Year: 2023

Reshoring: the future of supply chains

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Have global supply chains had their day? A quick scan would suggest not. But times are changing. Supply chains are shrinking. Production in some areas is coming home and firms are seriously rethinking how they build a supply chain for the future. Increasingly, organisations in the US and other developed nations are moving away from the cheap-labour strategies of yore – the kind that have fuelled rapid industrialisation in South East Asia. Think textiles in Bangladesh or plastics in China. Instead, those same firms are exploring so-called ‘reshoring’ or ‘nearshoring’ to reduce their risk exposure.

Already 67 percent of global retailers and manufacturers have changed where they source materials and components due to supply chain disruptions. Almost two thirds say that further relocation remains a high priority, or the top priority. More than three quarters do not expect supply chains to normalise in the next 12 months. The numbers tell a clear story. In 2010 there were just 6,000 American jobs created by reshoring, according to the Reshoring Intiative’s 2023 report. Last year there were 360,000, an increase of almost 6,000 percent (see Fig 1).

Last year General Motors announced plans to pump $7bn into four Michigan manufacturing sites to boost battery cell production and EV capacity. Intel announced the largest private-sector investment in Arizona history with plans to build two new leading-edge chip factories. And Pittsburgh-based US Steel unveiled plans to invest $3bn in Alabama-made steel. Reshoring, once a strategic theory, is a market reality.

A new normal
Why the sudden change? Well, the triple threat of Covid, politics and climate change have a lot to do with it. Together they’ve stressed time and again just how dangerously exposed global supply chains are to pockets of disruption. In the UK, for example, shoppers were left wanting when, thanks to unpredictable weather on the continent, there were no tomatoes on the shelves. While in the US, beer drinkers were hard up thanks to a Covid-induced shortage of carbon dioxide supplies. These may seem like trivial examples, but they’re instructive of a new normal for supply chains that span the globe – one where economic shocks, political instability, and climate-induced catastrophe will regularly hit business as usual.

“Large pandemics like Covid-19 and the Spanish flu are relatively likely,” claims one William Pan, associate professor of global environmental health at Duke. He and other researchers estimate that a pandemic similar in scale to Covid-19 is likely to come within 59 years. Food for thought. Or consider Russia’s decision to invade Ukraine, which was, among many things, a useful reminder to bosses that authoritarian leaders rarely act with shareholders’ best interests in mind.

Since then, access to oil and gas, metals, such as titanium and palladium, and agricultural crops, including wheat and corn, have been severely limited – and expensive. Should a Chinese invasion of Taiwan follow, as many experts suspect, it will have a freezing effect on global supply chains. Yet the unpredictability of geopolitics pales in comparison to climate shocks. “Climate change is a slow-moving crisis that is going to last a very, very long time, and it’s going to require some fundamental changes,” says Austin Becker, a maritime infrastructure resilience scholar at the University of Rhode Island, speaking to Yale Environment 360. From floods to wildfires, extreme weather is bashing ports, roads and factories worldwide, seriously compromising the integrity of global supply chains.

Flooding in China recently forced the closure of a Nissan plant. Heatwaves in France forced the closure of nuclear power stations. This is only the beginning, and while no area is immune to climate shocks, many companies will have no choice but to rehome production in areas where infrastructure is more resilient. Little wonder then that 96 percent of CEOs are thinking about reshoring, have decided to reshore, or have reshored already – up on 78 percent in 2022.

The practicalities of reshoring
The first question, naturally, is how much will it cost? “Ultimately, for private companies the decision comes down to costs,” says Shay Luo, Principal at Kearney. “Sometimes the end-to-end costs, including production, tariffs and logistics, are too much. Which explains why most American companies move from China to Altasia countries and Mexico, rather than return to the US directly.”

Even without disruption, shipping costs and unfriendly policy add a fair chunk to the price tag of doing business in far-flung nations. But homing production locally in the US or in the EU, for example, is, frankly, expensive. “It’s important for governments to offer policy and economic support that incentivises private companies to align their for-profit interests with any motivations the government may have,” Luo says.

After all, politicians like nothing more than to sell their constituents on better and more abundant job prospects, while businesses like business-friendly policies. Take US President Joe Biden, who signed two bills last year to make American manufacturing more attractive. His CHIPS and Science Act includes a pot of $52.7bn for American semiconductor research, development, manufacturing and workforce development.

Moreover, his Inflation Reduction Act sets aside a tidy $369bn to promote clean energy, in part by giving generous incentives to EV manufacturers based in the US. Goods from China are also subject to a 25 percent penalty tariff, meaning locally sourced goods enjoy an effective tax advantage. The same applies in the EU, where a new Carbon Border Adjustment Mechanism adds a kind of trade tariff on emissions generated by imports from outside the EU. “The wind has changed from one which was blowing globalisation along at an ever-faster rate, to a headwind, making short-term costs a big part of sourcing decisions,” according to a recent ING report on the matter.

Though simply creating manufacturing jobs does not mean that workers will automatically show up. According to Kearney, half of manufacturing executives struggle to fill vacancies, even for basic manufacturing tasks, and look to automation and training to address the challenge.

Luo suggests that more accessible childcare and relevant education, particularly in STEM subjects, could help expand the pool for employers. With the right policy, governments can begin to close that skills gap. Though recent and persistent inflationary pressures mean that wages will give many pause.

At least until recently, labour costs have not been a huge factor for relocation. However, growing inflationary pressures are stretching the gap between the US, the EU and China once again. Today as before, wages are a major consideration in deciding whether or not to reshore.

The question though is not ‘will you produce at home or abroad?’ Rather, it’s a question of balance. The shape of supply seems to be changing in every conceivable way. It’s becoming less chain-like and more network-based. Diversification can protect against the immense geopolitcal, environmental and economic challenges we’re seeing.

The future
Ultimately, the decision to relocate boils down to whether or not companies can realise some sort of competitive advantage. It will often be the case, for example, that reshoring will bring tax advantages or reduce shipping costs, but if the trade-offs in terms of wage rises or raw materials are too great, companies will be reluctant to reshore on such a large scale. It’s not a question of home or away, obviously. Companies will diversify their production rather than uproot it entirely. If the primary concern is around disruption, a diversified supply chain will, in theory, mitigate any threat.

The shape of supply seems to be changing in every conceivable way

This is a sentiment shared by the World Bank, who warn that stronger value chains, not reshoring, are needed after the Covid-19 shock. “Value chains – which split the production of goods and services into discrete activities that can be spread across the globe – have helped generate remarkable gains in prosperity,” they write. “Between 1990 and 2017, low- and middle-income countries almost doubled their share in global exports, from 16 percent to 30 percent, as they joined value chains. During the same period, access to new markets and investment opportunities reduced the proportion of people living in extreme poverty from 36 percent to nine percent.”

The impact of reshoring on low- and middle-income countries may not necessarily be front of mind for bosses, but there is a compelling development case for diversification over reshoring. Worryingly, a shift toward global reshoring in high-income countries and China could drive an additional 52 million people into extreme poverty, with the majority in Sub-Saharan Africa.

There isn’t just anecdotal evidence but reliable data to show that we’re seeing a rewiring of global supply chains. Whether production will move home wholesale, however, is the wrong question. Instead it falls on companies and governments to consider what value chain works not just for bosses but for the developing world as a whole. Reshoring represents an opportunity for global companies, for politicians and for local employment. It also presents an existential threat to millions of people across the world. The picture, as always, is complicated. But again, reshoring is no longer a theory, it’s a reality.

Real-life Succession: handing over the keys

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The final season of HBO’s hit show Succession captivated audiences across the world this year. Each week, millions around the globe tuned in to catch up on the latest backstabbing and in-fighting among the Roy siblings – the super-rich heirs to a media empire and one of the most deeply dysfunctional families on TV. The Roys’ machiavellian scheming and power-hungry plotting kept audiences hooked over the course of the show’s four-season run. But, while the cut-throat world of Succession certainly draws on real-life influences at times, the reality of managing leadership change is thankfully far more civilised – even if it does pose its own challenges.

In my own experience, the negotiations resulting in my being named CEO of the family business – Premier Dental – were among the most difficult processes of my professional life. These negotiations saw my father relinquish his role as CEO and owner and move into a new status as chairman of the board. At this time, decisions had to be made that many family businesses find themselves wrestling with at some time – issues such as how ownership shares will be divvied up among various members of the family, how those shares will be paid for or otherwise transferred from one owner to another, how important decisions about the business will be made, and how long the transition from one generation to the next will take, and more. With this experience of succession planning under my belt, there are five essential tips I would offer any family business looking to navigate a change in leadership and governance.

Legal representation: The business will employ a law firm to manage the entire process – but you should also engage a lawyer to advise you personally and to represent your individual interests. This is a family affair, but what’s best for you and what’s best for other members of the family may not always be perfectly aligned. When all parties have advice and representation to defend their interests, then the chances for creating a plan that is fair to everyone are greatly enhanced.

Respectfulness: Avoid taking the Roy family approach. Foul-mouthed insults and scathing jibes are not what is needed, here. Be respectful of everyone involved in the process, difficult as this may be at times. Big decisions about the future of a family business involve money, power, prestige and pride – all matters that generate strong emotional reactions. No matter how much all the family members love one another, the discussions are likely to become contentious. Work hard to avoid saying or doing things that you may later regret or that may end up burning bridges among family members. If you keep your head, even when others may lose theirs, in the end you’ll be glad you did. Trust me, I’ve been ‘headless’ myself – it’s not cute.

You need to balance current interests with the needs of future generations

Communication: Again, this is where Succession teaches us what not to do. The lack of communication between the extended Roy family is simply staggering – and by leaving so much unsaid, they so often find themselves in tight spots that could have been avoided. Remember that you can only get what you ask for – so don’t assume the other members of the family, or the professional advisors and representatives involved in the process, understand what you need, want and value. Speak clearly about what matters to you and about the kind of arrangements that you consider fair and beneficial to the business – and when necessary, repeat yourself until you are sure you have been heard.

Use data: As with any negotiating process, you will achieve more if you know as much as you can. This means understanding the family, its philosophies and preferences; the strengths, weaknesses, and needs of the business as it faces a challenging future; the kinds of arrangements that other families have made when faced with similar business issues; and so on. If you do your homework and shape your ideas according to what you learn, you’ll be more likely to end up with an agreement that allows for a solid future.

Plan for the non-end: Although it’s difficult, you need to balance current interests with the needs of future generations. Strive to leave them a business and a dynamic that will raise as few questions and difficulties as possible.

Managing change at the top
On a personal level, addressing these issues required some challenging conversations with my father, which were complicated by our unique relationship and his approach to business. At times, when my father and I were at odds, he would vaguely suggest that he might want to reconsider things we’d already settled, making the whole process very stressful for me. The months of negotiations embroiled me in a period of pain and frustration more intense than any other I’ve experienced. In the end, though, our disagreements on ownership and control were resolved amicably and, I believe, for the good of the business. But if anyone ever tells you that dealing with a family business and its culture is easy, don’t believe them.

Javier Milei’s radical shakeup: Storming Argentina’s 2023 primaries

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Financial spheres were abuzz as the staunch libertarian and market maven, Javier Milei, garnered a staggering 30.5 percent of votes with 90 percent counted. For many, Milei’s rise is emblematic of the larger fault lines in the nation’s fiscal policies and political ethos.

Flaunting his long hair and equipped with an economic acumen honed in the corridors of finance, Milei represents an antithesis to Argentina’s prevailing fiscal order. He’s been a vocal critic of ‘Kirchnerism’ – a populist economic strategy adopted by the country over the last decades. Critics often label Milei as hard-right, but in financial circuits, he’s viewed as a pragmatic visionary, especially given Argentina’s precarious economic landscape.

A deeper dig into his fiscal proposals reveals audacious plans that are nothing short of revolutionary in the Argentine context. Notably, Milei advocates for the abolition of the Argentine peso, pitching its replacement with the US dollar. It’s a move that’s raised eyebrows, but also earned nods of approval from certain sections that view the peso as emblematic of Argentina’s financial missteps.

This isn’t merely about currency. It’s about a nation where four out of ten people live below the poverty line, grappling with a debilitating inflation rate that soared to 116 percent. For a considerable segment of the Argentine populace, the verdict is in: the prevailing system, with its entrenched policies and bureaucratic inertia, has palpably failed.

Milei’s economic narrative is underpinned by a comprehensive assault on ‘Kirchnerism’. It’s a battle cry being echoed by those disillusioned by persistent economic quagmires. His penchant for rock music and spiritual pursuits might paint a colourful personal canvas, but it’s his financial blueprint that’s resonating with a populace desperate for change.

However, the path ahead is laden with challenges. Milei’s detractors argue that his economic measures, while radical, lack the nuance needed to navigate the complexities of Argentina’s socio-economic matrix. Yet, what’s undeniable is the groundswell of support, especially among the younger demographic.

The financial world is watching with bated breath. Milei’s victory in the primaries could set the stage for greater upheavals in October. If he clinches the win then, it could herald a pivotal chapter not just for Argentina, but for emerging markets grappling with similar challenges.

The key question remains: can this libertarian maverick, with his audacious fiscal prescriptions, steer Argentina away from its entrenched economic abyss?

Sustainability lessons from Iceland

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When the world’s leading climate scientists released the final instalment of their latest assessment report in March 2023, the thousands of pages amounted to a warning: world leaders must act more quickly on climate change. Upon the Intergovernmental Panel on Climate Change (IPCC)’s latest publication, United Nations secretary general António Guterres told leaders that it was now or never, and he called on nations to invest in renewable energy and low-carbon technology to reduce emissions in order to hit net zero targets “as close as possible to 2040” – a deadline that is a decade before the 2050 goal most countries are aiming for.

Economies have been slow to decarbonise, but the target of limiting warming to 1.5°C is still achievable, the IPCC report said. “There is sufficient global capital to rapidly reduce greenhouse gas emissions if existing barriers are reduced,” it said, calling on governments, investors, central banks and financial regulators to play their part. One country is hoping to be a model of how to eliminate barriers to carbon neutrality and freedom from fossil fuels: Iceland. But what does decarbonisation look like in Iceland, and can other nations replicate its methods for reaching this milestone?

A distinct advantage
Iceland has a goal to be carbon neutral by 2040, and leaders have put forward an ambitious climate action plan to achieve this. But the country, famous for its volcanoes and geothermal spas, undeniably has an advantage. Iceland has already phased out fossil fuels in both electricity production and house heating. “Iceland has been harnessing renewable energy for over a century,” explained Nótt Thorberg, director of the trade group Green by Iceland, which is part of Business Iceland.

“At the very beginning, it started small – just some experimenting amongst a few entrepreneurs.” New businesses found innovation in the application of geothermal for direct house heating and developing hydro power from springs in the early 1900s, and it grew from there. “Today, over 85 percent of Iceland’s primary energy stems from renewables, and 100 percent of electricity and house heating is renewable,” Thorberg said. But there is still work to be done. Green by Iceland has cited several areas, including: transitioning to a carbon-free transportation system, implementing more effective waste management practices, scaling up sustainable agricultural practices and boosting local carbon removal efforts.

Leading by example
Over the past century, Iceland has built its expertise in geothermal energy, which has advantages and disadvantages. Geothermal technology involves extracting heat from the ground to be used directly for heating or converted into electricity. It is low cost and able to operate year-round at stable levels, unlike wind and solar power. However, to be used to its full advantage to generate electricity, particular conditions are needed that are limited to tectonically active regions. Iceland’s 32 active volcanic systems make it one of the most active volcanic regions on the planet, with eruptions occurring every four years on average. Currently, just 20 countries generate geothermal energy, and with its famous hot springs and geysers, Iceland is the poster child for the technology.

Iceland’s innovative answers to decarbonisation should give other countries the inspiration to search for solutions

Geothermal accounts for more than 60 percent of Iceland’s primary energy, according to Thorberg, but she insisted that its adoption could be wider. “Interestingly, many countries have the opportunity to harness geothermal,” she said. “If you look at a heat map of the world, many parts will light up. This goes for large areas within the US and Europe, for instance.”

For countries looking to start generating energy with geothermal plants, investment in research and development (R&D) is a given, but Thorberg said Iceland has seen a significant return on investment, with savings of three percent of annual GDP as a result of geothermal applications. As innovators in the sector, they are now taking their expertise further afield. “Iceland has accumulated considerable experience and knowledge when it comes to geothermal and the cascading uses, and many of the solutions that have come out of our journey can be applied in other parts of the world.”

Reykjavik Geothermal, which was founded in 2008, has a focus on exporting its expertise to emerging markets that have ideal resources for geothermal energy, and it is currently constructing two projects in Ethiopia. In the African Rift Valley, Gunnar Orn Gunnarsson, founder and chief operating officer of Reykjavik Geothermal, said the volcanic geology is familiar, and experts in Iceland are keen to help and educate other countries. “It’s an environment we understand,” he said. Arctic Green Energy was similarly created to export Iceland’s leadership in geothermal and other renewables to the emerging markets of Asia. The business teamed up with China’s Sinopec in 2006 to create Sinopec Green Energy, which has become the world’s largest geothermal district heating company.

Continued innovation
Iceland fosters a culture of resilience and innovation inspired by necessity. “The fact that we are a small nation is a strength, it brings closeness, and we share a common vision,” said Thorberg. “Especially during times of crises, we have thus worked together to make the most of what we have within Iceland. So, there is a degree of resilience, courage and forward thinking ingrained in our shared values as a nation, which has brought us where we are today.”

This is evident in its growing start-up ecosystem. From ORF Genetics, which is hoping to be a game-changer in the lab-grown meat sector, to Vaxa, which converts clean energy into nutrient-rich microalgae. One of the country’s most exciting innovations comes from a business partnership to pull carbon dioxide (CO2) from the air and store it back in the ground. Carbfix is accelerating a natural process that usually occurs over geological timescales, whereby CO2 is turned into rock. Using their method, the process can be completed in just two years. The business has plans to scale up significantly to decrease emissions from heavy industry worldwide. “We have very high interest from abroad to investigate various ways of collaboration, whether it be to analyse rock formations, use our geological expertise to estimate whether an area could potentially be a good place to apply our technology, whether we could receive emissions captured by other companies around the world – all of these discussions are going on,” said Ólafur Guðnason, head of communications at Carbfix. “We foresee within the next few years to have a definite project underway somewhere abroad.”

Working together
Collaboration is critical for success at companies like Carbfix, as it only forms one part of the decarbonisation solution – it needs a partner company to capture the CO2 before it stores it in the ground. “Because our solution is regarded as tried and tested, we’re fortunate to have a lot of chances to collaborate with direct air capture companies,” Guðnason said.

In Iceland, he said, companies benefit from a small population and a close relationship between the government and industry. “The cluster mentality of collaborative innovation is quite strong here as a culture in Iceland, and we as Carbfix have definitely benefited immensely from collaborating with academia and other companies. Collaboration is a core element for us to move forwards,” Guðnason said.

Because of the nature of Iceland’s geothermal energy plants, businesses have naturally clustered around power facilities to share resources. However, that attitude extends beyond the energy sector. Iceland Ocean Cluster is using the same collaborative spirit to connect entrepreneurs, businesses and knowledge in the marine industries to create a circular economy centred around another of Iceland’s vast resources: fish. “There is no waste in the seafood industry,” says Thor Sigfusson, founder of the Iceland Ocean Cluster. “There is economic value in this.” As well as creating seafood, fish byproducts can be used in beauty products, in clothing and fashion and even in the medical industry: Kerecis, an Iceland-based business, uses cod skins to heal wounds.

Iceland’s unique location and geography have presented opportunities for innovative businesses, and certainly some of these projects could be replicated elsewhere. But perhaps the biggest takeaway is the way the Icelandic businesses, government and people have collaborated over the country’s climate goals. The latest IPCC report stressed the importance of sharing knowledge and expertise. “If technology, know-how and suitable policy measures are shared, and adequate finance is made available now, every community can reduce or avoid carbon-intensive consumption,” it said.

“Iceland has an abundance of natural resources, and we went from being one of the poorest nations in Europe to one of the most prosperous ones,” says Thorberg. “Our geographical location meant we needed to push new boundaries to develop as a country.” What’s important to consider, she continued, is that Iceland’s renewable transition was a political decision, with significant upfront investment and R&D. Rather than a copy-and-paste strategy, Iceland’s innovative answers to decarbonisation should give other countries the inspiration to search for solutions based on their own resources and opportunities. “I think other countries can learn from our path, in that sense,” Thorberg said. “There is a degree of courage you need in the beginning. To succeed in your strategy, you will need to do things differently – just as Iceland did.”

London: no longer the world’s dirty money clearing house?

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For years, London has been synonymous with being the global clearing-house for dirty money, attracting illicit funds from around the world. However, recent developments and increased scrutiny have brought about a growing determination to put an end to this reputation.

London’s role as the world’s dirty money clearing house has been well-documented. High-value properties have become a haven for criminals and money launderers, seeking to legitimise their ill-gotten gains by investing in the city’s prestigious real estate market. This influx of dirty money has distorted property prices, fuelled inequality, and compromised the market’s integrity.

Taking Action
Recognising the urgent need to combat money laundering and restore the credibility of its financial system, the UK government has implemented various measures to curb the flow of dirty money into London. One significant development was the introduction of the “Unexplained Wealth Order” (UWO) mechanism in 2018. UWOs empower authorities to investigate individuals who own assets that appear disproportionate to their known income, allowing for the seizure of these assets if the owner fails to provide a reasonable explanation. This tool has proven effective in uncovering hidden wealth and exposing money laundering activities.

Transparency is crucial in eliminating London’s reputation as a dirty money clearing house. The British government has taken steps to increase transparency in the real estate sector by establishing a public register that tracks the ownership of overseas companies owning UK properties. This register aims to prevent money laundering and deter criminals from using real estate as a means to hide their illicit funds. It serves as a valuable tool for authorities to identify suspicious transactions and ensure greater accountability.

Collaborative Efforts
Tackling the issue of dirty money requires collaboration between governments, regulatory bodies, and financial institutions. Sharing intelligence and strengthening international cooperation are vital in exposing and dismantling global money laundering networks. To this end, the UK government has been working closely with international partners to enhance information sharing and coordinate efforts to combat illicit financial activities.

While progress has been made, challenges remain in completely eradicating London’s reputation as a clearing-house for dirty money. The complexity of financial networks and the use of offshore entities make it difficult to trace the origins of illicit funds. Continued investment in resources, technology, and expertise is necessary to strengthen the capacity of law enforcement agencies to detect and prevent money laundering activities effectively.

London’s status as the world’s dirty money clearing house is slowly being dismantled through a combination of legislative measures, increased transparency, and international collaboration. The introduction of UWOs and the public register signify the commitment to combat money laundering and restore integrity to the real estate market. While challenges persist, there is a growing determination to ensure that London’s financial system remains clean and transparent, safeguarding the city’s reputation as a global financial hub.

The diminishing effectiveness of Western sanctions

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In recent years, there has been mounting evidence to suggest that the effectiveness of Western sanctions is diminishing. This article aims to critically examine the reasons behind this decline in effectiveness and explore potential alternatives.

One of the key factors contributing to the diminishing effectiveness of Western sanctions is the changing dynamics of the global economy. As emerging powers like China, Russia, and India rise in prominence, they provide alternative economic avenues for targeted countries. These nations are often willing to fill the void left by Western sanctions, thereby reducing their impact. Additionally, the interconnectedness of the global economy allows countries to find workarounds and establish new trade partnerships, limiting the effectiveness of Western sanctions.

Sanctions Fatigue
Sanctions have become a common tool in Western foreign policy, leading to what some refer to as “sanctions fatigue.” Years of imposing and maintaining sanctions on various countries have led to a desensitisation among both the target countries and the international community.

Targeted nations have become adept at weathering sanctions, developing strategies to mitigate their impact, and finding ways to continue their activities through illicit means. This growing resilience undermines the intended impact of Western sanctions.

Western sanctions often have unintended consequences that can undermine their effectiveness. In some cases, they lead to increased hardship and suffering among the general population while failing to put sufficient pressure on the targeted regime.

This humanitarian cost can erode international support for sanctions and generate sympathy for the targeted regime, ultimately weakening the intended impact. Furthermore, sanctions can create opportunities for corruption and black market activities, benefiting those who thrive in the face of economic restrictions.

The effectiveness of Western sanctions heavily depends on the support and cooperation of other nations. However, securing broad multilateral support has become increasingly challenging, as countries often have diverse interests and priorities.

Disagreements among Western nations themselves can further dilute the impact of sanctions. For instance, the Iran nuclear deal highlighted divisions within the international community regarding the efficacy and approach to sanctions. Without united international support, Western sanctions become less potent as countries seek alternative avenues for engagement.

Exploring Alternatives
Given the diminishing effectiveness of Western sanctions, it is crucial to explore alternative approaches to achieve foreign policy goals. Diplomatic engagement, dialogue, and negotiation should be prioritised to address concerns and resolve conflicts. Building coalitions and alliances with like-minded nations can help exert collective pressure on targeted regimes.

Economic incentives and positive reinforcement strategies can also be explored as means to steer the behaviour of countries towards desired objectives. It is essential to recognise that a multi-faceted approach, encompassing both coercive and cooperative measures, may yield better results.

The diminishing effectiveness of Western sanctions can be attributed to several factors, including changing global dynamics, sanctions fatigue, unintended consequences, and limited multilateral cooperation.

While sanctions have played a role in shaping international relations, their limitations are becoming increasingly evident. As the global landscape continues to evolve, it is imperative for Western nations to reassess their strategies, explore alternative approaches, and prioritise diplomatic engagement in order to achieve their foreign policy objectives more effectively.

Understanding the pitfalls of compliance fatigue

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Compliance fatigue refers to the mental and operational exhaustion that arises from the continuous burden of adhering to an ever-expanding web of rules, regulations, and protocols. While the importance of regulatory compliance cannot be understated, the pitfalls of compliance fatigue are a pressing concern that demands attention.

Dilution of priorities: As organisations grapple with an ever-growing array of regulations, their focus can shift from core business objectives to simply meeting compliance requirements. This shift dilutes the strategic vision and hampers innovation, as resources and energy are redirected towards checking boxes rather than driving meaningful progress.

Risk of oversight: The overwhelming nature of compliance tasks increases the likelihood of important details slipping through the cracks. Organisations might miss crucial updates or fail to address emerging risks, leading to potential regulatory violations and reputational damage.

Decision paralysis: Navigating intricate compliance landscapes can lead to decision paralysis. Organisations might hesitate to take strategic steps or launch new initiatives due to concerns about potential compliance complications, stifling growth and innovation.

Employee burnout: Employees responsible for managing compliance activities can experience burnout due to the constant pressure of ensuring adherence to regulations. This not only affects their mental well-being but also diminishes their ability to contribute effectively to the organisation.

Inefficient resource allocation: Compliance fatigue can lead to over-allocation of resources to compliance-related tasks, leaving fewer resources available for other essential functions such as research and development, customer service, and marketing.

Erosion of customer experience: Overemphasis on compliance can sometimes translate into a cumbersome customer experience. Excessive documentation requirements, extended verification processes, and complex procedures can alienate customers and hinder business growth.

Potential for non-compliance: Paradoxically, the very fatigue induced by compliance can lead to non-compliance. Employees overwhelmed by the sheer volume of regulations might miss crucial updates or misinterpret requirements, inadvertently leading to violations.

Financial strain: Complying with regulations often involves significant financial investments in terms of technology, personnel, and training. The continuous demand for resources can strain an organisation’s budget, impacting profitability and growth potential.

Overcoming compliance fatigue: While compliance fatigue poses substantial challenges, there are strategies organisations can adopt to mitigate its impact:

– Risk-based approach: Focus efforts on areas that pose the highest regulatory risks, ensuring that resources are channeled where they are most needed.

– Automation and technology: Embrace automation and technology solutions that streamline compliance processes, reducing the manual burden on employees.

– Clear communication: Establish clear communication channels to keep employees informed about regulatory changes and their implications. Foster a culture of transparency and awareness.

– Training and education: Invest in ongoing training and education to ensure that employees understand compliance requirements and are equipped to navigate them effectively.

– Outsourcing: Consider outsourcing certain compliance functions to specialised third-party providers, alleviating the burden on internal resources.

– Regulatory technology (RegTech): Leverage RegTech solutions that leverage technology, data analytics, and AI to enhance compliance management and reduce the strain on organisations.

In the modern business landscape, compliance is non-negotiable, but organisations must be vigilant about the potential pitfalls of compliance fatigue. By adopting proactive measures and embracing a balanced approach to compliance management, businesses can safeguard their operations, foster innovation, and ensure a sustainable path to growth while navigating the ever-evolving regulatory environment.

Do you have a robust talent strategy in place?

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For a company looking to attract funding, there are many criteria they need to be aiming to hit. Many of these are obvious, and long standing, from strong financial projections to a robust business model and customer base – all quantifiable metrics that investors look out for. But, a surprising KPI has crept onto the investor playbook, and that is talent strategy. This includes elements like a company’s culture, how it develops its employees and investment in its learning and development.

Why has this become a focus for investors? The economic instability of recent years has been a major factor. Investors want businesses that have sustainable strategies that are agile and adaptable in the face of change. And a people strategy is vital here, with a company’s resilient workforce being a key element amid economic uncertainty. Let’s take a closer look at the whys behind this emerging priority area for investors.

Prioritising talent
There is an incredibly strong link between how a business manages its talent and how that business performs – this is with regards to output, profitability, efficiencies, and more.

A 2022 study by Cornerstone found that high-performing organisations – defined as those that outperform their peer group – placed greater emphasis on people development. While just 76 percent of low-performing, or laggard, organisations prioritised employee training and development, 96 percent of high-performing organisations did so. The significance? A business that prioritises professional development is one that is going to have more highly skilled employees within its workforce. A more skilled workforce is a more capable, efficient and productive workforce. Employees will be better at their jobs and drive greater success for the business as a whole, further attracting investors as a result.

Another major benefit of prioritising development is the boost it can have on employee retention. After all, if employees feel that their organisation is investing in their growth and prioritising their development, they are more likely to stay where they are. With the costs of hiring new employees costing organisations huge sums a year, avoiding these costs could have a big impact on profitability.
The economic slowdown has left its mark on the global job market. Many companies have even enacted hiring freezes, and in the UK MPs have warned that the shrinking workforce is actually limiting the country’s economic growth. These challenges are being reflected globally.

But investors will still want to see evidence of intelligent talent resourcing within a prospective business. This is where a talent mobility strategy is key. Despite the challenging job market and hiring freezes, the last thing organisations should do is freeze the development and mobility of their existing talent. The potential consequences of doing so are clear, with workers who lack visibility into internal career opportunities within their organisations 61 percent more likely to quit. By contrast, 73 percent globally indicate interest in learning about new roles within their organisations. There is a clear appetite for internal mobility, and so the question becomes: How can companies kickstart talent mobility and incorporate it into their culture?

Unearth internal opportunities at scale
When working to make hidden career pathways and opportunities visible, businesses need to strike a balance between the human element and technology. For instance, employees have shown a strong preference for self-service technology to discover internal mobility options, with an 80 percent higher likelihood of choosing this option over manager conversations. And yet, according to learning leaders, the number one way a workforce has visibility into growth opportunities is through manager conversations.

Technology provides a way for businesses to unearth hidden career pathways and create an internal opportunity marketplace. Through this, employees are empowered with greater visibility into opportunities and with greater autonomy over the next step in their careers. Meanwhile, managers can take on mentoring roles, guiding their teams through career decisions via conversations and training. Companies that prioritise talent management and internal mobility, like DPDHL, have already seen success in filling open positions and mobilising the workforce.

The new fuel of the business world is people, and the skills, knowledge and experience that they bring to the fore. Companies that recognise this evolving landscape, and prioritise their talent management strategy in response to these shifts, will be the ones to captivate investors’ attentions.

By harnessing talent mobility, leaders are equipping their businesses with the adaptability necessary to ride out times of turbulence. It is with this strategy that they will attract new investment and funding.

Locked out: Tackling the world’s runaway rent crisis

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When Tim Ellis’ landlord gave him and his 20-something flatmates notice to end their tenancy for a £4,500-a month East London house, they didn’t attempt to argue. Even before moving in the landlord tried to hike the rent last minute, pre-contract. From London via Berlin to Sydney rents are at an all-time high. The search for urban shelter is often costly and exhausting for those seeking opportunity and a place to live.

How will young people put roots down in the future if they can’t afford big cities? Is reform of the global urban rental market possible? Or is this market failure on a simply epic scale? Solutions for change – especially as food, energy and transport inflation bear down while interest rates race higher – look thin on the ground.

Dial back
First, calm down a notch suggests Kath Scanlon, Distinguished Policy Fellow at The London School of Economics and Political Science (LSE). The urban shelter pressures are not spread equally – far from it – she says. “They’re not being felt in Middlesbrough, Hull or Indianapolis. They’re being felt in high-demand, attractive cities like London, Vancouver, San Francisco and Barcelona.”

Perhaps, but the lifeblood of big and attractive cities are usually fed and supported by younger people, particularly in the service economy or public sector. Key workers, in other words. “You’re right,” Scanlon says. “The crisis has implications for when people have children, where school rolls are falling in London.”

So what tools can be deployed? Scanlon doesn’t see the potential for one big intervention that would “solve everything because you are working within the confines of an existing system. We’re not going to sweep away the existing planning system or eliminate the UK Greenbelt.”

Instead she sees potential for more development of Greenbelt land of, say, within 800 metres of existing railway stations “that would provide a couple of million potential homes. If you increased social housing from what is now very small levels that would make a difference.” House price swings are also cyclical, she says, though hopes for wild house price falls among younger home buyers look stillborn: the latest UK government numbers show an annual 5.5 percent price rise in the UK, even if values have fallen one percent since January 2023.

1990s – the decade of demand
Let’s roll back briefly – how did we get here? Dr Chris Foye is a lecturer in housing economics at Henley Business School, University of Reading. He says the seeds for massive affordability pressures in large, well resourced cities were freely sown in the early-1990s.

 

How the property race boomed

  • 2008 was the year when housing was super-commodified as interest rates fell to support the global economy. Shorn of reliable asset classes to park capital in, institutional investors piled into bricks and mortar.
  • For rented housing this meant, inevitably, higher rents to satisfy shareholders. But there was a difference this time: large institutional investors, like Blackstone, were switching from investing in offices where people worked to where people lived, like apartment blocks – a big shift.
  • Residential real estate was valued globally at $326.5trn in 2020, according to Savills, compared to the value of all gold mined at $12.1trn.
  • Property – along with urbanisation and a rapid drying up of enthusiasm for stocks and gold – was now king.

 

“That’s when you got agglomeration economies where companies want to be in cities. Networks, the sharing of knowledge, all those things become very important.” A huge surge in employment followed, but only for these highly networked conurbations. You could buy into these cities if the price was affordable, or you could commute. But fast good quality commuting networks are not evenly spread. Even now, some three decades on, some commuting times have deteriorated, says Foye.

A cocktail of zero social housing aspiration – at least as far as the UK goes – and a massive supply-demand imbalance was supercharged in 2008 by cheaper credit from global central banks following the global financial crisis. Rock-bottom interest rates spurred lending – and prices – higher. By late January 2017 the world’s biggest economy was headed by a property developer – President Trump.

So which major Western cities are prioritising lower-cost social housing and a coherent long-term social policy to support it? Not many. Foye says look at Vienna or Helsinki, two cities unconnected by geography but with a long history of strong social housing. Despite big differences, the model is different. In Vienna the government already owns much of the land.

Around 60 percent of Vienna’s 1.8 million residents live in rent-controlled properties. Both cities have a more balanced income distribution, meaning the supply-demand pressures are less – basic economics. Move east to Tokyo, he adds, where rents have generally been kept stable “because Japan produces a huge amount of new housing.” Traditionally Japan has also been a low inflation economy.

To build or not to build?
For many Western cities, you have to build far more social housing, or more housing for lower-income residents. “That way you address the distributional issue and you address the price, or rent, issue,” says Foye.

Such change would mean a doubling or tripling of new supply for some countries. The UK Home Builders Federation (HBF), whose members account for 80 percent of new homes built in England and Wales each year, says under-delivery goes back decades. Some experts believe the UK should be building 300,000 new homes a year, claims HBF spokesperson Steve Turner. “Last year we built around 235,000. That’s a doubling of supply. We were around 120,000 in 2012.”

Some say the government is weakening supply progress, partly through new environmental regulations – more cost, less bottom line developer profit. Supply levels could collapse to near 2012 levels Turner warns, potentially worsening the inter-generational divide between those who own versus those who don’t, or can’t. But this argument pivots also on the UK fixation on home ownership, leaving less room for alternatives – especially for the young – and social housing.

Most new UK social housing is built by the private sector through a cross-funding model. When planning permission is given a local authority may stipulate 20 percent, for example, of new stock as ‘affordable,’ which it will manage.

Seen through a global lens the supply and demand issue looks increasingly pervasive. The right to adequate housing – including affordable housing, not just what the market will bear – is guaranteed by the Universal Declaration of Human Rights, Article 26, including reasonable security of tenure. Good luck with that, many will say.

What about rent controls? French rent rises for unfurnished properties are controlled by an index, the Indice de Référence des Loyers, or IRL. Three-year tenancies are commonplace and the minimum notice is six months. Rent controls in the US, which are increasingly under attack, are decided at state level. But less concentrated industrialisation in developed economies means the draw of lower rents, or rent controls, which in the past let industrialists cap salaries and costs, have less attraction.

The house always wins
Authorities are sensitive to large-scale social housing change because of the in-built education and health services following wind. “There may also be an increase in traffic or pollution, as well as existing infrastructure like water and energy supplies being stretched further,” says Tabitha Cumming from The Lease Extension Company. In the early stages of the pandemic some predicted rents would fall in big cities and that this would persist. For a short while the city was looking almost obsolete. It didn’t happen.

The world is crying out for well-designed homes for those on ordinary wages

So where will young people live in future affordably? A sliver of hope has emerged from the UK Government’s Michael Gove. The levelling up, housing and communities secretary is introducing a ‘fairer deal’ for tenants but it’s small beer compared to the three million social homes UK housing charity Shelter says are needed in the next two decades at a £10bn cost per year.

One outcome is the continued development of more ‘edge cities,’ or a new incarnation of suburbia – cheaper land but urbanish, attracting a skilled and educated labour force. More likely is that the ‘crisis’ will continue to worsen until it reaches critical mass, if it hasn’t happened already.
Meanwhile the world is crying out for well-designed homes for those on ordinary wages. Critics, including some developers, are quick to say the profit isn’t there, but demand is off the map. How might, with some more committed policy and environmental re-tuning, a Carrefour Group or Lidl respond, in comparison?

The developing country with a positive trajectory

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Although it may not sound feasible from a financial point of view, the declared figures recently released by the securities commission of Zambia show that the capital market still made remarkable gains in the first trading quarter for this year. This, despite the downturn in the world’s economy following the outbreak of Covid-19 in 2020 and the Russia–Ukraine war in 2022. According to Securities and Exchange Commission (SEC) chief executive officer, Philip Chitalu, despite external and internal shocks the Zambia capital market increased its total savings from the equivalent of $3.46bn in 2021 to $3.74bn at the end of the first quarter in March this year.

Positive performance in the face of both external and internal economic factors, together with support from macro-economic and financial market fundamentals, was responsible for the 8.65 percent growth. While the pandemic lockdowns, the war in Ukraine, confusion in the local copper mining industry and other factors have a telling effect on the economy in Zambia, the capital market still shows resilience having recorded significant growth.

Local financial analysts attribute the increase in savings to assumptions by many that the country has a promising economy due to its political stability and abundant natural resources, which tends to attract investors and capital. A growing economy is definitely a good bet for a buoyant capital market due to increased financial activities.

At the same time the increase in share prices for companies listed on the Lusaka Securities Exchange (LuSE) and collective investment schemes assets contributed to the rise in savings. Statistics show that collective investment schemes’ assets under management grew by 18.3 percent to reach $84.5m last year from $71.5m in 2021. In this same period the number of investors increased from 141,538 to 271,631.

The LuSE All Share Index (LASI) went up by 22 percent last year relative to the same period in 2021. On a monthly basis in the first half of last year market increases were noted from January to February where it went up by 7.65 percent. Hence at the end of the second quarter of 2021 LASI was at 6,854 points before reaching 7,342 points at the end of the third quarter in that year. At the end of December 2022 LASI closed at 7,337.79 points leading the SEC chief executive to make an optimistic statement on the future dealings of the capital market. “If the figures are anything to go by then we have a bright future for the capital market in Zambia,” Chitalu said.

A master plan
The growth of the Zambia capital market has so far incentivised the government to seek the participation of commercial banks in the treasury bonds it floats on the LuSE floor. It wants the financial institutions to quote, buy and sell their bond securities on the country’s capital market at all times. When launching the Capital Market Master Plan for 2022, Zambian president Hakainde Hichilema said the plan, once implemented, would contribute to greater transparency for all treasury bill participants and at the same time enhance efficiency in the government bond market.

Hichilema said his government wants to make it compulsory for all commercial banks and other financial institutions in the country to buy and sell their securities on the primary market in order to benefit all participants. This is after realising the crucial role of both the primary and secondary dealerships on the capital market. The government is expected to reduce investment costs and to create a more dynamic liquid market. Although the plan sounds attractive, more so with the advent of electronic trading platforms, banks and other financial institutions have not yet bought into the idea.

On the part of Bank of Zambia the government plan requires completion of the bond yield curve while also determining the benchmark of the rates on a number of securities. It is also vital to assess the country’s current government bonds situation as plans are devised to develop the capital market further. Meanwhile, Zambia is one of the 10 countries in Africa whose capital market is under study by the Africa Trade Barometers, according to Stanbic Bank.

The study will assess that country’s trade openness, access to finance, macro-economic stability, infrastructure development, foreign trade, governance, economic performance and trade financial behaviour.

It is not all plain sailing though. Zambia has considerable financial problems to solve and it would be foolish to pretend otherwise. It has external debt of more than $20bn and has not yet accessed the remaining part of the International Monetary Fund’s loan it badly needs to restructure the economy.

The global digital economy and African Trade Exchange initiatives are expected to have a positive growth bearing on the capital markets of many African countries including Zambia, and for this developing country it is a promising sign for a better and more prosperous future.

Ripple effects of plummeting oil prices

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Falling oil prices are having a domino effect on the global energy stocks after dropping between six and seven percent, with European goliaths falling by between six and eight percent and US oil corporations falling by five to seven percent. Both the US benchmark and the global benchmark crude oil prices have fallen significantly, reaching their lowest levels since December 2021. The price of the US benchmark dropped by six percent to $67.48 per barrel, the most since July 2012. In a similar vein, the benchmark Brent Crude price fell by almost five percent to a low of $71.46 a barrel.

While it may be great to pay less for petrol, the market impact goes beyond mere lower consumer prices. Changes in oil prices have a ripple impact on the world economy. Perhaps unsurprisingly, the oil business itself is one of the most significant casualties. Oil companies may suffer greatly if oil prices fall. Because they are selling their oil for less money, they are making less money, which can result in job losses, production reductions, and even bankruptcies. It includes not just the larger oil businesses but also the smaller ones and the nations whose economies significantly rely on oil exports.

Oil prices plunged in the first quarter of the year in response to the collapse of two top US banks, Silicon Valley Bank and Signature Bank. Failure of the banking system is putting investors on the back foot. Hefty estimates for oil demand were quashed by the worry that the effects of this failed bank crisis would spread to the wider financial system. Market analysts at Oanda warned that due to lingering “contagion” risks brought on by the turbulence in the banking sector, the oil market will be “locked in a surplus for most of the first half of the year.”

With the sanctions imposed on Moscow due to the war in Ukraine, the inflation rate in the US has climbed to its highest level in 40 years, predicting an unavoidable recession. To combat this, the Federal Reserve has raised the interest rate to its highest level since 2007. Even while some have predicted that the banking crisis would likely soon come to an end and that the price of oil will recover swiftly, there is nonetheless some concern about the possibility of future interest rate increases. The effects of the interest rate increases are likewise hard to predict and may continue to highlight financial vulnerabilities brought on by excessive debt and stretched asset valuations, as well as in particular financial market areas.

According to a WEF report, “with price changes, there is a shift in profiting between oil producing and oil consuming countries”, so while low oil prices may be seen as difficult for countries that export it, it is manageable. Oil exporting nations are making adjustments to their fiscal and monetary policies in response to falling oil prices to lessen the effects on their economies. This may entail decreasing government expenditure, raising taxes, eliminating subsidies, and putting in place monetary tightening measures like higher interest rates.

Apart from that, US CPI has increased immensely, putting pressure on the economy where the Federal Reserve is already dealing with the rising inflation amid banking crises. The oil market can turn around if the Federal Reserve reduces the interest and inflation rates. But at the moment it seems like the market is either preparing for a future recession or it may be that one or more funds has to raise cash and lower the risk on their books due to concerns over liquidity following the bank failures.

Is there a ray of hope?
But it’s not all doom and gloom. Lower oil prices are also attracting big investors like Warren Buffet who has increased his stake in the oil company Occidental Petroleum (OXY – 0.45 percent). With the most recent acquisitions, Buffett’s company Berkshire Hathaway now has a 22.2 percent share in the business. It has acquired over 200 million shares valued at $12.2bn. It is anticipated that China’s economy will bounce back and this year demand will drive from the Chinese market.

As the largest oil consumer in the world, an increase in demand from China could turn oil around. The International Energy Agency (IEA) anticipates that the oil demand will increase by two million barrels-per-day in 2023. According to the Executive Director of the IEA “With the Chinese economy now recovering, it will have major implications for oil and gas market balances.” The OECD has also raised its forecast for global economic growth from 2.2 percent in November to 2.6 percent this year and 2.9 percent in 2024, an increase of 0.2 percentage points over the previous prediction. However, OECD warned that the recovery is still precarious and that risks are still heavily weighted to the downside despite the upward revision of growth expectations.

For all the positive signs, there is still considerable uncertainty over whether or not oil companies will be able to attract investors’ attention, how well China will recover, the continuing effects of the war in Ukraine and the overall geopolitical climate. For now at least, it’s a waiting game.

Financial secrecy is killing democracy

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Raymond Baker is a man on a mission. Following a long career in business that started in Nigeria during the decolonisation period, he published in 2005 Capitalism’s Achilles Heel, a seminal book on illicit financial flows. Nearly two decades later, things are even bleaker. In his new book Invisible Trillions, Baker, 87, argues that financial secrecy has become a main driver of capitalism, bringing the kleptocracy he witnessed in Africa closer to home. Secrecy, he argues, is not a bug but a feature of the system, breaking the link between supply and demand, ownership and control, value and price. Regulating the maze of shell companies and tax havens used by corporations, criminals and corrupt politicians alike is a chimera. He shares with World Finance his thoughts on how hidden money is eroding democracy and what to do about it.

What sparked your lifelong interest in financial crime?
I have lived in the developing world and watched financial crime and corruption. After a long career in business, I decided that I had to say something about this phenomenon. That still drives my will to make a contribution.

You argue that capitalism has adopted a ‘secrecy motivation.’ What is that?
There wasn’t much secrecy in earlier stages of capitalism. Rich Americans built mansions, but you could see these mansions. Today, many rich Americans have money stashed offshore, and you can’t see that. Secrecy enables money to flow from the bottom to the top in ways that governments find extremely difficult to curtail. Inequality has grown in most countries to the highest levels ever. A major contributor to that is financial secrecy: the ability to make, move and shelter money in ways that cannot be controlled.

What role did decolonisation play?
In the 1950s and 1960s, 48 countries gained independence. The colonial powers wanted to keep extracting wealth from former colonies, so they set up mechanisms facilitating the movement of money out of them. People living in these countries didn’t trust their governments and wanted to get money in foreign accounts. That period contributed to the formation of financial secrecy systems facilitating those two processes.

Did you experience that phenomenon while living in Nigeria in the 1960s?
I once met a British ‘old coaster’ living in West Africa for decades. He was the managing director of a company in Nigeria. When I asked about profits, he looked at me with disdain. He said: “Profits? I’m not trying to earn a profit. I’m just remitting money back to the parent company in the UK!” I was startled, because, being just out of Harvard Business School, I had studied all about profits. Here was someone telling me that the price at which he sold goods was insignificant! He only cared about paying the invoices for what was sent by the parent company.

Today ‘trade misinvoicing’ is a much bigger problem, right?
Corporations have kept these issues under the table for a long time, citing the need for free trade and movement of capital. Every multinational corporation uses abusive transfer pricing to move money, either for tax evasion purposes or to convert into hard currency.

Is the EU doing enough to tackle financial secrecy?
It’s a start-and-stop affair. The UK government had said that it would address beneficial ownership by requiring publicly available registries of who were the owners of companies. That has been delayed. The European Court recently ruled that you can’t require publicly available information on ownership because it’s a matter of privacy, although it should be available to governments and some civil society organisations. But this is trying to have your cake and eat it too.

There is a theory that Brexit was partly driven by a desire to avoid EU rules against financial secrecy. What’s your view?
I never understood why the City supported Brexit, given the risks. Why did the City go along with the beneficial ownership agenda? It was getting a lot of criticism about handling dirty money coming into UK real estate. And the City decided that it needed to clean up its act and supported the beneficial ownership effort. Then Brexit came along and complicated that. We started seeing money move out of the UK and into the Netherlands and Switzerland. I’m not clear whether the City wants to be a player in cleaning up the global financial system or wants to continue to profit from secrecy. The jury’s still out.

In the book, you say that the US is the preferred destination for illicit money. Why is that?
Take shell companies. More were created here than anywhere else. The US has come up with a modest beneficial ownership effort, which still has an enormous number of holes. When money comes into a US bank, this is supposed to check whether it arrived from an illegitimate source. When banks see suspicious money, they file a suspicious activity or currency transaction report. 80,000 such reports are filed on average daily. US banks find a reason to take nearly every dollar they can and just file these reports to shift the responsibility to the government. As long as the US continues to have the world’s biggest trade and budget deficits, it will be tough to change that.

You cover a few success stories in tackling financial secrecy, such as post-9/11 legislation against terrorism financing. Could that serve as a guideline for broader action?
In October 2001, the US passed the ‘Patriot Act,’ which stated that no US financial institution could receive money from foreign shell banks. Also, no financial institution could send to the US money it had received from shell banks. This also applied to wire transfers. That was very effective. Shell banks were wiped out. We also pushed other governments to collaborate on curtailing terrorism financing. We forced the SWIFT system to open its books. So we pushed most of terrorism financing out of the legitimate financial system. This shows what you can do if you have the political will.

Is the war in Ukraine a similar shock that could awaken politicians to the dangers of financial secrecy?
We allowed dirty money to come in. The UK and US real estate sector has been a major recipient of dirty money, including from Russian oligarchs. What does that do to the mentality of Putin who looks at the West and concludes that it will always defend its financial interests? He probably thought he could take over Ukraine without being worried about reactions. So maybe we contributed to his megalomania. If you serve criminals for decades, how do you expect them to respect you? I have watched the West blame ‘those corrupt countries over there’ for half a century. In fact, we have been open to receiving the money they have stolen.

You claim in the book that beyond foreign aid we should focus on the money flowing out of the developing world, notably Africa. Why is that a problem?
Africa is a net creditor to the rest of the world. Instead of richer countries supporting Africa, Africa is supporting them. The equation for economic development has two parts: money coming in, money going out.

The World Bank and the IMF have focused on the money they’re shifting into the developing world. I don’t know how a development economist can devote his life to improving the lives of poor people and ignore money coming out of developing countries. It’s time for the World Bank and the IMF to put this issue on the table.

Secrecy enables money to flow from the bottom to the top in ways that governments find extremely difficult to curtail

How can we ensure global collaboration on financial secrecy?
The argument that these issues need to be addressed globally is a deliberate deterrent to addressing these activities. Countries hide behind the need for global consensus, rather than taking measures themselves. The US passed the Foreign Corrupt Practices Act in 1977, years before Europeans. We led virtually every country to adopt anti-corruption measures. Let’s not let the desire for unanimity become a stumbling block toward forthright action.

Has over-financialisation of the economy contributed to financial secrecy?
The financial sector represents around 20 percent of global GDP. It has been a growing part of the US economy and has contributed to the loss of manufacturing jobs. I would like to see more manufacturing in the US and the financial sector have less sway. Banks should get out of the business of owning corporations.

How can you regulate banks when they have so much corporate activity? We should go back to the Glass-Steagall era when commercial and investment banking were separate. That would be a controversial point for the US Congress to take up. Perhaps the reality would come forward if a large US bank found itself in trouble through some of its corporate investments.

Isn’t the financial services sector too big to fail?
We can regulate the banks better. Following the 2007–08 financial crisis, we passed regulations that improved the health of larger banks. The Trump administration weakened those regulations. Silicon Valley Bank was one of the prime advocates for medium-sized banks being too small to regulate. But then it became too big to fail! You can’t have it both ways. I support higher levels of bank capitalisation, regular stress test reporting and stronger anti-money laundering provisions.

Does the financial secrecy system threaten democracy?
There’s no question about it. The intervening link is inequality, driven by financial secrecy. The financial secrecy system is designed to move money from poor to rich, from criminal to legitimate, from corrupt to respectable. It has driven inequality through the roof. When I graduated from Harvard in 1960, the ratio of senior executive pay to workers’ wages was 20:1; today, it’s more than 350:1.

Financial secrecy has contributed to inequality, and is hurting democracy. No democracy can be strong amidst rising inequality. So controlling financial secrecy is a necessary step towards strengthening democracy.

Samba and tango: the shared currency plan

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When Lula da Silva and Alberto Fernández, presidents of Brazil and Argentina respectively, announced last January that the two countries would start preparations to issue a common currency called ‘Sur,’ the reaction was a mix of shock and amusement. “This is insane,” tweeted the former IMF chief economist Olivier Blanchard. Brian Armstrong, CEO of the crypto exchange Coinbase, went one step further, suggesting that Bitcoin might be a better “long-term bet” for the two countries.

A new currency with a long history
The severe backlash, including from local businesses and economists, has pushed the two governments to reframe Sur as a ‘unit of account,’ aimed at facilitating bilateral trade, rather than a fully-fledged currency union. Sur will be used in parallel with national currencies and trade financing will be guaranteed by a common fund, explained the two countries’ finance ministers in a joint press conference. Brazil’s finance minister Fernando Haddad even implied that the plan would only go forward if the currency was partly backed by Argentinian commodities. “It would be a vehicle currency for electronic settlements, without using the US dollar as an intermediary currency,” says Rodrigo Wagner, an economist specialising in currency adoption who teaches at the Adolfo Ibañez Business School, adding: “Unlike initial interpretations, the actual project seems implementable.”

Some hope that a currency union between South America’s two largest economies could lead to closer economic and political integration in the region, following in the steps of the European Union. Trade between South American countries stands at just over 15 percent, compared to 55 percent in the richer and more economically integrated European Union. Lula and Fernández have invited other South American countries to join the fledgling partnership, with little interest so far. “The proposal could gain more traction in the future if it were part of a coherent package for integration,” says Wagner.

If anything, a common currency could facilitate trade and capital flows between the two neighbouring countries. Standing at roughly $28bn in 2022, trade between Brazil and Argentina has stagnated compared to over $40bn just a decade ago, partly because of Argentinians’ inability to purchase Brazilian goods due to a chronic shortage of dollars. “Sur could initially boost trade between the two countries, as Brazilian exporters would have some advantage relative to other exporters, which would charge in hard currency. But that is a classic case of trade diversion, as opposed to trade creation,” argues Alexandre Schwartsman, a Brazilian economist and consultant who has served as Director of International Affairs at the country’s central bank, adding: “At some point, however, when Brazil would want to settle the difference, presumably in hard currency, problems would most likely arise.”

With a thriving manufacturing industry, Brazil could tap into the opportunities offered by the common currency to increase exports to its neighbour. Over the last decade, Brazil has had an annual trade surplus of around $2.4bn with Argentina. However, Argentina would have more to gain from the deal, according to Schwartsman, given its chronic shortage of hard currency: “It would be a major gift to Argentina and some Brazilian exporters, which would be paid regardless of whether Argentina pays its debt. Probably the Brazilian central bank or the treasury would pay exporters and keep the ‘claim’ against Argentina. But there is no major advantage for Brazil.”

Surprisingly enough, the project enjoys support from both sides of the political spectrum in two countries that are deeply divided and have gone through periods of economic and political turmoil. Just four years ago, the previous Brazilian President Jair Bolsonaro proposed a joint currency with Argentina, hastily dubbed ‘peso real.’ The country’s central bank issued a statement clarifying that no such plan was in the pipeline; the following day Bolsonaro insisted, but never mentioned it again.

For the current Brazilian president, who made a surprise comeback to politics and won a third term last winter, the plan is driven by a mix of ideology and geopolitical interests, Schwartsman argues, notably concerns over perceived ‘US imperialism’ and the use of the dollar as a weapon to put pressure on developing countries. Solidarity between the two countries’ leftwing governments might have also played a role. “The announcement was intended to lend some support, mostly moral, to the Argentine government, which is ideologically congruent with Lula’s,” says William Summerhill, an economic historian specialising in Brazil who teaches at UCLA. “It’s a signal of solidarity in the abstract.”

Can it work?
One reason why the announcement has been met with scepticism is the lacklustre history of monetary integration in South America. Previous attempts to create currency unions have failed, although announced with great bombast. A similar plan to launch another Brazilian-Argentine currency called ‘gaucho’ in the 1980s was abandoned amid the economic crisis that engulfed Latin America at the end of the decade. Twenty years later, several South American countries ruled by leftwing governments adopted a virtual currency aimed at facilitating trade; aptly named ‘SUCRE,’ an acronym standing for ‘Unified System for Regional Compensation’ but also ‘sugar’ in French, the project practically never took off.

A common currency could facilitate trade and capital flows between the two neighbouring countries

Even less ambitious plans to create mechanisms to clear export payments, such as the ‘Convênio de Pagamentos e Créditos Recíprocos’ (CCR) arrangement between members of the Latin American Integration Association, have been shelved. The lack of a common currency is not even the main obstacle to economic integration, says Wagner: “A ‘vehicle currency’ is far from being the most binding constraint to boost trade. Cross-border contract enforcement and massively reducing exchange rate controls seem much more relevant.”

History aside, the vast differences between the two economies pose the greatest challenge. For a fully-fledged common currency to work, Argentina and Brazil would have to remove trade barriers, harmonise regulation, and enable free labour and capital flow. The two economies have grown apart over the last two decades, with Argentina’s inflation rate surpassing the 100 percent threshold this year, while Brazil has been enjoying single-digit inflation rates and a stable monetary environment. Argentina has been cut off from global debt markets since its most recent default in 2020 and has imposed foreign exchange and capital controls to prevent its citizens from buying dollars.

The two countries would also have to share a central bank and harmonise interest rates, which were separated by nearly 70 percentage points in the first half of 2023. A monetary union would also require the two governments to guarantee Sur with large holdings in gold or a reserve currency, possibly the dollar. The lack of a mechanism to coordinate money supply and fiscal coordination makes this viable only as a “small-scale, off-the-books special programme in which the value of anything involved is tightly regulated. Something so specific and scaled-down that it would make no difference,” says UCLA’s Summerhill.

Dropping the dollar
One reason why the two countries are eager to go ahead with the plan is to reduce their dependence on the dollar. Argentina and Brazil are major exporters of commodities whose economies are vulnerable to fluctuation in US foreign exchange and interest rates. Argentina’s fateful decision to peg the peso to the US currency in the early 1990s is widely seen as a main contributor to the crisis that engulfed the country in 2001, a political and economic disaster from which it has yet to recover. During his campaign last winter, the Brazilian President Lula proposed a common currency for South America as a means of increasing economic integration in the region and undermining its dependence on the dollar. “Sur was possibly designed to create some momentum behind the idea of delinking from the use of the dollar in transactions and government reserves,” says Summerhill, adding that a new currency for trade is a topic “very hard to escape,” given the dollar’s dominance in the region’s economy; sanctions imposed by the US against Russia and the ensuing disruption to trade served as a stark reminder of that. “Behind any transactions using other currencies, there is a dollar shadow price for the goods involved, which determines the other countries’ exchange rates,” Summerhill says.

Some see ‘Sur’ as part of a broader scheme of the BRICS countries, a group of emerging economies that includes Brazil, Russia, India, China and South Africa, to minimise the influence of the dollar in world finance. In a meeting this May, officials from Brazil and Argentina discussed the prospect of establishing swap mechanisms that would allow exporters to avoid using the dollar for transactions. “BRICS members do not have a concretely expressed ‘plan’ to de-dollarise the global financial system, but individual members have interests in pursuing the use of local currencies in international trade and investment,” says Zongyuan Zoe Liu, a fellow for international political economy at the US think tank Council on Foreign Relations.

As with previous attempts to create currency unions in South America, many experts expect the initiative to fall into oblivion once the initial enthusiasm and political momentum fizzle out. “The interaction of domestic politics within both countries, including widespread and endemic corruption, the rise of populism, and the unstable nature of their respective economy feed into the political cycle, as well as the lack of robust monetary policy experience, do not make a joint currency credible,” says Liu.“It will disappear into the background as a low priority for Brazil,” Summerhill adds. “There are much bigger fish to fry.”

The third era of sustainable finance

Posted on by itsupport

To understand where we are, it’s useful to remind ourselves of the journey taken to get here. The sustainable finance movement can be roughly separated into three eras with unique characteristics, each building on the other. The first such era started roughly around 1990, when the Domini 400 Social Index was launched in the US, one of the first such indices and still going today. This was the ‘pioneering era’ characterised by boutique firms exploring a new concept of investment that better incorporated environmental and social data into investment decisions. This is when the term ‘socially responsible investing’ or SRI was popular and the term ESG had not even been coined yet.

The work of these early pioneers in the 1990s began to diffuse into mainstream finance in the early 2000s. This is when the shift to the second era, the ‘mainstreaming era’ began to take place. This was characterised by the entrance of major financial services and asset management companies into the sustainable finance space. In this phase, we see a shift from SRI to ESG (environmental, social and governance), accompanied with an expansion of what issues are being addressed. This phase sees a growing acquisition of the small boutique SRI players by the big mainstream financial services companies, and it is when we see companies like S&P, Bloomberg, FTSE-Russell, MSCI, Vanguard and Blackrock – to name a few – all enter the sustainable finance space with offerings for mainstream investors. It was also the period that saw the creation of the UN-supported Principles for Responsible Investment, in 2005, and the UN Sustainable Stock Exchanges (SSE) initiative, in 2009. It was a decade that began with the niche and ended with the mass market. This mainstreaming era continued into the 2010s, and continues to this day. Sustainable finance has momentum and continues to grow in size and sophistication.

The age of sustainable finance
By the mid to late 2010s, however, the world was noticeably shifting to the third era of sustainable finance, the era of ‘regulation and standardisation.’ This era is characterised by the codification of sustainable finance practices. The UN Sustainable Development Goals, launched in 2015, created the global policy framework for sustainable development that further fuelled the mainstreaming of sustainable finance. As sustainable finance grew, so did the need for regulation and standardisation. Public markets are like trains and regulation and standardisation are the twin rails they run on.

As sustainable finance grows in size, it was inevitable that more work would need to be done to ensure transparency, stability and investor protection. The start of this era can be traced to events like the creation in 2015 of the now famous TCFD, or Task-force on Climate-related Financial Disclosures, by the Financial Stability Board and in 2018, the creation of the first formal sustainability working groups at IOSCO, the International Organisation of Securities Commissions. National regulators were also getting involved as well as supranational authorities like the EU. It is a period in which the world went from zero markets with mandatory ESG disclosure to more than 30.

This is the era of sustainable finance that we live in today. In the last five years, sustainable finance has benefited from the development of official taxonomies such as the EU Taxonomy on Sustainable Finance, the creation of the IFRS Foundation’s International Sustainability Standards Board (ISSB) consolidating sustainability reporting standards, and the work of the IOSCO Task Force on Sustainable Finance. As Ashley Alder, IOSCO Chair and head of the Hong Kong securities regulator says, “it is of utmost importance that the regulatory community steps up its efforts in ensuring markets contribute positively to sustainability challenges, in a way that secures the integrity of financial markets and the protection of investors.”

Education is key
In this era of standardisation and regulation, education takes on new levels of importance. Market participants need help in keeping up with the now fast pace of developments in sustainable finance. We’ve seen training and capacity building related to climate change and disclosure of climate-related information in particular become a growing focus for stock exchanges. As the linchpin of capital market systems, stock exchanges have their finger on the pulse of market needs. Exchanges’ growing focus on sustainability-related training and capacity building speaks volumes about the demand for knowledge and expertise on this topic.

This rising demand is likely due to the rapid progression of standards, frameworks and guidance being developed, coupled with an expansive demand from both investors and regulators. Stock exchanges have recognised the knowledge gap and are taking action. A key example of this action is related to the launch of the TCFD recommended disclosures. These 11 recommended climate-related financial disclosures and accompanying guidelines set a new global framework for identifying what information investors require to assess and price climate-related risks and opportunities.

Stock exchanges play an important role in supporting listed companies and investors as they overcome challenges related to the identification, management and disclosure of climate-related risks and opportunities. When the FSB launched the TCFD recommendations in 2017, stock exchanges were among the first organisations to support the recommendations publicly. Since then, the number of exchanges supporting the TCFD has continued to grow and training has become the top activity conducted by stock exchanges in support of the TCFD recommendations (see Fig 1).

Since 2021, more than 50 stock exchanges have hosted training for their market specifically on climate-related financial disclosures and the TCFD. Much of this training has been supported by the SSE Academy, the SSE initiative’s education arm focused on the provision of globally consistent and pragmatic training for market participants on the adoption and implementation of sustainable finance practices. Building on the UN SSE initiative’s Model Guidance on Climate Disclosures and the TCFD’s recommendations, the SSE Academy has collaborated with stock exchanges providing interactive training that allows companies to ask experts key questions to overcome hurdles and accelerate their climate-disclosure journeys. Through this training programme, the UN SSE, partnering with the World Bank Group’s International Finance Corporation (IFC) and CDP, has enabled stock exchanges to train over 20,000 market participants from 142 countries through more than 200 hours of training. At least a quarter of the 20,000 participants self-identified as being in a leadership position in their organisation and 35 percent of participants indicated that their organisations were in the process of integrating the TCFD recommendations into reporting practices for the upcoming reporting cycle.

The motivation for participating in training varied slightly by region (see Fig 2), however the main impetus globally for upskilling on this topic was to enhance skill sets pertaining to identifying climate-related risks and opportunities that face organisations. Nearly half of all participants indicated risk and opportunity identification as a motivating factor for joining training. During the training, the second most frequently asked question pertained to conducting scenario analysis as a means of identifying the financial impact that climate-related risks and opportunities organisations will face over the coming years.

At the completion of the training, participants indicated in feedback forms that they wish to receive additional training on a number of topics – the most referenced topics being on conducting climate scenario analysis, ESG standards more broadly, nature-related disclosures, and ongoing developments in climate-related disclosures including developments from the IFRS Foundation’s International Sustainability Standards Board (ISSB).

To address these ongoing capacity building needs, the SSE Academy has partnered with the IFRS Foundation to develop new training on the ISSB’s upcoming standards. The ISSB is set to be the new global standard consolidating existing frameworks for reporting financially-material sustainability factors, with international support from the G7, G20, the International Organisation of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions. Based on the structure developed by the TCFD, the ISSB’s initial standards set out both general sustainability-related financial disclosures as well as specific requirements on climate-related financial disclosures. Together with the IFRS Foundation, the SSE Academy will continue to support stock exchanges in their capacity-building activities by providing training on the ISSB’s standards when they are released in the coming months.

Black-Scholes and the mysterious smile

Posted on by itsupport

One of the oldest questions in finance is how to price options – those financial instruments which give you the right, but not the obligation, to purchase an asset in the future at a set price. For example, suppose that you think that the shares of some company, currently priced at $100, are set to go higher. Rather than purchase the shares at that price, a cheaper alternative is to buy a ‘call’ option which gives you the right to buy them at a certain price, known as the strike, in a year’s time.

Let’s say you choose a strike equal to the current price, and after a year the shares have gone up to $120, then the option allows you to buy them for $100 and sell them immediately for $120 to give a quick $20 profit per share. On the other hand if they have gone down, all you lose is the amount you paid for the option.

The problem then is, what should that option price be? And how does it change if we choose a different strike price, like $90, or $105? The answer is important, not just for individual investors, but for the financial system as a whole, which relies on the accurate pricing of this type of risk.

The nervous market
One of the first to have a theoretical stab at this problem was the French mathematician Louis Bachelier. In his 1905 thesis, he argued that the average return of stocks is zero, because they are as likely to go up as go down. The price of an option therefore depended only on the variability of the stock’s price, which he referred to as its ‘nervousness’ though today we call it the volatility. The more nervous the stock, the more expensive the option, because there is a better chance of it ending up ‘in the money.’

Bachelier’s approach had some problems and received little attention at the time, but some 60 years later the economist Paul Samuelson came across a copy and arranged for a translation. As he later told the BBC, he believed that Bachelier’s work held the key to developing “the perfect formula to evaluate and to price options.”

The Black-Scholes model met with immediate success – and helped kick off an explosive growth in options trading

In 1973, this dream formula was achieved in the form of the Black-Scholes model. Its elegant proof relied on the argument that, by constantly buying and selling options and the underlying stock, one can construct a risk-free portfolio. A consequence was that, as with Bachelier, the expected return of the stock dropped out of the equation – all that mattered for the price calculation was the risk-free rate that could be obtained on something like a Treasury bill.

The Black-Scholes model met with immediate success – and helped kick off an explosive growth in options trading. Samuelson wrote that “one of our most elegant and complex sectors of economic analysis – the modern theory of finance – is confirmed daily by millions of statistical observations.” The Nobel Prize Committee – who awarded Black and Scholes their prize in 1997 – agreed that “thousands of traders and investors now use this formula every day to value stock options in markets throughout the world.” The formula has since been described as “the most successful theory not only in finance, but in all of economics” and even as “the most widely used formula, with embedded probabilities, in human history.”

Which is odd, given that the model is actually far from being the perfect formula that Samuelson envisaged.

Is there something funny?
Part of the appeal of the Black-Scholes model was that it seemed to put option pricing onto a rational basis, by eliminating the need for subjective and uncertain estimates of future growth. This changed the perception of options trading from a form of speculation, to a form of risk management, which made it much more acceptable to people like regulators (in fact it is both).

To accomplish this feat, the Nobel-winning proof relied, as mentioned, on the idea that we can constantly buy and sell options and stocks; however this ignores the bid/ask spread, which is the difference between the seller’s ask price, and the buyer’s bid price. And it also assumes that the volatility can be treated as a constant.

There is an easy way to check these assumptions, which is to look at statistical data. First, it is clear that growth rates do matter, because if you buy call options in something that tends to go up, like the S&P 500 index, then you tend to make money. What counts is not the risk-free interest rate, as assumed by the model, but the actual growth rate.

The second problem is that volatility over a certain period is not constant, but is correlated with the price change over the same period. In fact this effect is partially captured by traders, who adjust the volatility depending on the strike price – a phenomenon known as the ‘volatility smile’ because of its parabolic shape.

Of course it’s no surprise that traditional economics, with its exaggerated emphasis on objectivity and rationality, doesn’t get the joke. So how can we improve the Black-Scholes model given these obvious drawbacks? And why are the markets smiling? We return to that in a future Econoclast.