and Western Union temporarily halted services in Afghanistan in the weeks following the US military’s withdrawal – cutting off many Afghans from a critical source of income in a desperate time of need. For those seeking an urgent solution to the nation’s cash crisis, crypto has offered a much-needed lifeline, with the conflict-ridden country seeing a surge in cryptocurrency usage among its citizens in 2021. Indeed, in Chainanalysis’ Global Cryptocurrency Adoption Index, Afghanistan now ranks seventh in the world for peer-to-peer crypto transactions. Last year, however, it didn’t even appear on the list.
In a similar vein, Libya, Palestine and Syria are all near the top in global online searches for bitcoin and other forms of cryptocurrency, while downloads of bitcoin wallet BlueWallet grew by 1,781 percent in Lebanon in 2020, as the country continues to grapple with an ongoing financial meltdown. In times of conflict and crisis, it would seem crypto offers a way to circumvent broken systems and to provide some financial protection to those in real need.
No safe bet
Cryptocurrency is far from being the perfect cure to the world’s many financial ills. It has, undoubtedly, been a useful – and at times, necessary – tool for some of the world’s most vulnerable citizens. But it is not without its flaws.
In more developed economies, there remains a more sceptical outlook on crypto, both among economists and the wider population alike. Indeed, in the US and Europe, cryptocurrency payments are far from being an everyday occurrence for most citizens. The world of crypto remains something of a niche subculture, largely dominated by semi-professional traders and blockchain aficionados. There is also a significant gender imbalance among traders, too – in the US, 76 percent of current crypto holders are men.
The main criticism of crypto, however, is that it is notoriously volatile in price. Thought to be 10 times more volatile than most major currencies, the market value of cryptocurrencies such as bitcoin can fluctuate by hundreds of dollars in a single day, making crypto a high-risk investment for many. Regulators have repeatedly warned about the dangers of investing and trading in cryptocurrency, citing this unpredictable and extreme volatility as one of their most pressing concerns. Price fluctuation not only puts people’s personal finances at risk, experts warn, but could potentially threaten financial stability across multiple different markets. In October, Bank of England Deputy Governor Sir John Cunliffe called for urgent cryptocurrency regulation, citing financial stability concerns. In a speech given at Sibos, an annual banking conference, he compared the current crypto boom to the rocketing value of US subprime mortgages before the catastrophic 2008 global financial crash. Without rapid intervention, he argued, a potential crypto crash could plunge the global economy back into another 2008-level crisis.
“When something in the financial system is growing very fast, and growing in largely unregulated space, financial stability authorities have to sit up and take notice,” he said. “They have to think very carefully about what could happen and whether they, or other regulatory authorities, need to act.”
In 2021 alone, cryptocurrencies have surged by around 200 percent to an estimated value of $2.3trn – up from $800bn in 2020. As Cunliffe noted in his speech, subprime mortgages were valued at around $1.2trn in 2008, and triggered a global financial meltdown of unprecedented proportions when borrowers began defaulting on loans. With the fallout from the 2008 crash still fresh in economists’ minds, it is hardly surprising that regulators are setting alarm bells ringing when it comes to crypto’s seemingly unstoppable growth (see Fig 3).
Environmental issues
And crypto’s inherently volatile nature isn’t the only cause for concern. There is also growing unease among sceptics and aficionados alike over bitcoin’s environmental impact. Bitcoin mining – the process through which ‘new’ bitcoins are created – is incredibly energy intensive. In order to be awarded a new bitcoin, ‘miners’ must use their computers to solve a series of incredibly complex puzzles. Whoever solves the puzzle first is awarded a new coin to their computer.
However, solving the problems requires the use of incredibly powerful specialised computers, which then need to run at full capacity, burning through an extraordinary amount of energy during each mining operation. As a result of this energy intensive process, the Cambridge Centre for Alternative Finance estimates that a single bitcoin transaction has the same carbon footprint as 680,000 Visa transactions. Already, this considerable carbon consumption is beginning to damage bitcoin’s reputation on the global stage. In May, Tesla CEO and long-standing crypto advocate Elon Musk announced that his electric car company would no longer be accepting bitcoin for car purchases, due to pressing concerns over the currency’s environmental impact.
“When there’s confirmation of reasonable (~50 percent) clean energy usage by miners with positive future trend, Tesla will resume allowing bitcoin transactions,” Musk said in a tweet, clarifying his position. Environmental concerns also played a role in the World Bank’s decision to decline a request from El Salvador to assist with implementing bitcoin as legal tender. The central American nation approached the World Bank earlier this year, seeking technical assistance with its plans to formally adopt bitcoin as an alternative national currency. “While the government did approach us for assistance on bitcoin, this is not something the World Bank can support given the environmental and transparency shortcomings,” a World Bank spokesperson told Reuters in July.
If crypto continues on its current upwards trajectory, the inconvenient truths surrounding its environmental impact and its inherent volatility will surely become increasingly difficult to ignore.
An undefined future
Like all modern innovations and technological advances, the world of cryptocurrency is a fast-moving one. In little over a decade, crypto has gone from a niche, abstract idea to a $2trn industry. Bitcoin’s introduction as legal tender in El Salvador marks a pivotal moment in the history of cryptocurrency, but the journey certainly isn’t over yet. In many ways, it feels like this could just be the beginning, as countries around the world look to potentially follow El Salvador’s lead. No matter the outcome of the Salvadoran bitcoin experiment, one thing is for certain – governments across the globe will be watching closely, and taking notes.
Less than one month on from the Bitcoin Law coming into effect in El Salvador, more people are said to have a Chivo bitcoin wallet than a traditional bank account. According to President Bukele, three million Salvadorans are now using Chivo – almost half of the country’s total population. By contrast, only a third of Salvadoran citizens are believed to have a bank account. It’s amongst these unbanked citizens that bitcoin is likely to be having the greatest impact. For those with access to a smartphone but not to a bank, payments, deposits and money transfers are now available to them at the touch of a button. While financial inclusion may have previously been a real economic hurdle for El Salvador, now digital literacy is perhaps the most pressing challenge, as the Bitcoin Law means little if citizens don’t fully understand the financial options available to them.
In developing economies across the globe, crypto appears to be gaining mainstream appeal
Despite the initial glitches and setbacks, El Salvador’s bitcoin gamble has already achieved some undeniably impressive results. As of October, 30 bitcoin ATM machines have been installed in major cities in the US, including Los Angeles, Houston and Chicago, in the hopes that Salvadoran expats will use Chivo to send money back home. The plan appears to be working – in a tweet posted on October 16, President Bukele told his followers: “today, we received 24,076 remittances, adding up to $3,069,761.05 (in one day).”
When it comes to the environmental aspect of bitcoin, too, the country also appears to be making some progress. Aware of the growing concerns surrounding the cryptocurrency’s carbon footprint, the Salvadoran government is currently exploring options to mine bitcoin using geothermal power. A pilot project has been set up at a geothermal power station near El Salvador’s Tecapa volcano, where 300 state-of-the-art mining computers are currently being powered by electricity generated from the volcano’s high-pressure steam. In El Salvador, where geothermal electricity already accounts for a quarter of domestic energy production, volcano-powered mining could be the solution to bitcoin’s dirty problem.
The world watches on
It is still far too early in El Salvador’s bitcoin journey to draw any firm conclusions on its success or lack thereof. But it certainly seems likely that the country’s bold experiment will fuel a new flurry of activity in the world of digital currencies. Most of the world’s central banks are already looking to create their own versions of digital currencies, with the Bank of England announcing in April that it is exploring the possibility of launching a new form of digital money to exist alongside cash and bank deposits. According to a report by PwC, 60 governments around the world are currently working on some form of Central Bank Digital Currency (CBDC), with 88 percent of those under construction said to be based on blockchain – the same technology that powers bitcoin. With so many CBDCs being tested, the question is not if they will be introduced, but when.
As for whether any countries will be as bold as El Salvador in adopting any form of cryptocurrency as legal tender, that remains to be seen. For now, the future of crypto remains as unpredictable as its market value.
It’s over a decade since Steve Jobs made what would be one of his most quoted comments about good business: “great things are never done by one person; they are done by a team of people.”
This observation was true before the Apple CEO gave his take on the value of people. Across 30 years of working at major web companies from Lycos to Google, in addition to co-founding my own technology company, I’ve seen that success almost always comes down to having the right talent. During recent challenging times, this has proved especially relevant.
Rapidly shifting market trends, ongoing uncertainty, and financial strain in almost every sector have underscored the huge importance of strong teams for keeping businesses on track. While there’s no bullet-proof formula for leaders to perfect their people foundation, there are some key steps they can follow to build and nurture collective power.
Hire people better than yourself
While we’ve all heard the advice that a leader shouldn’t be the smartest person in the room, there is often too little focus on what’s required to avoid that scenario: humble hiring.
The CEO might be the driving force behind steering overall business direction, but that doesn’t mean they must have the highest level of skill, experience, and knowledge in every area.
Striving to be the ultimate authority creates undue personal pressure, in addition to limiting your opportunities for learning and enrichment. From the business perspective, the company will also miss multiple benefits that come with creating a talented team.
Seeking out individuals who are highly skilled in their field will ensure they can produce the best results for the organisation: in our industry that would range from keeping product development in tune with changing demand, to delivering advertising campaigns that maximise sales. Bringing specialists together also helps foster a climate of innovation, where workers inspire each other to explore fresh ideas, try different approaches, and continually raise their ambitions.
Moreover, doing so means you can confidently delegate work to those who will do a better job. As well as saving crucial time to focus on smarter strategic decisions, this shows one of the core qualities employees want to see from leaders — trust in their capabilities.
In short, actively recruiting people with skills that surpass, and expand on, your own is crucial to achieve greater collective intelligence, productivity, and growth.
Don’t expect others to do something you won’t
Of course, many duties do still fall with leaders. At the basic level, establishing clear goals and responsibilities is important to sustain unified progress and offer a sense of purpose: another vital factor for workforce happiness. But it’s crucial not to let heavy focus on targets distract from the most vital part of being a leader: motivating your team through action.
Bringing together an exceptional group of people is a good start, but unleashing their full potential takes consistent work and guidance. In particular, leaders must play their part by embodying the behaviours and cultural attitude they want to cultivate.
For instance, simple steps such as responding positively to suggestions can be a powerful demonstration of your appreciation for collaborative thinking. This can encourage creative contribution and cement it within the business DNA; allowing for a horizontal structure that offers equal opportunity to influence company evolution.
During a company meeting, for example, our project manager proposed the idea of developing our own ‘sandbox,’ a technology tool that allows for the testing of solutions for privacy-compliant online advertising. The discussion generated a lot of enthusiasm in the team and, as a result, we have now developed SWAN (Storage With Access Negotiation) and presented it to The World Wide Web Consortium (W3C).
Similarly, stimulating a spirit of ongoing evolution also has to start at the top, with leaders embracing and adapting to change. The past 18 months, for example, have highlighted the need for me to alter my own view on remote working. Having previously leaned strongly towards the easy accessibility and information flow of physical offices, the pandemic has taught me to recognise the advantages that logging in from home offers for our people.
Throughout my career, I’ve been lucky to work with many people; all of whom have proved that the individual skills everyone brings to the table are equally invaluable. That’s why the final takeaway I would offer for any leader is this: aim to find and nurture the best talent you can – and leave your ego at the door.
From finance to fashion, few industries have escaped the extraordinary digital transformation that has come knocking at the door of business these past 20 months. Against a backdrop of rapidly evolving consumer expectations, the pandemic has served to catalyse and amplify many of the existing trends that were already ramping up prior to the lockdowns. From demands for greater corporate accountability, responsibility and transparency, to an increasing appetite for sustainable, renewable and socially responsible products (physical or otherwise), younger generations have been driving a deep and inescapable sea-change towards more ethical and regenerative ways of working and consuming.
In the finance sector alone, 2019 saw the UK’s Financial Conduct Authority take proactive steps to prevent ‘greenwashing’, challenging firms making misleading claims over sustainable investments. And with the Bank of England receiving a government mandate to buy ‘green’ bonds earlier this year, it seems unlikely that we’ll be returning to business as usual any time soon. So much the better. As we navigate the aftershocks of the UK’s estrangement from our European counterparts, we seem nevertheless to be taking a page out of the continental handbook, and heeding the European Commission’s advice that advisers ‘take sustainability risks into account in the selection process of the financial product presented to investors before providing advice, regardless of the sustainability preferences of the investors.’
What’s fascinating from a consumer standpoint, is the rapidity with which this approach seems to have manifested practical changes in service. I can attest from personal experience, that where once I would have been viewed askance when raising ethical concerns to my financial advisers, I’m now inundated by so many options that it’s as though I’ve landed in an entirely different epoch. The change has been swift and remarkable, and it’s a pivot which has already materialised in a boom of green, digital-first banking products. And with fintech services such as Good Money and TreeCard already disrupting the sector (and attracting huge swathes of Millennials and Gen Z in the process), this is a trend we can expect to see a lot more of – especially when you consider that consumers born between 1981 and 2012 will make up a full 72 percent of the workforce by the year 2029.
So where does that leave us? Well, one thing is clear. If the finance sector (or any other, for that matter) is serious about ensuring its long-term resilience and prosperity, it’s going to have to dance to an altogether different tune. From offering ethical investment and banking services, to integrating ESG into one’s business strategy, the future will belong to those organisations brave enough to harness and lead the change towards a better, more sustainable world.
Inflation is starting to cast a shadow across developed economies as they emerge from the COVID-19 pandemic. It has jolted central bankers and policymakers out of their comfort zone with the totemic two percent target suddenly slipping away from them. Since the global financial crisis, gentle inflation has been seen as the friend of stable, growing economies. Now, it is looking to break the shackles central banks thought they had firmly affixed to it.
Some economists and analysts see higher inflation as a benign influence in economies with high levels of debt but that ignores its corrosive effect on savings and those on fixed incomes, such as pensions. Others are warning of the threat of stagflation, and a return of the economic blight of the 1970s, when a grim combination of low growth and inflation rates of 20 percent crippled the UK and other western economies. The two percent inflation target adopted by the Federal Reserve, Bank of England, European Central Bank and others emerged out of that era of high inflation and was then cemented into policy in the wake of the 2009 global financial crisis.
“It was a bit of an accident,” says David Morrison, senior market analyst at UK-regulated online trading platform Trade Nation. “It came in when we were coming off the back of very high inflation in the late 1980s when inflation was still in double figures. It started with the New Zealand central bank and by the mid-90s most central banks were moving towards it, although the Federal Reserve didn’t officially embrace it until 2012.”
A delicate balance
According to the OECD, normally cautious in its inflation forecasts, the US and the UK are unlikely to see inflation fall back to that two percent target until well into 2023, although it predicts other economies might withstand inflationary pressures better (see Fig 1).
This will mean a constant stream of headlines about inflation exceeding the two percent target, but most economists believe central banks will live with those rather than change the target. It is a delicate balancing act. Raising the target would not be without its benefits, but the risks outweigh those, says Martin Beck, senior economic adviser to the EY Item Club.
“A higher inflation target, if achieved, would imply nominal interest rates being higher than otherwise. This would give central banks more room to cut rates when a shock hits. So there’s certainly some theoretical benefits from raising the inflation target. The problem is how it could be achieved. Most major central banks have undershot their targets over the last decade and the risk is that loosening policy sufficiently to achieve the higher target would cause inflation to overshoot and spiral upwards.”
Inflation is not just about numbers, debate over a few percentage points and the likely impact on interest rates. It is also about expectations, and that is a danger gnawing away at policymakers, says Beck. “A higher inflation target would also increase the chances that the public would start to pay more attention to inflation, and so it would bear more on pay demands.
One of the triggers for rising inflation in the 1960s and 1970s was the fading of ‘money illusion.’ As inflation began to creep up, workers became more aware that growth in pay was being eroded by rising prices and sought to offset that with larger pay demands.”
“Expectations are everything. Going out to deliberately push inflation up by raising the two percent target is an extremely dangerous thing to do. It can easily get out of control,” says Morrison.
Tempering trust
Keeping a lid on people’s expectations – and fears – about rising prices is one of the reasons why central bankers and politicians keep stressing their belief that the current inflationary pressures are only transitory. This was the theme adopted by the Governor of the Bank of England, Andrew Bailey, in his pre-budget letter to the Chancellor of the Exchequer, Rishi Sunak, in which he blamed the exceptional volatility of post-Covid economic activity on the hikes in energy and fuel prices and supply chain strains pushing up transport costs.
Bailey is also cautious about being manoeuvred into a situation where the bank raises interest rates but inflation does not respond. This is a seminal moment for central banks and one of the central tenets of monetary policy in the 21st century. If they raise interest rates and the impact they have on demand is minimal, people will start to lose faith in their ability to control inflation. This concern is very real, says Kieran Cleere, head of sales trading for the market risk solutions team at Silicon Valley Bank.
According to the OECD the US and the UK are unlikely to see inflation fall back to that two percent target until well into 2023
“At its core the monetary policy lever is a demand tool. Central banks will be asking themselves the very same questions as the markets at large: what has been the catalyst for the broad-based price increases? Where supply bottlenecks are driving prices not only is increasing rates unlikely to have a material impact but, on the contrary, it risks throttling a nascent, if faltering, recovery. If supply constraints are driving prices the question has to be whether the monetary Aladdins are the right people to put the fiscal genie back in the bottle?”
The alternatives for the central banks are to talk tough, hoping that they are not called into action before they can be effective. “History tells us that inflationary expectations and central bank credibility are the key to inflation dynamics”, says Vladimir Potapov, CEO of VTB Capital Investments.
He believes that talk alone might not be enough and that central banks might have to take the plunge and raise interest rates. “The famous economist John Cochrane says that fighting inflation is like deterring an enemy. If you just say you have the tools that’s not very scary. If you tell the enemy what the tools are, show that they all are in shiny working order, and demonstrate that you have the will to use them no matter the pain inflicted on yourself, deterrence is much more likely.
So, central banks should demonstrate that they are ready to act and we believe that is what most central banks are doing right now.” Emerging market central banks are already starting to move in this direction with Singapore announcing its first serious tightening of monetary policy for over three years in mid-October. The major central banks are now expected to follow with incremental increases over the next few months.
Most believe significant moves by the major central banks are unlikely, partially because the pressure on prices is being driven by supply factors and partially because the impact on households and businesses of any precipitous rise in interest rates could be detrimental. This is very much the view of the EY Item Club, says Beck. “Higher interest rates would do nothing to resolve supply problems or bring energy prices down but would add to the pressure on household finances from higher prices and welfare cuts.”
He doubts the Bank’s Monetary Policy Committee (MPC) would want to risk damaging the recovery by raising rates too far, too soon. Inflation may be looking as if it has few friends but those holding large amounts of debt – governments, businesses and households – have often benefited from the diminution of their debt burden in real terms in the past, especially if they can cope with the burden of the higher interest payments that usually accompany higher inflation.
Inflation acceptance
Cleere thinks governments will be quietly relaxed about modestly higher levels of inflation, calling their response nuanced. “Going forward the servicing and paying down of debt burdens will be front and centre of treasury minds around the globe as economies re-establish a normality. Given the scale of stimulus provided, tax increases alone cannot rein in debt without fear of crushing economic activity. For this reason, a tacit approval of inflation is going to inform part of any future approach to deleveraging nations.”
Indebted businesses might not be so sanguine if their interest payments start to rise, warns Morrison: “Even in the junk bond market, spreads have come right down and poor business have been able to borrow the money. Once those spreads start widening then we are heading for trouble.” Failing businesses would do nothing to ease the supply side pressures, many of which are global, but would be a serious drag on economic growth. This is a gloomy prospect but one canvassed as a very real threat by several leading economists, including Professor Nouriel Roubini from the Stern School of Business at New York University. In a recent article (in The Guardian) he dismissed the role of inflation in reducing debt as holding more dangers than potential benefits.
“As a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating: a full stagflation with much lower growth and higher inflation. The temptation to reduce the real value of large nominal fixed-rate debt ratios would lead central banks to accommodate inflation, rather than fight it and risk an economic and market crash.
“But today’s debt ratios (both private and public) are substantially higher than they were in the stagflationary 1970s. Public and private agents with too much debt and much lower income will face insolvency once inflation risk premia push real interest rates higher, setting the stage for stagflationary debt crises.” For most of this century inflation sat benignly on the economic sidelines clutching its two percent target. It looked to be everyone’s friend. It is rapidly losing those friends as it casts aside its former constraints.
But in 1993, he accepted a job as Technical Director of the Animal Health division at Pfizer – reportedly as a “stopgap” while waiting for a permanent academic position to come about, according to the Financial Times.
A research paper by the Breakthrough Institute looked at exactly that and found three groups whose livelihoods would be most at risk; those growing soy and corn for animal feed (which accounts for around 95m acres of farmland in the American Midwest, according to the USDA), contract farmers growing pork or poultry, and meatpacking plant workers.
