2022 | World Finance

Pensions reworked: finding the sweet spot

Posted on January 12, 2022January 12, 2022 by itsupport

It’s hard to ignore the current zeitgeist for app-based money management and digital investing. But when it comes to saving for retirement, the greatest challenge for fintechs is still educating and engaging young adults facing an uncertain future. The wave of digitalisation that has swept the financial market over the past 10 years has led people of all ages to get more actively involved in their personal finances. But there persists a well-established impression that pensions are by comparison stuffy, boring, complicated, and not relevant for younger people. Romi Savova founded PensionBee in 2014 with a desire to make pensions simple and help customers to locate, consolidate, and manage their investments. PensionBee has certainly tapped into the current trend for managing money and investments digitally and via apps, and the company is passionate about engaging with and educating their customers. Having set out to solve a problem, Savova herself remains actively involved in responding to users’ needs, and with a potential savings crisis on the horizon when today’s young adults retire, a savvy young business owner on the side of millennials will surely help to bring attention to the issue.

There’s something very motivating about having a holistic view of your finances and seeing your savings grow over time

Primarily, that issue seems to be that pensions still scare people off with an intimidatingly complex reputation, and Savova agrees. “Pensions are often thought of as complicated and difficult to manage, and many people associate their pensions with filling out paperwork piled in a scary drawer. PensionBee’s mission is to make pensions simple. We do that by enabling consumers to interact with their savings through a unique combination of smart technology and dedicated customer service.”

So far, so user-friendly. But rather than training and working in one specialism for one’s entire working life, it is the norm these days to have a portfolio career, moving to new jobs and even completely different industries several times over. It is rare for people to retire at 60 when they may live beyond 85 (see Fig 1). The department for work and pensions predicts that the average worker will have 11 different jobs during their career, with each workplace – since 2012 – now automatically enrolling eligible staff into a pension scheme (see Fig 2). “Pension consolidation is one of the most popular reasons savers choose PensionBee,” Savova tells World Finance. “People are busy, and their time is valuable so they want to sort out their finances quickly and simply so they can confidently get on with their lives. The days of taking time off work to fill out lengthy paper forms and spending hours on the phone to legacy providers are long gone. Now these tasks can be done in a few clicks from an app on your mobile while you’re travelling to work or sitting on the sofa.

“For younger savers in particular, there’s something very motivating about having a holistic view of your finances and seeing your savings grow over time – thanks to a combination of compound interest, personal and employer contributions and perhaps even investment growth. Having full visibility from an early age can help savers achieve their goals faster and ultimately get the retirement they want.”

Embracing the hive mind early
Here, Savova touches on a vital point. It is only in the past few years that financial education around savings, loans, pensions, and mortgages has made it onto the UK school curriculum. That means that, unless it was specifically chosen by or for them, young adults in their 20s and 30s today had no guaranteed financial education. The impact of a financial education cannot be overestimated, and a quick look at some statistics about the amount of money sitting in ‘lost’ pensions in the UK alone is jaw-dropping. Thinking about its customers and the pension market at large, we ask Savova if our collective ignorance is obvious to her expert eye, and can anything more be done?

She explains that her company exists to solve a real problem facing millions of people in the UK. “The pensions landscape is too complex, it’s still too difficult to get basic information on how much you’re paying in fees, where your money is invested or even what your current balance is. Despite this poor experience, consumers are often reluctant to make changes for fear of doing the wrong thing. As a result, many savers risk missing out on better pension plans that could help them look forward to a happy retirement.

Many savers risk missing out on better pension plans that could help them look forward to a happy retirement

“We’ve created a product that seeks to give people pension confidence and a sense of optimism about their future, as they know they are saving regularly for the retirement they expect and deserve. Confidence and optimism aren’t emotions that most people feel about their pensions right now, and that’s because the market is not currently set up to serve savers in the ways that they need and expect. We see evidence of that across the UK in the lack of engagement, low contribution rates and the estimated 20 million pension pots left behind when people have changed jobs.
“One of the most common questions we’re asked is how much to save for retirement. And of course, the answer is the earlier you start the better.” The global average is estimated at 78 percent of current income for a comfortable lifestyle (see Fig 3).

Savova continues; “Over time, the compound interest savers can earn on their savings could have a significant impact on their pension pot by the time they decide to retire. If only those working today had been taught this when they were at school, we might not be in the midst of a savings crisis where many retirees face the very real risk of a shortfall in later life.”

Environmental concerns
Another common worry, particularly among those new to investing, is around having their money fund industries they may not agree with, such as fossil fuels. Even if pension issues are considered to affect the older population disproportionately, environmental issues face the younger among us far more. While it could be argued that younger generations have more pressing financial problems than their parents or grandparents before them (it is widely believed that millennials are the first generation ever to be materially worse off than their parents), it is also the case that theirs is an active and engaged generation who have no problem challenging authority and have multiple ways to do that from their smartphones. Just as young activists can tweet directly to world leaders, could there be untold collective power in our pockets in the literally trillions of pounds in our pension pots?

Campaigns like Pension Awareness Week encourage us to take a moment to educate ourselves about what pensions are, what they can do, and why it’s important to invest as much as you can as early as you can. Even a one percent increase in contributions can, with the power of compounding, add up to significantly more in a final pension pot at the end of one’s career. According to the Make My Money Matter campaign, spearheaded by film maker and co-founder of Comic Relief, Richard Curtis, “greening your pension is 21 times more powerful at cutting your carbon than giving up flying, going veggie and switching energy provider, combined!”

Being a millennial herself, Savova is no stranger to environmental and social crises, and this also taps into the drive she feels to educate and engage her customers. We talk a little about the gathering momentum for using investments for good, and ESG as an indicator of IPO success. Could it be that having a choice about where our money goes is the hook for young people to engage more with their pensions? She thinks so.

“We’ve seen from our own customer base that younger savers are more likely to be invested in one of our responsible plans. Increasingly the younger generations are voting with their feet and choosing the companies and products that align with their values.

“Our fossil fuel free plan was created in 2020 in direct response to customer feedback, which highlighted a growing divide, with some customers wanting to engage with oil companies and others no longer believing in the effectiveness of engagement, instead desiring a product that excluded oil from the outset. The plan excludes firms with proven or probable reserves of oil, gas or coal; tobacco companies; manufacturers of controversial weapons and persistent violators of the UN Global Compact.

We’ve found a way to connect with a generation that has long been forgotten by the legacy providers

“At PensionBee, we believe that sustainable business practices have a positive impact on long-term pension returns. Therefore we consider it important to regularly seek our customers’ views on how their pension, and the companies it invests in, should evolve in a changing world. In our most recent survey, the majority of savers invested in the fossil fuel free plan told us that they are happy with the current exclusion policy, but a significant proportion told us they wanted to also exclude companies that provide associated services to the major oil producers and also banks who finance fossil fuel exploration. As a direct result the plan has now broadened its exclusion criteria to remove companies that provide associated services to the fossil fuel industry.”

It is refreshing to find that the firm’s customer response policy is more meaningful than a token fund, and PensionBee is also listening to a minority within this customer group that want to move more quickly still: “We’re committed to finding a new plan that goes even further in its exclusionary policy, with a focus on positive impact. Even though this new plan is likely to come at a higher cost and reduced diversification, given the emerging nature of this segment in the economy, there’s a growing appetite for a plan of this type. A change is definitely underway and it’s young people who appear to be leading the charge!”

Pension activism
Here, we seem to find the paradox. Young people care about everything. There has never been such passion and drive around veganism, social issues such as Black Lives Matter, averting the climate emergency and corporate social responsibility. With an increased awareness of where our money goes and putting investment back into local economies and towards good causes, comes a surge in the proliferation of ethical funds and pension investments. Combine tech-savviness with the moral imperative for this generation to do better, and rather than a bleak situation, we could be at a perfect tipping point, a new age of pension investing that not only benefits the individuals who are taking control of their own futures, but that also contributes to a less gloomy future for the planet as people quite literally take matters into their own hands.

A rally in defence of fair pensions in Madrid, Spain

Any shrewd entrepreneur knows that there is opportunity in solving problems of inconvenience or effort, and PensionBee takes this premise and creates an easy to use and understand platform that could end up changing customers’ behaviour, such that they end up with a pension that is much more fruitful than it would have been otherwise. In terms of strategy, I wonder whether PensionBee consciously positions itself as a ‘challenger’ in the world of pensions as Starling, Monzo et al have with retail banking. Savova is direct in acknowledging that since it was founded in 2014, PensionBee has been a challenger in an industry ripe for disruption.

“We’re constantly innovating and setting new standards of transparency in a sector that hasn’t changed or adapted with advances in technology and consumer behaviour in decades. We’ve found a way to connect with a generation that has long been forgotten by the legacy providers, and are passionate about campaigning on behalf of savers to improve standards across the industry, whether that be around exit fees or consumer switch guarantees.

“Being on the right side of change, particularly in financial services, is very motivating. Over the years we’ve learned that as long as you have the consumer on your side and are doing the right thing, you can take on huge battles and win. “We aim to be the best universal online pension provider, and in the past 12 months have released several innovative new product features that set us apart, including deeper open banking integrations, so our customers can manage their pension in some of the UK’s most popular money management apps, and creating a pension product for the self-employed, a group who have historically been underserved by the pensions industry.”

I wonder if there is a typical PensionBee customer, and if the company’s metrics show any gender or generational bias. I assume young adults make up the majority of the customer base and I am right, with those in their 30s and 40s making up the majority. Interestingly, around 20 percent of its customer base is self-employed; a significant proportion of whom will be classic portfolio careerists. The gender split is around 3:1 in favour of men, but Savova assures me they are putting plans in place to significantly increase the number of women signing up to PensionBee next year.

“The needs of our customers vary and we’re here to help them look after their pensions throughout their savings journey, from sign up to drawdown. PensionBee’s vision is to live in a world where everyone can look forward to a happy retirement in the form of financial freedom, good health and social inclusion. Educating people about the benefits of saving for later life is vital to achieving this.

“Saving for retirement is a marathon, not a sprint. It can be overwhelming to think about how much a saver will need to put aside to be able to afford the lifestyle they’d like in retirement; however, it’s important to set realistic goals, whatever their age, and use a pension calculator to ensure they stay on track. Apps like PensionBee’s increase consumer engagement with pensions and help savers feel a sense of control and ownership over what’s happening to their money. By feeling in control, we hope that savers will consider what retirement could look like for them so that they make appropriate contributions and better plan for later life.”

Gathering the nectar
I attempt to follow the process and try it for myself. PensionBee shouts loudly about helping you trace your old pensions, but in the early stages of signing up with them it becomes apparent that they can only trace what you can provide. This is reasonable, but unless you have a list of previous employers and their associated pension providers next to you when opening your PensionBee account, you will still likely find yourself trawling through emails and paperwork attempting to dig out the name of your previous providers. The UK government has a pension tracing website that may be able to assist with this.

It is also worth bearing in mind that pensions held from civil service, the NHS, teaching positions or other public sector jobs like local government are not possible to transfer into a PensionBee scheme, or any other for that matter. The reason for this is twofold. The first is simply that the government does not allow such pensions to be moved anywhere other than its own scheme, probably because it is in everyone’s interest to not risk billions of pounds being moved out of government control and potentially into high-risk portfolios or poorly managed funds, or simply being forgotten about. The government invests and manages these pension funds itself, and returns are then used to raise capital for government aims.

The second reason (and perhaps a tonic to the above) is that civil service pensions are roundly considered to have excellent terms and no adviser would suggest you’d get a better deal elsewhere anyway. The upside to that is that people with such pensions can continue to benefit from them; the downside is that it means that no app or pension system will be a ‘one stop shop’ for you. PensionBee and its ilk plainly offer the most benefit and convenience to those who have had several previous jobs in the commercial sector. It will appeal most strongly to those who have a standard portfolio career rather than those in state positions.

Empowerment through taking control
Apps like PensionBee take the hard work out of tracing your own pensions from days gone by and enable you to start saving easily if you haven’t already, split into one of eight funds. No endless options to scroll through, no paperwork. Yes, for the more experienced investor there isn’t much to challenge you or lots to compare and contrast, but the financial imperative is for people today to take care of themselves (and the planet) in a way that has not taken this shape before. Gone are the days of a once-a-year letter from a pension provider you didn’t know you had, telling you how a set of investments you don’t understand have performed. Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement.

Gone are the days of working for the same employer for 50 years in the hope of having a vaguely comfortable retirement

So many elements are at play here: portfolio careers where people switch jobs every five years or so. The willingness of young adults to look corporations in the eye and ask where their money is going. The proliferation of fintech startups that bring ease, speed, and dare I say it, fun, into making investments and watching your savings grow. The fact is that more and more people are aware that the future does not look good, either in terms of relying on the state pension alone or when considering the direction the world is headed.

Savova certainly seems to understand this duality. On the one hand is the need for digital money management and making finances easy and relevant to everyone, but especially younger adults. On the other is a global imperative to put a stop to climate change and impending doom. The paradox is that something historically thought of as boring, irrelevant, and moreover a long way off, could be crucial in tackling the ecological disaster that may once have been far away, but has now very much come knocking. We may not be especially motivated to riffle through financial paperwork for a retirement that is decades away, but Romi Savova says it doesn’t have to be that way, and for a small amount of effort, we could all take practical steps towards a significantly improved retirement pot and, with a bit of luck, a sustainable world in which to enjoy it.

Merkel’s departure marks the end of an era in Germany

Posted on January 11, 2022January 4, 2022 by itsupport

During her time as Chancellor of Germany, Angela Merkel has shaped the country into one of the most highly reputed nations in Europe. Now, in 2021, she has stepped down from her role, and Germany has been left waiting for the formation of a new government, following an inconclusive election in September. The Social Democratic Party (SPD) emerged as the strongest option in the election and, along with the Greens and the Free Democrats, have opened formal coalition talks, with Olaf Scholz, Annalena Baerbock and Armin Laschet all looking like the frontrunners for the coveted role of Chancellor.

However, all the parties accept that the situation is complex, and it will take time to come to a satisfactory resolution to form this new government. In the meantime, Merkel and her government will remain as caretakers of Germany until a decision is made.

The rise of Merkel
Merkel was born in 1954, and for the first 35 years of her life, she lived in Soviet-controlled East Germany. Here, she worked at a state-run research centre as a research scientist, until the fall of the Berlin Wall in 1989. The historic shift that the fall of the wall brought about led to Merkel abandoning the scientific work she had been carrying out, and instead she turned her hand to what would become a lifelong interest in politics. Merkel was first elected Chancellor of Germany in 2005, becoming the first woman, and the first East German, to hold the nation’s highest elective office. She has held this position for so long in fact that she has become Germany’s second longest-serving leader of the modern era, after her former mentor, Helmut Kohl, who was also chancellor for 16 years.

During Merkel’s time as Chancellor, she has achieved a great deal, but the aspects she will be remembered for most by her country, and the world more widely, are her commitment to emissions cuts, and arguably even more so than this, her actions with regard to the refugee crisis. Merkel’s decision to allow over one million refugees to enter Germany in 2015 and 2016 is how many supporters and critics will define her legacy. Her support of migration earned her praise by her supporters, and those more left-leaning in Germany. However, these actions were criticised by the far right, who were concerned Merkel represented an open-border immigration policy that had gone disastrously wrong.

To find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge

What no one can argue with though is Merkel’s popularity over the years, having affectionately been referred to as ‘Mutti,’ meaning ‘mother’ in German. While initially used as a patronising term by her critics, it has since been rebranded as a term of endearment. While other world leaders have come and gone, Merkel has remained, a figure of stability in Germany, avoiding scandal in a way her predecessors and many other European politicians have not. Merkel has led Germany through a global financial crisis, the Eurozone debt crisis, the immigration crisis, and most recently, the pandemic. Her unwavering statement of “we will manage” when faced with an escalating immigration crisis neatly encapsulates the spirit with which she has carried the German nation through tough times. Therefore, to find someone who possesses both her stability and strength, someone who can unite all of Germany and the EU, will be a challenge.

New directions
Germany’s newly elected parliament held its first meeting on October 26 of this year, following the September election. The German President, Frank-Walter Steinmeier, formally dismissed Merkel and her Cabinet. However, they will remain in a supervisory position until a new government officially takes office. The SPD candidate for chancellor and the former vice-chancellor under Merkel’s fourth government, Olaf Scholz, is one of the leaders tipped to replace Merkel. Scholz has previously served as the finance and interior minister for Germany, and is one of the longest-serving members of parliament.

However, although his experience as finance minister does benefit him, his critics have also thrown accusations his way regarding two big financial scandals, aiming to cast doubt on his suitability as a candidate for chancellor. But in terms of popularity, he’s a runaway leader in the polls; it was revealed in at least one survey that if the German people were voting for their next chancellor, Scholz would be the one they would choose to elect.

For some of the German population, and more widely, other world leaders, Merkel is leaving her final term as a chancellor on something of a high, with unemployment in the country down by six percent, which is half of what it was when she first became chancellor in 2005.

In addition, Merkel’s government’s economic policies have helped Europe’s largest economy recover, twice. However, for some German economists, Merkel’s fourth term as chancellor has been viewed as a time of slippage in the country’s competitive drive, with widespread agreement that Germany’s physical and digital infrastructure is now backward. Therefore, in the lead-up to the election, promises from other parties included these specifics as areas they would focus on, should they come to power, as well as promising to look at tax and pension reforms.

The view of a post-Merkel Germany
Germany has always held a certain weight in European policymaking. Therefore, the next chancellor will not just be responsible for leading Germany through crises, but also the whole of Europe. The predicted coalition is likely to be more in favour of EU integration than Germany previously has been, and there is even more reason that the next chancellor will have to take charge on many issues arising within Europe. One of the tasks awaiting the next chancellor is the need to update The Banking Union, which was first introduced in the wake of the debt crisis. However, this could cause controversy within Germany due to many of the population having concerns that updating this union will lead to them paying massive bills in order to support euro nations that are less financially conservative. In addition, the eurozone is also due to update its debt and fiscal rules in 2022, another matter at hand that the new chancellor will have to decide their stance on. One final economic issue that will soon need to be tackled is whether the recovery fund, initially meant as a one-off measure to fund the EU’s recovery from the pandemic, should become a permanent feature within the EU.

This fund would require the backing of the new chancellor, and the position that they take on this is crucial, as the other member states look to Germany for leadership. Will a post-Merkel Germany continue to lead Europe? It remains to be seen whether the new coalition government aligns Germany closer to or further away from the EU.

Merkel’s legacy
When Merkel announced her departure from German politics, it was widely acknowledged what a significant impact this would have not just on Germany, but Europe too. Her ability to remain in power for so long as chancellor is the reason why she has become a symbol of political stability. However, her ability to ward off political opponents over the years is partly what has led to the current situation, where there isn’t a clear heir to take the reins.

The legacy Merkel will be leaving behind can be summed up as a continuing defence of the liberal world order, a title allocated to her as a result of her consistent support of refugees, as well as her support of the laws that seek to address the climate crisis.

Her policies over the years have contributed to her shifting the Christian Democrats party significantly to the centre. However, this has resulted in a rise of the far right populist group, Alternative for Germany (AfD), who now hold 92 seats in Germany’s parliament, having not previously won seats in the Bundestag prior to 2017. Merkel will remain in a caretaker role until the new government is officially in place, which might not be until Christmas.

After the new chancellor has been appointed, she will be able to completely step back, and will be granted an initial transitional allowance of half her pay, after which time she will be entitled to a pension, from her work as chancellor, government minister, and member of the Bundestag.

The next chancellor faces the significant challenge of running a country that has come to be relied upon as one of the world’s great economic leaders. Other countries, particularly within the EU, will look to Germany for guidance and to help Europe recover from the continued economic fallout from the pandemic. For many, Merkel’s departure represents the end of an era. For the first time in over a decade and a half, Germany must manage without its mother.

China’s war against its corporate powerhouses

Posted on January 10, 2022December 23, 2021 by itsupport

When Jack Ma, the founder of Chinese e-commerce powerhouse Alibaba, gave a speech in Shanghai in October 2020, he didn’t suspect that it would mark the beginning of his demise. Addressing an audience of corporate and government elites, Ma openly criticised the Chinese government for its handling of the economy. “Outdated supervision” of financial regulation, he claimed, was stifling innovation, while China’s financial regulators resembled an “old people’s club.” To add insult to injury, he called for change, criticising the government’s meddling with private corporations. “The game in the future is about innovation, not just regulatory skills,” he warned.

As it turned out, regulators had little patience for innovators like Ma. The speech would be his last public appearance for several months. The plucky entrepreneur even failed to appear in the final episode of his own talent show, ‘Africa’s Business Heroes,’ which supports aspiring African entrepreneurs. More ominously, his account on Twitter, the altar from where even Chinese entrepreneurs feel free to preach to an audience hungry for their wise words, went silent. Ma’s last tweet to his 655k followers was posted on October 10, 2020, a reminder of his precipitous fall from grace.

The fall of tech barons
Ma’s disappearance from the public eye was not an isolated incident. In November 2020, the much anticipated $37bn IPO of Ant Group, Alibaba’s sister company offering financial services, was cancelled over a “significant change” in regulation. As it would emerge, just a week after his controversial speech, Ma had met with Chinese regulators. Following the meeting, officials issued stricter rules for micro-lending companies, forcing Ant to overhaul its business. Another reason why Alibaba was targeted by authorities was its growing influence in the financial services market, including consumer credit, which surprised Chinese authorities. “In the case of Ant, Alibaba’s finance subsidiary, regulators were increasingly under the impression that they were losing out on oversight of financial flows within China. Alipay and WeChat were taking a near 100 percent market share in the space of payment services providers, so the Chinese government now wants to take back control,” said Kai von Carnap, an analyst at the Berlin-based think tank Mercator Institute for China Studies (MERICS). Last April, Alibaba received a fine of $2.8bn for monopoly abuses; by October 2021, its stock market value had nearly halved compared to the previous year. Although the crackdown would probably have happened anyway, Ma’s caustic words made things worse for him, said von Carnap. “Criticising them {regulators} in their faces lit the fuse that made them prove they were serious about institutional changes.”

Companies must be regulated more tightly and also play their part in creating a more ‘equal’ society

Alibaba is the most prominent victim of a silent war the Chinese state has been waging against its own soldiers in the economic war with the West: Chinese tech corporations. Another tech powerhouse, DiDi Chuxing, China’s dominant ride-hailing company, is under investigation for data security breaches. Analysts believe that the firm drew the ire of the government by listing on the New York Stock Exchange last June, before the Cyberspace Administration of China (CAC) had completed its data security review. Last August, Chinese authorities introduced regulation forbidding teenagers from playing video games for more than three hours a week, a measure that has hit the country’s $45bn video gaming industry; no new games have been approved by China’s gaming regulator since August. Tencent Holdings, a gaming behemoth, had lost around a third of its value by November, while its music branch was forbidden from signing exclusive deals.

At first glance, the clampdown could be interpreted as China-style antitrust action against digital powerhouses that had long overplayed their hand. “In Beijing’s eyes, more regulation on big tech is good for the country’s tech development, because small players will have more room to innovate,” said Linghao Bao, an analyst at Beijing-based consultancy Trivium China. For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially, a goal the Chinese government saw as compatible with its own growth goals. These days are now over. “One common driver behind all these cases is that these companies offended regulators or pursued regulatory arbitrage and angered some major decision makers,” said Xiaomeng Lu, Director in Eurasia Group’s geo-technology practice, adding that Alibaba and Ant were punished for their aggressive ‘choose one from two’ strategy, which prevented affiliate merchants from collaborating with other platforms.

However, the clampdown goes far beyond what would be perceived as antitrust action in the West. Last summer, the Supreme Court outlawed the ‘996’ overtime policy that allows tech companies to employ people from 9am to 9pm, six days a week. In July, China wiped out the country’s $100bn edtech industry overnight by introducing new regulation forbidding companies from providing pupils with core tutoring services and banning IPOs and foreign investment into such firms.

The state takes over
Data, singled out last year as a major production asset, lies at the centre of China’s push to tighten its grip on the tech sector. The government already collects huge volumes of data through its social credit system, monitoring citizens via a network of algorithm-powered surveillance systems. It now wants access to data held by private companies, as evidenced by new regulations introduced earlier this year. One of them, the Personal Information Protection Law, requires firms to seek approval from state regulators to move data out of China. Another piece of legislation, the Data Security Law, focuses on the protection of ‘core data’ that affect national security. “There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security. This is partly a result of the Snowden revelations, which were a big wake-up call for Beijing,” said Rebecca Arcesati, an analyst at MERICS, specialising in China’s digital and data policies. Companies that don’t comply with the new rules will face severe penalties. “The question is, how can global companies, such as Chinese wireless equipment vendors and digital platforms, guarantee that the data they collect overseas will not be shared with the Chinese state? China’s emerging data governance regime is making the answer clearer: they can’t,” Arcesati warned.

China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future

Foreign companies operating in China may find the new rules too strict or ambiguous, particularly those operating data centres. “For very profitable firms, such as Tesla, this {compliance burden} may not be a big deal. For smaller players that can’t afford the extra cost, this will add to their operational and financial stress operating in China,” Xiaomeng Lu said. Many of them already take a conservative approach to data compliance, due to a lack of understanding of local regulation. There is a risk that tighter regulation could put these firms at a disadvantage compared to Chinese competitors by making it more difficult for them to transfer data from China to other markets, Arcesati said, adding that there might be more pressure on companies to create China-specific solutions that will be incompatible with global ones. Last October, LinkedIn became the latest foreign social media platform to leave the country, citing a “significantly more challenging operating environment,” interpreted as a covert reference to censorship.

In November, Epic Games, a US company partly owned by Tencent, stopped accepting China-based registrations for Fortnite, a popular video game. “Investors did not take regulatory risk seriously when it came to China. They assumed it was a free for all, and so long as the economy grew the Party didn’t care who was getting rich and how,” said Shehzad Qazi, Managing Director at China Beige Book International, an independent provider of data on the Chinese economy, adding: “This turned out to be very naive and short-sighted. China remains very investable, but smart money will now seriously price in regulatory and broader political risk.”

The long arm of the Chinese state has also reached corporate board rooms. Large firms have long been required to run ‘party committees’ bringing together executives and party officials to discuss how corporate strategies align with state policies. The government is now pushing for direct board representation through the ‘golden share’ rule, which allows government agencies to take board seats with stakes of just one percent.

Earlier this year, a government fund purchased such a stake in ByteDance, the company behind the social media platform TikTok, along with a board seat. “The impact of golden share on companies is still quite limited at this point. The new board member of ByteDance is merely a former mid-level propaganda official,” Trivium’s Bao said. “This person is unlikely to meddle with corporate decisions at ByteDance.” However, some analysts note the novelty and far-reaching consequences of the measure. “You could interpret that as a more public and direct form of influence at these companies,” von Carnap from MERICS said.

Chinese tech companies have also been victims of increasing tension between the US and China. A series of delistings from US exchanges of several Chinese firms, overall worth over $2trn until mid-2021, will consolidate the ongoing decoupling of the two economies. Many Chinese companies, including Alibaba, are instead opting for a second listing in Hong Kong. NASDAQ Golden Dragon China Index, which tracks New York listed firms, had lost by November a third of its value since the beginning of the year. New rules issued by China’s cyberspace watchdog will make it harder for firms to list outside of China, while newly introduced US regulation also makes delisting easier for non-compliant foreign firms, following a scandal involving Luckin Coffee, a US-listed firm caught lying about its sales numbers. “In the past decades, overseas listings and the dependence on foreign financial centres was a pragmatic alternative for Chinese companies, given the recognised institutional barriers in China’s financial system,” said Max Zenglein, chief economist at MERICS and expert on China’s macroeconomic development, adding: “This trend {reshoring} was inevitably going to happen. An aspiring economic superpower wants its companies to list at home, not abroad.”

China has launched a campaign to achieve tech supremacy in key areas its government perceives as crucial for the country’s future, from AI to space technology. Surprisingly, the crackdown on consumer-orientated big tech chimes with that policy, according to Eurasia’s Xiaomeng Lu: “From Beijing’s perspective, knocking back on these platforms’ troublesome practices is well-aligned with its goal of tech supremacy – the government wants to steer companies towards ‘hard technology’ investment in semiconductors, AI and quantum computing, and move away from what they view as ‘low-end’ competition.” However, some think that the policy may backfire: “In the real world it is hard to separate online platforms from hi-tech manufacturing, so the crackdown will probably hurt the overall technology push,” said David Dollar, a former US Treasury emissary to China and senior fellow at the Brookings Institution’s John L. Thornton China Centre.

Prosperity for all
The purge of tech companies is symptomatic of a broader shift in the Chinese economy. Last August, the party’s financial and economic affairs committee declared that it was necessary to “regulate excessively high incomes” to ensure “common prosperity for all,” a term that has become a synonym for China’s new economic dogma, putting emphasis on fair distribution of wealth. In a speech made the same month, the country’s leader, Xi Jinping, delineated the basic tenets of the “common prosperity” policy, explaining that equality would become a priority by “rationally adjusting” excessive incomes. The timing of the speech, amid the crackdown on internet giants, sent the message that the era of “growth-at-all-costs” expansion for digital behemoths was over.

For many years, big tech companies were allowed to skip regulatory oversight in order to grow exponentially

Although the Chinese government hasn’t fleshed out the details of the new policy, it is expected that large corporations will face higher taxation, pressure to make donations and strong antitrust action. Many Chinese corporations and entrepreneurs rushed to embrace the doctrine, donating billions for the common good. Alibaba has pledged to donate $15.5bn to help reduce poverty. But the damage has been enormous, wiping out over $1.5trn of stock market value from China’s biggest tech groups by mid-2021. “Chinese entrepreneurs have benefited greatly {from China’s growth}, but in the wake of their success several societal problems have been created,” said Shehzad Qazi from China Beige Book International, adding: “Now these companies must be regulated more tightly and also play their part in creating a more ‘equal’ society.”

A key part of the new policy is expected to be higher spending on healthcare and social security, a radical shift for a country that, although nominally Communist, lacks a Western-style welfare state. “China has very little redistribution through its taxes and expenditures, so policies such as a property tax and unification of rural and urban social services could help develop the middle class,” Dollar said, adding: “This would enable China to move away from its over-reliance on investment and develop a more sustainable growth path.” The drift towards a more egalitarian economic policy marks the abandonment of market reforms introduced in the ’70s by Deng Xiaoping that encouraged profit-making, encapsulated by the motto “Making money and getting rich is glorious.” Tech corporations, the poster children of China’s economic miracle, may be the first, but not last, victims of a return to purist Communist dogma. “Since 2013, there has been a systematic reversal by the Party to the extent that private profits are no longer morally justified and getting super-rich is morally wrong, paving the ground for the recent introduction of the ‘common prosperity’ policy” said Zhiwu Chen, who teaches finance at Hong Kong University.

There is a concern that data may be obtained and exploited by foreign adversaries, particularly by the US, endangering China’s national security

However, many question the efficacy of the policy. “China’s leaders seem prepared to accept a marked short-term slowdown in growth as a price for greater financial stability over the long-term,” said Eswar Prasad, an expert on Chinese trade and financial policies who teaches at Cornell University, adding: “The government’s moves to simultaneously increase state control of the economy and the lack of clarity about its intentions towards private enterprise could intensify volatility and act as a drag on growth in the long-term.” Tighter control may lead to lower profits, added Chen: “The common prosperity policy is cutting private incentives to invest and start businesses, which will slow down economic growth and hurt the housing market down the road.”

A real estate crisis
A crucial part of the new economic policy is reining in debt-fuelled property investment and speculation. Currently, real estate accounts for around 30 percent of the country’s economy, which the government aims to bring closer to single-digit numbers.

In 2021, China had 65 million empty homes, many concentrated in ‘ghost towns’; the country’s imminent demographic crisis, with senior citizens projected to account for 40 percent of the population by 2050, means that many of these houses will remain empty forever. Logan Wright, Director at Rhodium Group, a research provider, expects the property sector’s underperformance to continue well into 2022, affecting the country’s growth rates.

The sector’s crisis came to the fore last September when Evergrande, one of the country’s largest property developers, missed a series of bond coupon payments. The company, burdened with more than $300bn of liabilities, has become a symbol of an economic model the government is now rejecting, after decades of unchecked growth. Investors hoped that the central bank would bail out Evergrande, fearing a spillover across the real estate sector. However, government officials publicly criticised the company for poor management and excessive risk-taking, marking the shift in the way large corporations are treated by the state. Regulators have introduced measures to tackle property speculation. The most important one is a planned property tax, expected to deflate the real estate sector. “They are now addressing the real elephant in the room by going after highly leveraged real estate developers. The concern over financial risk trumps their concern over lower economic growth,” said Zenglein from MERICS, adding: “The Evergrande fallout is the result of deliberate measures taken by regulators to rein in risky business practices and it sends a powerful message.

Evergrande’s crisis did not come as a surprise, allowing the government to prepare and take necessary steps to contain the situation if necessary.” The firm’s size and links to other developers have raised concerns over a property price collapse that could lead to a financial crisis. Markets may be temporarily over-reacting, said Prasad from Cornell University, but the danger will persist: “Fears that a bankruptcy filing might signal a broader unravelling of the Chinese financial system could precipitate capital outflows, put downward pressure on the currency, and cause at least temporary turmoil in foreign exchange markets.” More companies may also follow a similar path, according to Zhiwu Chen from Hong Kong University, clipping China’s economic prospects. “While official interventions will prevent large-scale crises from happening, the costs from past excessive debt-fuelled investing and business expansion in China will be gradually spread across Japanese-style ‘lost decades,’ with the negative consequences manifested gradually, instead of a crisis.”

Revolution 2.0
To explain China’s authoritarian drift, many scholars turn to a dark page of the country’s history: the Cultural Revolution, an upheaval that cost the lives of an estimated 1.5 million people from 1966 to 1976. In an attempt to consolidate his power within the Communist party and avert criticism over economic mishaps, Mao Zedong unleashed a violent youth movement that paused the country’s economic and technological development. Many scientists were arrested, imprisoned or executed. Universities stayed closed for several years and entrance exams were cancelled.

However, basic education expanded, particularly in the countryside, with the proportion of children who had completed primary education doubling within a few years. Analysts point to the legacy of this tumultuous period as a lodestar guiding the current leader of the country, Xi Jinping. Like Mao, Xi sees himself as a modern helmsman turning the ship of Chinese society to the familiar waters of egalitarianism, making the wellbeing of the great unwashed living in the countryside the state’s priority, following decades of unbridled economic growth.

In government affairs, Xi is also borrowing a page from Mao’s little red book. Defying the unwritten rule that requires the country’s leadership to pass the torch to a new generation every decade, he is preparing to renew his Presidency for a third five-year term next year, after abolishing the two-term limit and purging hostile party officials. In a bid to win the hearts and minds of low-rank party members, he often presents himself as an empathetic leader focused on the problems of ordinary citizens, such as unaffordable housing. “The rich and the poor in some countries are polarised with the collapse of the middle class leading to social disintegration, political polarisation and rampant populism – the lessons are profound!” Xi said in his speech last August.

However, the parallels with Mao end there. “Xi has some stylistic similarities with Mao, and his authority within the party appears to be strong relative to Xi’s predecessors, but he does not dominate the Party anywhere near the extent that Mao did,” said Andrew Walder, an expert on Chinese history at Stanford University. Unlike Mao, a radical Marxist who according to Walder opposed the idea that the Communist party’s main task was to bring economic growth, Xi believes that a large private sector is essential for economic development, but only under the tight control of the Communist party. “Xi is essentially a nationalist who deploys Marxist and Maoist symbolism, which is primarily an exercise in nostalgia about the Party’s former revolutionary past. Mao was a radical who was anti-bureaucratic. Xi simply wants to tighten up the Party’s bureaucratic control to ensure that it continues in power,” said Walder.

Despite Xi’s ambitions, China may have reached a point where economic development requires less, rather than more, state control. Even before the pandemic, growth rates were hovering around six percent (see Fig 1) and are expected to drop further, a major downgrade from the double-digit rates of past decades. The clampdown on fast-growing tech companies has also taken its toll.

In the third quarter of the year, (see Fig 2) China’s growth slipped to an underwhelming 4.9 percent, with lockdowns and a problematic vaccination campaign threatening recovery. Private debt is also rising, a sign that China now faces the problems of a mature, middle-income economy.

China’s ratio of household debt to disposable income reached a record high of 130.9 percent in 2020. So far, the country’s response to these challenges has been a mix of aggressive nationalism abroad and tighter control at home. However, aiming for a combination of economic growth and national assertion, China may get neither. “Everything nowadays has become a matter of national security, because of Xi Jinping’s all-encompassing definition of what constitutes national security,” said Arcesati from MERICS, adding: “That balance will be difficult to strike.”

Who will control the Taliban’s treasure?

Posted on January 7, 2022December 23, 2021 by itsupport

Afghanistan, a mosaic of tribal identities making cohesion extremely fraught as well as historically bloody, has around $9bn in assets held overseas. Most of these assets are frozen. Around 80 percent of the country’s budget is dependent on foreign aid, which has also dried up. “Our engagement with Afghanistan has been suspended until there is clarity within the international community on the recognition of the government,” said IMF spokesman Gerry Rice in September.

“We’re guided by the international community in terms of the recognition of the government in Afghanistan, and we don’t have that.” Afghanistan’s GDP is also part-reliant on overseas remittances, which are struggling to land safely, if at all. Seventy percent of the country’s population is under the age of 25 so most have no experience what Taliban rule means – till now.

Rich but poor
Klisman Murati, CEO of global risk and development research house Pareto Economics, told World Finance that the Taliban are incapable of plugging the public finances void. “If there’s no revenue coming in for the government, there’s no way these civil service salaries can be paid, fully or at all.”

Talk of tacit or implied financial support or recognition from other countries only gets you so far. “Who will take the first step? I don’t think anyone is going to take the first step until they see a robust system of law and that the Taliban can maintain a functioning society. Even if they can, there are going to be certain terms and conditions put forward by the West, to make sure they respect the values that the West holds.”

Afghanistan, however, is richly endowed with rare earth metals vital to the world’s transition to a cleaner, greener economy. Back in 2010 a number of US geologists and military officials concluded that, beneath much of the country’s mountainous dust and rock lay huge supplies of copper, cobalt and lithium.

The Chinese aren’t interested in re-building Afghanistan. They‘re only interested in fuelling their ambitions

These and other hard-to-excavate earth elements are vital in the production of electric vehicles. If Afghanistan was allowed to develop its mineral resources “it could become one of the richest countries in the area within a decade,” Said Mirzad of the US Geological Survey told Science Magazine in 2010. But under the previous unity government, trust with investors was weak. Corruption between local warlords and the Taliban is extreme and reliable governance looks decades away.

“China has the deepest pockets but has not rushed in to extract the presumed $1trn worth of minerals beneath the Afghan dust,” wrote Dr Vanda Felbab-Brown, Senior Fellow at US thinktank Brookings in August. Felbab-Brown says China bought just a handful of licences, put off by security and corruption worries. Dr Christine Cheng is Lecturer in war studies at King’s College London and also holds a BASc in systems design engineering and she takes a close interest in sustainable technology.

She says China is paying close attention to Afghanistan’s precious metals potential but concurs with Felbab-Brown that super-caution from the international community, both west and east, reins in longer-term planning, for now.

Next-gen terror
The priorities of near neighbours China and Russia, she says, is the security situation. “Russia and China, foremost in their mind, care most about how Afghanistan is going to deal with Islamic extremists and they are worried about what is going on in their own territories and worried about the lesson learned as Taliban as victors. Also how ISIS-K is managed and contained…the spillover effects of that.”

Just as concerning is the potential for fracturing within the Taliban itself. “That’s the biggest danger,” Cheng goes on. “The people who negotiated the Doha agreement [signed in February 2020] with the US that’s one faction – the diplomatic part.” Much of this faction was largely in control in the 1990s. “If you listen to the people who were in control in the 1990s and then read what they are writing about their approach to governance, it’s much more moderate than you or I would expect, given how they ruled the first time. You could say they’ve gotten older, wiser, lived abroad perhaps and learned about how they might have done things differently.”

“But those,” she goes on, “who are at mid-level now, those mid-level commanders who actually control things on the ground, they weren’t around in the 1990s and didn’t see much of how the Taliban ruled.

So their approach, or world view, is really different. And arguably more radical. They want much harsher restrictions. They want a much stricter Sharia state. That’s causing divisions.”

This fracturing of order within the Taliban is something the west regularly underestimates, other sources confirmed to World Finance. But for many ordinary Afghan families, fracturing is normal. For example, before the US pull-out it was common for a family to have one son employed by the Taliban and another working for the US-supported government. Afghan families hedge bets to survive.

Klisman Murati says it’s important to remember that any idea of Taliban rule imploding has limited relevance. “The Taliban don’t have de facto control over the whole of Afghanistan. If the Taliban implodes it doesn’t mean much because the rest of the country doesn’t survive off the Taliban.” Only those in Kabul, employed by public institutions funded by international money allowing education and healthcare to develop, are mainly affected.

The Taliban meanwhile have sent a strong signal of their intended direction: their new minister of the interior, Sirajuddin Haqqani, is wanted by the FBI and the US department of state is offering a $10m reward for any information leading to an arrest.

Just $2 a day
Much of the Afghan working population earns less than $2 a day. Many Afghan banks can’t supply enough hard cash to customers and runaway inflation for everyday staples – rice, bread and vegetables – is widespread. The Afghani, the national currency, has been in freefall since August.

So what gives? How, economically, will the country manage medium term? Dr Iftikhar Zaidi is senior lecturer in leadership and strategy leadership and change at Cranfield University and knows the region, as well as the border between Afghanistan and Pakistan from an earlier military career. “You have a government that isn’t liked, for different reasons. These are people who are locked in a version of Islam that only theoretically existed perhaps. They are locked in time but they won’t be brought forward by disengaging.”

He goes on: “The Afghans are sitting on an abundant quantity of chromium. It isn’t a rare metal but the quality of chromium in Afghanistan is high and is economical to mine, compared to anywhere else in the world. Then there are other rare earth metals, like cerium. So, if we don’t go in, someone will. The Chinese can. They don’t have to do it overtly. They will provide the money to the Taliban, who will mine these metals.”

“So the Taliban,” he says, “will find money. But it’s a question of what we, the west, are prepared to pay as a price.” He adds: “The Chinese aren’t interested in re-building Afghanistan. They’re only interested in fuelling their ambitions.”

Brutal reality
Dr Bryan Watters, associate professor of defence leadership and management at Cranfield University and a colleague of Zaidi says the major players – the US, EU, China and Russia – haul much historical Afghan baggage behind them. Border controls apart, the country’s untaxable, he says. Watters warns too many people look at Afghanistan through the eyes of an urban elite. “There’s talk about how the people of Afghanistan will not put up with the situation. Get beyond Kabul and the other three big cities [Kandahar, Mazar-i-Sharif, Herat] and I don’t think anything has changed. The urban elite can be dealt with brutally. They’re either being thrown out or they’ll be dealt with. If the Taliban believes the urban elite are a threat to their beliefs and their idea of nationhood, having defeated the Americans, dealing with a few urban elites ain’t going to be a problem.”

“The west may tut-tut but like, Syria and North Korea, will do little,” adds Watters. Much of the developed world is pulling away from COVID-19 and obsessing over rising energy prices and tangled supply chains. “This isn’t an environment where developed countries are going to increase their aid budget to Afghanistan.” China will probably make sure that there’s just enough financial support to keep Afghans fed and watered – just about – says Dr Zaidi. “It’s a simple population. All they want is $2 a day to survive.”

For the population of 30–40 million (no public census has taken place since 1971) that’s not much money, he says. “You can get $2 into people’s hands, which keeps them happy – and milk the country.” China may manage this with Russia he says, or a consortium of like-minded countries. The west certainly doesn’t want China to have a monopoly on lithium – high grade lithium is low density, floats in water and is of spectacular interest to developed industrial economies transitioning to a more sustainable model – and other metals vital to electric vehicle batteries, medical kit and other uses. China already controls much of the rare earths market and therefore the prices. But the west has spent enough and spilled enough blood in Afghanistan and the US has made its decision to leave. The question is: what will it do next, and when?

Climate change: from crisis to opportunity

Posted on January 6, 2022January 11, 2022 by itsupport

On a grey, Glaswegian Sunday in mid-November, COP26 negotiations drew to a dramatic close. Hailed as a potential “turning point for humanity” by British Prime Minister Boris Johnson, the UN’s climate change summit brought together world leaders from almost every country on Earth for a series of urgent, timely and closely followed discussions. For two weeks, the world looked on as deals were struck, pledges were signed and new climate change commitments were drawn up. Amid powerful pleas from young climate activists, countries from around the world took decisive action in Glasgow, promising to protect forests, cut methane emissions and shift away from fossil fuels.

But the trailblazing tone of the summit was tempered on its closing day. An eleventh-hour intervention by India and China saw the wording of the final deal – the Glasgow Climate Pact – amended to reflect a commitment to “phase down” coal usage, rather than the original pledge to “phase out” the harmful fossil fuel. COP26 President Alok Sharma was almost overcome with emotion as he explained what had happened to assembled delegates, saying that he was “deeply sorry” for how events had unfolded. According to a tearful Sharma, the last-minute alteration was necessary to keep the pledge on the table, but he admitted that the resulting outcome was a “fragile win” in the fight against the climate crisis.

Despite this late revision to the COP26 deal, the Glasgow Climate Pact still very much represents a historic moment in the global effort to combat climate change. The agreement marks the very first time that an international climate deal has aimed at reducing coal consumption – for the past 30 years, the word ‘coal’ has been notably absent from any global climate pacts. Elsewhere across the summit, more than 100 world leaders promised to end deforestation by 2030 (see Fig 1), while China and the US announced a surprise pledge to work together to cut greenhouse gas emissions.

On ‘finance day,’ a coalition of 450 banks, pension funds and other financial institutions – who together have over $130trn at their disposal – committed themselves to the Paris Agreement 1.5 degrees Celsius warning limit, in what was a historic unlocking of private capital to fund the transition to green energy.

The climate crisis is certainly looming large on the global horizon – but the world’s most powerful players are now taking tangible action.

Who can you call?
While politicians such as Liberia’s President, George Weah, may have taken centre stage at COP26, the summit showed that global finance has a critical role to play in the fight against climate change. After all, financial institutions control vast amounts of capital, and if they stop lending to environmentally damaging sectors – fossil fuels, coal mining, fracking and forestry, to name a few – then these industries may find that their funding soon dries up. Despite this mounting pressure, however, it appears that our financial giants aren’t quite ready to turn their backs on fossil fuels just yet. In fact, the world’s largest investment banks have poured $3.8trn into fossil fuel companies since the signing of the Paris Agreement in 2015, according to a recent report led by a coalition of NGOs.

But COP26 may well see the financial world go green. The financial sector’s $130trn net zero pledge is undoubtedly a watershed moment for the sector, representing a decisive pivot towards a more sustainable future. If successful, it could very well be the first step along the road to a net zero financial system.

As eagle-eyed readers may have noticed, there was a familiar name behind this headline-grabbing COP26 deal. Mark Carney, the former Bank of England governor, was responsible for bringing together the $130trn coalition, in what was perhaps a personal career highlight for the climate-focused banker. Consistently vocal on climate change risks during his time with the Bank of England, Carney’s eco-credentials have only grown since his departure in 2020. Now serving as the United Nations’ Special Envoy for Climate Action and Finance, the Canadian native is on a mission: to drag the financial world away from the dirty investments of the past and push it towards the green opportunities of the future. It’s a big ask, but Carney may just be the right man for the job.

Calm in a crisis
Through every stage of his high-profile career, Carney has shown himself to be a dependable problem-solver. At the age of 42 – practically still a teenager in central banking years – he was promoted to the top job at the Bank of Canada, becoming the youngest ever central bank governor among the G8 and G20 nations. But banking wasn’t always Carney’s dream. In an interview with The Guardian, he admitted that banking had initially been a way to pay off his student loans after graduating from Harvard and earning a PhD at the University of Oxford. It turned out to be a good fit, however, and after proving his merit with a 13-year stint at investment banking juggernaut Goldman Sachs, he was appointed deputy governor of the Bank of Canada.

The summit showed that global finance has a critical role to play in the fight against climate change

It was while he was on secondment with Canada’s Department of Finance that he was called up for the role of governor at the Bank of Canada, assuming the post against the turbulent backdrop of the rapidly unfolding global financial crisis in February 2008. Taking on the top job at such an unprecedented, volatile and financially calamitous time was not for the faint-hearted. Yet it was in these testing times that Carney proved himself on the global stage. Just one month into his tenure, he slashed Canada’s interest rates, providing something of a fiscal injection and boosting market confidence at what proved to be a pivotal moment in time. Months later, other central banks followed suit, but by then it was simply too late. Carney had acted quickly and decisively, and his actions at this time are said to have spared Canada the very worst impacts of the financial crash. After a few short months in his post, it was already clear: Carney was a good leader in a crisis. It is perhaps unsurprising then, that four years later the Bank of England came knocking on his door.

Never smooth sailing
In 2012, the British economy was in a very sorry state. The UK had fallen into a deeper post-crisis recession than experts had anticipated. With GDP in decline, the country entered into its first double-dip recession since the 1970s. The Bank of England, meanwhile, was increasingly seen as an antiquated institution in urgent need of a refresh. And with the serving central bank governor nearing the end of his tenure, then chancellor George Osborne had just one man in mind to take over the role. However, Carney wasn’t easily sold on the Bank of England job, repeatedly turning the position down until the chancellor was forced to sweeten the deal with a more attractive offer. Securing a salary over double that of his predecessor, Carney officially took the helm in July 2013, becoming the first foreign governor of the Bank of England since the institution was founded in 1694.

“Mark Carney is the outstanding central banker of his generation,” chancellor George Osborne told MPs as he unveiled his appointment in the House of Commons. From the outset, expectations were almost unreasonably high – with representatives from across the political spectrum hailing the Canadian as something of an economic miracle worker. Yet despite these pressures, he once again rose to the occasion, quickly earning the nickname ‘Capable Carney’ in the British press.

The financial sector’s $130trn net zero pledge is undoubtedly a watershed moment

One of the first items the incoming governor had to tackle was making the Bank of England a more open and communicative institution. It goes without saying that changing the company culture and working practices of a 319-year-old establishment was no easy task, but it was certainly a necessary one. When Carney joined the Old Lady of Threadneedle Street in 2013, public distrust of the banking system remained high, with central banks expected to lead by example when it came to rebuilding trust and establishing a more honest and open working environment. In August 2013 – just one month after assuming his role as governor, Carney launched the bank’s ‘forward guidance’ policy, signalling his intention to make monetary policy more accessible and transparent.

More specifically, he wanted to give financial markets, businesses and the wider public a clear picture of the bank’s future interest rate policy – something that the institution had been famously tight-lipped about before his arrival. This early activity was a sign of more work to come on improving communications and transparency – which is now seen as one of Carney’s most noteworthy achievements from his seven-year tenure at the bank.

By 2016, Carney had made good progress. Under his stewardship, the Bank of England had implemented some necessary post-crisis changes and the British economy was in recovery, with GDP now growing again after taking a nosedive in the years following the financial crash. If Carney had been drafted in to solve a crisis, he was certainly well on his way to fulfilling that demand. Then, just as one crisis appeared to be over, another one landed on his desk.

The Brexit blues
Markets were jittery in the weeks leading up to the UK’s landmark EU membership referendum. As Britons headed towards the polling booth, Carney warned that a vote to leave the EU could trigger a new recession just as the country emerged from the last. This comment prompted Eurosceptic backbench MP Jacob Rees-Mogg to label Carney as an “enemy of Brexit,” but the Bank of England governor defended his position, insisting that the bank’s role was to “identify risks, not to cross your fingers and hope risks would go away.”

If we are to build a new, more sustainable world, it is only right that we also create a new, more sustainable financial system

And indeed, the Brexit risks didn’t disappear. In the early hours of June 24, 2016, the results were in: Britain had voted to leave the European Union. By the morning, the pound was plummeting and the Prime Minister had resigned. In the midst of the unfolding chaos, Carney once again took charge, offering reassurance to the nation in a televised address, broadcast shortly after David Cameron’s resignation. “We are well prepared for this,” Carney told the cameras in his presidential-style address. Overnight, a political vacuum had opened up in the UK, and it fell to the Bank of England governor to restore a sense of stability and calm to markets, business owners and British households. Determined to avoid an economic downturn, Carney soon set out his post-Brexit plan, with the press praising him as the only “adult in the room” at a time when the nation needed stable and decisive leadership.

Entering into all too familiar crisis-management mode, Carney slashed interest rates to historic lows in an effort to safeguard financial stability. “There is a clear case for stimulus, and stimulus now, in order to be there when the economy really needs it – to have an effect when the economy really needs it,” he said at a news conference upon announcing the base rate cut. In the months that followed, Carney stuck to his plan, acting calmly and quickly to keep the economy from plunging into the recession that he had so feared.

Just a few months on from the pivotal Brexit vote, the Theresa May-led Conservative government implored Carney to stay on as Bank of England governor for an additional year, taking his tenure at the institution through to June 2019. The Canadian dutifully agreed to serve an additional year, confirming that he would remain in post in order to help the UK to navigate its tricky exit negotiations with the European Union. However, as UK-EU talks rumbled on and Carney’s departure date loomed large in the diary, he was once again asked to extend his tenure – this time out to January 2020 to ensure a smooth Brexit transition.

So, having steadied the ship through the choppy Brexit waters, Carney was relieved of his duties after serving almost seven years in the Bank of England top job. After steering the institution through two ‘once-in-a-lifetime’ crises, he was now ready to take on the next global challenge: the threat of climate change.

Onto the next crisis
Nobody would have blamed Carney if he had decided to enjoy some well-deserved down time after departing from the Bank of England. But it seems that is just not his style. A long-time vocal advocate for action on climate change, he was appointed as UN Special Envoy for Climate Action and Finance in March 2020, with the aim of whipping up private finance to fund global climate goals. Net zero can still be a hard sell in the financial world – but if anyone is up for the challenge, it’s Carney.

Drawing on the same practical, problem-solving approach that served him so well during his banking career, Carney has spent the last 18 months persuading the world’s biggest banks to lend their support to international climate goals. Specifically, he has been influencing banks, insurers, pension funds and asset managers to invest in schemes that are aligned with the Paris climate agreement goal of limiting global warming to 1.5 degrees Celsius. COP26 saw months of tough negotiations come to fruition, with a Carney-led coalition of 450 powerful players from the world of finance – known as the Glasgow Financial Alliance for Net Zero (GFANZ) – all pledging to manage their assets in line with that 1.5 degrees Celsius pledge (see Fig 2). “Right here, right now is where private finance draws the line,” Carney told delegates on ‘finance day’ at the COP26 summit in Glasgow. “Up until today there was not enough money in the world to fund the transition. And this is a watershed.”

Between them, GFANZ members control more than $130trn, and will be using their deep pockets to fund sustainable green projects across the globe. As Carney observed in his COP26 speech, the creation of the GFANZ coalition is something of a watershed moment for the financial world. For many years, getting Wall Street to go green seemed like an impossibility. After all, investors tend to follow the money – and for decades, that money was in oil and gas. Sustainable investments have historically been seen as more risky, producing lower returns than their fossil fuel competitors.

But the tide now looks to be turning for green investments, with data showing that sustainable investments are now outperforming their more conventional peers. Fossil fuel investments, meanwhile, are becoming increasingly risky. As world leaders pursue an accelerated net zero transition, new research shows that half of all fossil fuel assets could become worthless by 2036. Investments in oil, gas and coal now risk becoming stranded as the world looks to decarbonise, making renewables and green solutions an ever-more attractive alternative.

“Private finance is judging which companies are part of the solution, but private finance, too is increasingly being judged,” Carney said in an interview for the United Nations website. “Banks, pension funds and asset managers have to show where they are in the transition to net zero. And people are voting with their money.” Indeed, with the call for global action on climate change now reaching fever pitch, the financial world can no longer ignore this plea – in order to stay both reputable and profitable, it will need to become part of the climate solution.

Finding values
If we are to build a new, more sustainable world, it is only right that we also create a new, more sustainable financial system. The financial world has always had a fundamental role in helping to shape global development, and the pledges struck at COP26 put finance at the heart of the global fight against climate change.

The world is emerging from the great lockdown, shedding its past and transformed into something new

Carney’s vision of “a financial system entirely focused on net zero” may seem idealistic to some. After all, can a financial system ever be entirely focused on anything other than, well, finance? And yet Carney’s $130trn COP26 coalition shows that financial net zero might be closer than we think. If now is indeed the moment for change, then why not dream big?

This is the concept that underpins Carney’s bestselling book, Value(s): Building a Better World for All. The title reflects the optimistic tone of the banker’s bold manifesto, which advocates for creating an economy – and indeed, a wider society – based on human values, instead of market values. Sticking to a topic that he happens to know all too well, Carney argues that a crisis in shared common values has brought about the three major crises of our time: the financial crisis, the COVID-19 crisis and the climate crisis. All too often, he argues, our fundamental human values are cast aside in favour of what is materially valuable, leaving us living within systems where price takes ultimate precedence.

We live in radical times
After a 30-year career on the frontline of finance, Carney appears to have reached a firm conclusion: that the system requires profound change. To some, this might seem like a radical stance. Yet we are living in radical times. Our ‘new normal’ is one largely defined by uncertainty and instability in almost every aspect of our daily lives. The pandemic has brought to light just how fragile our societies and the systems that uphold them truly are – and has prompted a revision of values at a scale we have perhaps never seen before.

Like a butterfly from its chrysalis, the world is emerging from the great lockdown, shedding its past and transformed into something new. There is a shared desire to create a new, better world than the one that came before – one in which we treat each other, and indeed our planet, with more kindness and respect. If there was ever a time for change, for hitting the reset button, then it’s right now. And with its deep pockets and mighty global influence, the financial world is well equipped to lead that transformation. As rose-tinted as it may seem, Carney’s vision might just be the blueprint the financial world needs as it cautiously enters its next chapter.

In Silicon Valley, is honesty the best policy?

Posted on January 5, 2022January 5, 2022 by itsupport

Silicon Valley has always been heralded as being a secretive place, and the mystery surrounding SV has arguably added to the excitement around the place over the last few decades. However, this culture of secrets has become increasingly dangerous, to the point that it is enabling founders of start-ups in Silicon Valley to commit high-level fraud. The Theranos scandal is what might immediately spring to mind regarding this fraudulent activity, but other founders of startups, including HeadSpin’s CEO and founder, Manish Lachwani, have also defrauded their investors, enabled by this covert culture.

More recently though, a shift in the coveted secrecy of Silicon Valley has been seen to be taking place. This shift is arguably a result of Trump’s victory in 2016, a rise in tech scandals and tech employees becoming more vocal about issues in the sector. In addition, the COVID-19 pandemic has led to a rise in med-tech start-ups, where investors are more likely to be reputable, and this rise gives these new start-ups the chance to operate on a more open and trustworthy level going forward.

The rise and fall of Theranos
Elizabeth Holmes launched Theranos at age 19, after coming up with a seemingly revolutionary way of testing blood from a simple finger prick. People were enthralled, with business tycoons George Schultz and Rupert Murdoch among the first big financial backers, with Murdoch putting $125m toward the company, despite having not seen an audited financial account of the business at this point. Holmes also sought out other big investors, including the DeVos and the Walton family, because she believed these families would support her in ensuring Theranos could remain a private company. In total, over $900m was invested into Theranos between 2004 and 2015.

Elizabeth Holmes was obsessed with the security at Theranos, asking anyone who visited the company’s headquarters to sign non-disclosure agreements

In 2015, Dr. Flier, then dean of Harvard Medical School, expressed concerns, after Holmes failed to answer basic questions about the technology of this device that would test the blood. However, at this stage, it was not suggested she was a fraud and she still received an invitation to join the medical school’s Board of Fellows at Harvard University. However, towards the end of that year, the business started to unravel, when a whistleblower raised concerns about Theranos’s flagship testing device, the Edison. The following year, in 2016, Holmes was banned from operating blood-testing services for two years by US regulators, and two years later, Theranos was dissolved. In June 2018, Holmes was arrested, along with Tamesh Balwani, her associate, on criminal charges of wire fraud and conspiracy to commit wire fraud. How she was able to get away with convincing investors of Theranos’s legitimacy for so long is all testament to the conspiratorial nature with which the company was operated. Holmes took her investors’ money on the condition that she would not have to reveal how Theranos’s technology worked, and also that she would have a final say over everything to do with the company, according to Business Insider.

In addition to these demands, Holmes was obsessed with the security at Theranos, asking anyone who visited the company’s headquarters to sign non-disclosure agreements before being allowed into the building. Interestingly enough, the secrecy that surrounded Theranos was an aspect Holmes had borrowed from her Silicon Valley hero, Steve Jobs, taking this idolisation as far as to dress in black turtlenecks and refuse to take any holiday, both traits of Jobs.

Theranos founder Elizabeth Holmes — Theranos founder, Elizabeth Holmes

Another recent defrauder in the SV area is Manish Lachwani, the former CEO and co-founder of the tech start-up HeadSpin. Lachwani was arrested at the end of August 2021, for allegedly defrauding investors in order to raise money for his company. Lachwani had overstated privately held financial metrics from the company, including revenue, in an attempt to inflate the company’s value. He overstated the annual recurring revenue of HeadSpin by $4m, as well as grossly exaggerating the overall revenue between 2018 and 2020 from $26.3m to $95.3m. The HeadSpin CEO’s actions are yet another example of the corruption in Silicon Valley that has further flourished as a result of the cloak-and-dagger nature that continues to surround start-ups. Lachwani’s possible prison sentence of 20 years hopefully has some chance of being an effective deterrent against this kind of fraudulent behaviour.

The masters of secrecy
The root of this ongoing culture of secrecy in Silicon Valley dates back to the 1990s, when Silicon Valley first became a hotbed for the technology industry. This inevitably led to the area becoming a highly desirable place for tech journalists to access, but these reporters quickly discovered that if their coverage was anything less than positive and full of praise, their level of access to the start-ups would soon disappear.

There is little doubt from anyone you speak to in the industry that the influence Apple, a Silicon Valley giant, has had on this culture of secrecy has been widespread and in a bid to emulate that success, it is something that all other start-ups have subsequently adopted. Apple’s love of keeping things under wraps started with its co-founder, Steve Jobs, as part of his magisterial desire for showmanship, in order to conjure up excitement for a big reveal of new products. Secrecy has historically been of more importance to Apple in comparison to companies selling similar products, such as Samsung, because of the high price tag and the associated reputation Apple has for selling a product that embodies a premium experience. This ultimately means that Apple products have been designed to feel aspirational, and therefore being shrouded in mystery to build up the grand reveal has helped serve this purpose.

However, in recent years, Apple employees have become increasingly open about internal problems, after concerns that the company culture of secrecy has harmed diversity and inclusion efforts. One example of this was demonstrated in September 2020, when a Slack channel was created by Apple employees in an attempt to promote a more flexible working environment. By the summer of 2021, this channel had reached roughly 2,800 members, and when Tim Cook announced that in September this year, Apple would be reopening its offices, Apple’s remote work advocacy group, off the back of this channel, sent an anonymous email back to him requesting further flexibility. Ultimately though, it is the company’s product launches that Apple is most concerned with keeping secret, and it is these products that they will do all in their power to keep under wraps and away from the watchful eye of the press, and social media.

Change on the horizon?
There has also been a more general turning point to secrecy in the tech world. Following Trump’s Presidential victory in November 2016, and a rise in tech scandals, technology journalists felt more compelled to push back the following year against the ossified norm of being unable to criticise technology giants for fear of being ostracised and losing access. More recently, new stories about these technology giants are coming from employees breaking NDAs and risking their jobs by doing so. But if the tech giants continue to self-govern and refuse to grant access to outsiders, this can often feel like the only way to expose perceived wrongdoing.

As a result of the COVID-19 pandemic, there is an increased emergence of med-tech start-ups. Silicon Valley expressed eagerness at the start of the pandemic to invest in future winners of the current crisis, and in March 2020, 12 investment firms pledged to invest over $30m in start-ups with COVID-19 programmes, with Y-Combinator, a start-up accelerator, connecting founders to investors.

One successful example of this is the start-up Shared Harvest Fund, which was founded by Dr. Nana Afoh-Manin, a doctor from Los Angeles, who began the myCovidMD initiative to help provide equal access to coronavirus testing. Mobile health start-up iXensor is another example of a successful med-tech start-up fostered in Silicon Valley, and then incorporated in Taiwan. It has developed a fully digitalised rapid antigen test and accompanying digital platform to aid with COVID-19 outbreaks. However, these med-tech companies and all those that follow, do now face more intense scrutiny in the wake of Elizabeth Holmes and the Theranos scandal. If any good has come from this, it is the raised awareness of due diligence when it comes to start-up investment instead of the vogue for leaping without looking in a desire to catch the next wave of the future (see Fig 1). The old adage of ‘if it looks too good to be true, then it probably is,’ should be heeded.

This new and healthy scepticism of start-ups has arguably done some damage to prospective start-ups with investors now exercising a greater degree of caution rather than relying solely on an appearance of integrity and what looks like a golden market opportunity.

It is therefore important that this new wave of start-ups emerging do not covet the same secrecy that Silicon Valley start-ups have always strived for, and instead try their hand at transparency in the beginning, so that investors know what they are getting into, giving these nascent companies a chance at real success in the long run.

The supply chain crisis

Posted on January 4, 2022January 5, 2022 by itsupport

Aptus Utilities, a UK energy and lighting infrastructure and installer company, sits towards the end of its own supply chain. For Ian Winn, group financial director, it’s an uncomfortable place to be currently. “We’re seeing prices increase as lead times lengthen and demand increases, making it very difficult for manufacturers and suppliers to build up stock levels. This is leading to shortages and impacts across the board.” Winn continues, “We’re not direct importers but two of our most important materials are electric cable and meters, which come in from the continent. Because of Brexit some lead times have now doubled.”

Aptus uses a lot of polyurethane pipe. “But production capacity was taken out of the market last year,” Winn goes on. “That’s reduced capacity to the manufacturers and pushed up prices and introduced scarcities exacerbated by the take-off in construction activity at the back end of last year and this year.” Add in COVID-19 issues for this street light installer. “Effectively they’re [street lights] fabricated steel. But with COVID-19 people are less able to work closely together.” Aptus is getting around some of the issues by talking to suppliers more, holding more stock. But they also have 20 three tonne long wheel-base on order since March from Peugeot. They’re eking more life out of their existing vans, which is pushing up maintenance costs.

Inexplicable planning failure?
Michael Boguslavsky, head of artificial intelligence at Tradeteq, told World Finance that while the supply chain crisis continues, there’s no lack of supply and demand data to plan around it. “What’s clear is we can’t put this down to a lack of resource,” Boguslavsky said. “Global companies have some of the best operational and risk management systems around but, in the case of microchips, they failed to detect how a shortage would impact operations.”

Consumer spending remains high, and inventory levels across the globe remain very low

The technology to detect and anticipate shortages exists – communicating with customers in real-time deploying lightning-fast payment systems right down the supply chain – and is in use in other areas. Banks and the financial trading community use fintech tools that can be repurposed, given care and planning, to other sectors.

Are industries picking up? The evidence looks uneven. Richard Parkinson, port director at Southampton’s UK Solent Gateway, says that while there’s no end of data, understanding it in a holistic way is massively challenging. There are two data issues – context and access – that are needed for an effective pan-global supply chain analysis, he says. “It may be that each logistic service provider, airline or shipping line holds its own data but perhaps it needs to be collated centrally for a single analysis of end-to-end global supply chains. That may be where the weakness in data lies: each element of the global supply chain holding its own stove-piped data.”

Licence to drive
In the UK the food supply chain is being weakened by an acute driver shortage. According to the Road Haulage Association there’s a shortfall of 100,000 missing jobs. Part of the problem is drivers quitting the UK during the COVID-19 pandemic who can’t – or don’t want – to return via the post-Brexit immigration system, which doesn’t recognise the haulage role as highly skilled. Also, the age of the average UK lorry driver is 55 – just two percent of HGV drivers are under 25 in the UK – so the pool of available UK driver labour is getting smaller.

“The public,” says Hugh Mahoney, CEO of UK food wholesaler Brakes, “are starting to notice the resulting gaps on retailers’ shelves; in failed waste disposal collections; and through the items missing from the menus at their local pubs and restaurants.” The disconnect at government level is a failure to see driving, says Mahoney, “as a part of the critical infrastructure that supports feeding the nation, and that this will disproportionately impact smaller farmers, producers and suppliers who will be hardest hit by surging distribution costs.”

In the run-up to Christmas the Conservative government has introduced temporary visas for 5,000 fuel tanker and food lorry drivers to work in the UK. But there still remains a serious shortfall of driving labour. “The EU workers we speak to will not go to the UK for a short-term visa to help the UK out of the shit they created themselves,” Edwin Atema from Dutch-based lorry drivers union FNV said in an interview with BBC’s Radio 4. “In the short term, I think that will be a dead end.”

Demand overwhelms supply
The disruption across so many points is a vicious circle. Freight forwarding specialist Unsworth warned at the beginning of October 2021 that Black Friday, Cyber Monday and Christmas were approaching fast. “Consumer spending remains high, and inventory levels across the globe remain very low,” it said.

Exports out of Asia, it added, have been one of the biggest chokepoints as European demand for goods has overwhelmed the capacity of space and workforce. Worse, several Chinese tech suppliers – including those supplying consumer tech giant Apple – have cut operations in Jiangsu province, a major hub for China’s industrial tech industry due to electricity rationing as the Beijing administration attempts to hit carbon-cutting goals. HP, Microsoft and Dell are also affected.

Business and political risk – watch those chokepoints

While the Suez and Panama Canals are global chokepoints there’s increasing worry over less well-known, but critical, shipping highways. For NATO, the Greenland-Iceland-UK Gap is a concern. This is a 200-mile stretch of ocean between Greenland and Iceland and a 500-mile gap between Iceland and Scotland. It’s where Russian warships push through to reach the Atlantic Ocean.

Both the Chinese and the Russians, in different ways, are looking at creating new chokepoints that can accommodate military operations.In other words, some countries are pivoting seemingly neutral economic infrastructure for political and strategic advantage. The US has always made use of its geographical and military reach, weaponised by 9/11.

However, some businesses, hauling considerable supply chain risk behind them, may underestimate the geopolitical nuances.They may even, unwittingly, make themselves a target. “Network connections are so complex that policy makers often don’t understand how interventions could produce unexpected consequences,” wrote Henry Farrell and Abraham Newman in the Harvard Business Review. “When the US announced sanctions against the Russian metals giant Rusal, it did not anticipate that they might bring the European auto industry to a halt, and it had to modify them swiftly. The more businesses’ government-relations offices can do to educate policy makers, the better.”

Turbulent waters
Simultaneously the cost of sending containers from China to Europe and the US has been hit by severe inflation. For some global trade routes the price of standard 40-foot containers saw a 400 percent rise in 2021. In mid-September the Economist estimated that the spot price of sending such a box from Shanghai to New York cost $2,500 in 2019 but this price was now close to $15,000.

The Ever Given container ship that ran aground in the Suez Canal, March 2021

Admittedly a monumentally-sized container ship blocking a vital maritime passageway – the 120-mile Suez Canal – in March 2021 didn’t help. The 220,000-ton Ever Given, en route to Rotterdam, diagonally blocked the canal having been blown off course by high winds. Most vessels passing through the Suez are obliged to use Egyptian pilots to help them navigate this stretch. However, the Ever Given belongs to a new super-class of carriers that are simply too vast for some waterways – including the Panama Canal. Somewhat predictably, the incident was a billion-dollar disruption to global trade as well as garnering a huge amount of press.

Forever change?
John Manners-Bell, CEO of Transport Intelligence, a supplier of market solutions to the global logistics industry and Visiting Professor at the London Guildhall Faculty of Business and Law, says global supply chains, post-COVID-19, will irrevocably change. “Globalisation has really been about sourcing things from China,” he says. “Now, companies are very much thinking about diversifying their supplier base. A lot more are thinking about sourcing more from either their own countries or from countries that are much closer.”

“Transportation risk,” he goes on, “has been growing for many companies for some years but has come into focus because of COVID-19. Geo-political issues such as the trade war between the US and China but also security concerns as well. You can easily see in the future that the world will start to break into supply chain regions.” Some will be China focused while other routes will be close to Europe and the US. In other words, there will be increasing bifurcation, one being Sino-centric and the other more Western-based.

Cooling on China
This will bring huge changes as regional trade flows rather than global flows predominate, says Manners-Bell. “There will be some major global companies that will lose out but more regional and national players will benefit.” Manufacturing is likely to gain considerably from the switch, he says. He cites electric car marker Tesla, which has sourced a great deal of components from inside the US, snipping transportation risk. While Tesla has operated out of its California Fremont factory, originally built by GM in 1962, its new factory in Austin, Texas is attracting many more local suppliers. That is where it’s building its SUV Model Y and Cybertruck models.

The ‘keep local’ rationale is gaining traction in the UK. A recent EEF survey claimed that the average UK manufacturer has close to 200 suppliers in total with almost 100 percent of manufacturers relying on some materials being sourced from overseas. Many, many companies must be reconsidering their relationship with China, however difficult it is to untangle a supply chain. Multiple supply chains may be one answer. Rising concern over data and privacy is another issue.

In October 2021 the British international freight association (BIFA) said 12.5 percent of global capacity was unavailable in August due to delays. “This means that in August 2021, a full 3.1 million TEU [shipping container with internal dimensions measuring 20 feet long] of nominal vessel capacity was absorbed due to delays. To put this into perspective, the insolvency of Hanjin in 2016 [the world’s eighth largest carrier at that time] removed only 3.5 percent of the global capacity – until the vessels came fully back into circulation with new owners. The current situation is akin to a scenario of three and a half Hanjins all going bankrupt at the same time, with no immediate outlook for the vessels getting back at sea.”

Solutions please
Neil Ballinger, head of EMEA at automation parts supplier EU Automation, says the supply chain manufacturing model itself, for some, would benefit from switching from a linear model to a circular one, slashing production scrap and making better use of existing resources. “Taking care of industrial equipment and implementing a strategic preventive maintenance programme can,” he says, “help manufacturers keep track of their machines’ lifecycles so that they can manage component obsolescence.”

Many companies must be reconsidering their relationship with China, however difficult it is to untangle a supply chain

Over time this limits the amount of new equipment needed to buy, he says. The circular route is built upon the three R’s approach: resume, reduce and recycle. It’s attracting more attention as sustainability and climate pressures mount. This approach contrasts against the linear economy model where the focus is more about eco-efficiency per se, rather than overall eco-effectiveness of the system itself. “It’s also crucial to diversify supply chains,” Ballinger goes on. “Over-relying on one supplier or a cluster of suppliers based in the same area can be a great risk at times of socio-political instability.” While logical enough, many materials companies, according to Professor Thomas Johnsen from Audencia Business School, have little choice “but to source from distant and high-risk locations, for example, in case of rare and precious materials and metals.” He told World Finance that “cobalt and lithium are essential for a range of electronic devices, including electric cars – and are notoriously difficult to source.”

‘Normal’ labour mode?
Then there is the concern around supply chain ethics and working conditions. In a crisis, it’s harder for companies to keep labour standards and working conditions tight. Supply chain disruption means higher risk of unauthorised subcontracting as wholesalers, agents and others seek alternatives, upping corporate risk. “The risk of exploitation,” says Jessica McGoverne, director of policy and corporate affairs at ethical trade service provider Sedex, “such as forced labour increases at times of pressure through a combination of factors – supplier pressure, worker shortages and more pressure on workers to work longer hours.”

There’s not just reputational risk but legal and financial. Poor practices and mistreatment of workers – low wages and discrimination – can quickly turn into scandals and negative press coverage, even a drop in share price. McGoverne says the global garment manufacturing sector has been badly hit by the supply chain crisis with close to 90 percent of businesses exposed to slashed orders. It’s not all bad news: some 20 percent of businesses have diversified and deployed new innovations to respond to the pandemic, she adds.

Picking, packing and sorting isn’t cheap
To what extent can artificial intelligence (AI) better support the average supply chain? Nigel Lahiri from software provider Grey Orange says industries exposed to labour shortages should look at robotics and AI to slash labour costs as much a third, “while also reducing order fulfilment time by as much as 50 percent.” He says the supply chain crisis, at least in the UK, is in part due to Brexit and loss of a European workforce. “Which reflects,” he told World Finance, “the often tedious and dangerous nature of those jobs within logistics, retail, food service, and manufacturing, which are the industries most affected by the labour shortages.”

“With a lack of labour,” he adds, “businesses within those industries will experience slow order fulfilment and food shortages by Christmas.” As the holiday season gets under way with the promises of record sales, so too does the risk of record returns. This logistics area is one many retailers dread. But some think this is a good area to deploy AI and robotics towards.

AI doesn’t object to repetitive tasks or require a pension, but it drags its own supply chain risk behind it: AI administers highly sensitive business information and only one incident is needed to jeopardise a supply chain. Not everything in a supply chain can be automated. Sales predictions and HR are areas supply chains will always struggle with. These ‘soft’ skills may never be a fit for robotics – until computers and robots are able to think beyond their own programming. And we’re not there yet, most AI experts say. Social cues, ‘reading’ a human situation – delicate HR circumstances, for example – remain well beyond it.

Each company is looking for the right mix of automation and AI investment to tackle the sheer volume of data

AI though can be an enabler of supply chain verisimilitude, says Chris Huff, chief strategy officer at software business Kofax. This has real value as ESG supply chain pressure rises. AI can track data insights that “previously,” says Huff, “might have been ignored because the human labour cost of assembling, analysing and gleaning insights was simply too onerous and costly.”

Applied with care AI can expose poor business practices and work quality. And when AI is used to create digital workflows the quality and cost of work can be rapidly measured. “Just about every industry,” says Huff, “is struggling to digitally transform as they seek to remain relevant. Each company is looking for the right mix of automation and AI investment to tackle the sheer volume of data.”

Taxing issues
What is harder to plan and anticipate is political risk. In fact, it’s impossible. Christiaan Van Der Valk is a tax and regulatory expert at Sovos, a reporting software business. He acknowledges being crisis resistant is an impossibility – but tax digitisation and the reporting around it can streamline supply chain governance, at least. “All companies could benefit from tax digitisation efforts.

The big question is whether governments can converge on more harmonised approaches. There is a real opportunity with modern technology for all stakeholders to benefit from tax reporting and business process automation, provided the diversity of legislative requirements can be reduced over time.” This is ongoing. Van Der Valk says too many businesses see supply chain tax issues as a tiresome ball and chain. “I’d recommend them to instead approach tax as an opportunity. While it’s true tax administrations, in their quest for digital transformation, may place varying requirements on your systems and processes which in the short term make supply chain automation harder, smart organisations transcend it to see a bigger picture.”

And if the tax data is high quality, your tax and business objectives stand a better chance of converging. “This level of externally-consumable data intelligence will open up new opportunities to improve many critical processes such as cash management, supply chain transparency for environmental protection and labeling purposes, and customer service.” So, get serious about understanding what tax authorities want in digital format, he advises, then look hard at how consistent the reporting flows are.

Turning a corner
While there are plenty of excuses for understanding the current shortage problem the most pressing challenge is how to restore stability and ease the shortages, and quickly. When the immediate supply concerns retract, companies and governments will need to consider what kind of insurance or slack they should build into the production system over the longer term.

Just as banks needed to increase their equity buffers after 2008, we perhaps now need to step back from just-in-time production and redefine productivity in light of the supply-chain risks being witnessed.

Taboo economics

Posted on January 3, 2022December 23, 2021 by itsupport

The word ‘taboo’ was introduced into the English language by Captain Cook from the Tongan word for prohibited or forbidden, in his 1784 book A Voyage to the Pacific Ocean. It is associated both with the holy, and the unclean. In his 1890 book The Golden Bough, the Scottish anthropologist James George Frazer argued that taboos were a throwback to the age of magic. Human belief progressed through three stages: primitive magic was followed by religion, which in turn was followed by science. Taboos belonged to the first stage, and could be viewed as a kind of negative magic: “The aim of positive magic or sorcery is to produce a desired event; the aim of negative magic or taboo is to avoid an undesirable one.”

So what would qualify as an economic taboo? Well, to start with something basic, how about money. Economists of course use money as a metric all the time – but they have long avoided talking about how the stuff is actually created. In fact, as economist Richard Werner remarked in 2016, the subject “has been a virtual taboo for the thousands of researchers of the world’s central banks during the past half century.” According to economist Norbert Häring, “Cursory observation suggests that credit creation or money creation are taboo words in the leading journals.”

The creation of money
Textbooks have traditionally dodged the subject by saying that the process is controlled by central banks, but the reality is that the vast majority of money (about 97 percent in the UK) is created directly by private banks. When banks issue loans such as mortgages, the money isn’t taken from somewhere else; it is just created on the spot, as if by magic. The taboo around money creation has started to lift in recent years, beginning with a Bank of England paper in 2014 that admitted that the standard textbook story was wrong. But it does seem odd that the misunderstanding could have persisted for so long. One reason perhaps is that, as banks have long known, the best way to make money is to literally make it. Money creation through loans is very good business, because the bank can charge interest on all that new money. As Häring notes, this “pecuniary benefit” is not discussed in the textbooks, which again “points to a taboo imposed by the interest of a very powerful group.”

Still, other kinds of business are profitable too – so what makes money special? The reason is related to another taboo topic – which is the subject of power. Classical economists and thinkers such as Thomas Hobbes and Adam Smith recognised the connection between money and power – as the latter wrote, “Wealth, as Mr Hobbes says, is power…the power of purchasing a certain command over all the labour, or over all the produce of labour which is then in the market.” But it has since fallen from favour. In fact the economist Blair Fix did a word-frequency analysis of economics textbooks, and found that “What defines econospeak is that power is conspicuously absent.”

This reluctance to address power is right there in the very definition of economics. The English economist Lionel Robbins wrote in 1932 that “Economics is a science which studies human behaviour as a relationship between ends and scarce means which have alternative uses” and similar definitions still appear in modern textbooks. Gregory Mankiw’s widely used textbook Principles of Economics, for example, defines economics as “the study of how society manages its scarce resources.”

The crowbar of power
But if you look at how scarce resources are actually allocated in the real world, it would be more accurate to say that what counts is power. Money is certainly a tool used by the powerful – as Nietzsche said, “money is the crowbar of power” – but other things can work too, like an army.

And if anything, it would be more accurate to say that economics avoids the question of how we distribute resources – and indeed has long treated it as taboo. Robbins wrote that, because the subjective utility of one person cannot be measured versus that of another, the whole question of fair distribution is “entirely foreign to the assumptions of scientific economics.” Or as Nobel laureate Robert Lucas put it in 2004, “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.” As an example, today one of the most obvious economic signals is that, on average, white males earn more than other people.

Yet given the lack of interest in power relationships, it is perhaps unsurprising that the words ‘sexism’ and ‘racism’ are missing entirely from the economic corpus, according to Fix. As the New School’s Darrick Hamilton argued in a lecture, “What we need to do as economists is a better job at understanding the roles of power and capital in our political economy.” A first step is to relax some of those economic taboos, and restore money and power to their rightful place at the centre of economics.