Helen | World Finance

Post-oil preparation on a global scale

Posted on January 13, 2016January 14, 2016 by Helen

According to a recent IMF blog post, “The low price environment is likely to test the relationship between governments in oil-exporting countries and their sovereign wealth funds”. It went on to say: “Absent cuts in public expenditures, governments will likely be transferring less revenue than before to these funds. At the same time, pressures to draw down on sovereign wealth funds’ assets will probably rise.” Such are the pressures weighing on sovereign wealth funds (SWFs) in the present climate.

It was little over a year ago now that the market for SWFs was closing out yet another record performance, and TheCityUK figures for that year showed assets under management had grown 16 percent on the last. Despite falling commodities and – crucially – oil prices, 59 percent of SWFs kept their assets on an upward curve and very few withdrew assets. This, together with Scott Kalb’s assertion in May that the world’s 74 highest-ranking SWFs controlled $7.7trn in assets, is testament to their importance both as a source of capital and a precious means of averting financial collapse. Unfortunately oil’s slump in the months since has proven a bridge too far, and while most were spared the consequences for much of 2014, the same cannot be said for this past year.

“Like any large institutional investor, SWFs will be monitoring the knock-on effects low oil prices have on global financial markets”, said David Evans, Senior Writer and Editor for the Sovereign Wealth Center. “And oil-funded SWFs may also have to worry about cash-strapped governments raiding the till — that’s already happened in Russia. The Kuwait Investment Authority is reportedly looking to sell assets to cover the government’s budget deficit, while Norway and Alaska are preparing to withdraw more capital from their funds.”

The performance of SWFs is tied to that of oil, and it’s no coincidence those countries with the largest SWFs are likewise home to the largest fossil fuels reserves

Safety in numbers
For all but a few, the performance of SWFs is tied to that of oil, and it’s no coincidence those countries with the largest SWFs are likewise home to the largest fossil fuels reserves (see Fig. 1). Often posited as an effective instrument for the management and reduction of hydrocarbon volatility, oil nations have warmed to SWFs, safe in the knowledge that doing so might spare them some of the risks contained within.

Between 2011 and 2014, assets managed by SWFs grew, on average, 20 percent each year, riding on the coat tails of oil’s whirlwind success. The close ties to oil are unsurprising, given $4.3trn of the market’s $7.1trn in assets under management are dependent on revenues from oil and gas, according to the Sovereign Wealth Fund Institute. Of the approximately 70 SWFs in operation, more than half are funded directly by oil receipts.

Norway, Saudi Arabia, Kuwait and the UAE, for example, are home to four of the world’s five largest SWFs, and, not coincidentally, are also home to some of the most plentiful oil reserves. To take a brief look at Norway’s fund, more formally known as the Government Pension Fund Global, the pot – of over $900bn at its peak – has done much to head off volatility and keep the national economy on the straight and narrow.

Speaking about the fund’s aims and ambitions, Norges Bank Investment Management, which manages the Government Pension Fund Global on behalf of the Ministry of Finance, wrote: “One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population”. As much could be seen when in 2014 the size of it made every one of Norway’s more than five million people a theoretical millionaire – in crowns at least. The government was clearly of the opinion that the fund’s growth would continue in much the same vein when it set out its expectations that same year that the fund would reach $1.1trn by 2020.

However, while the fund’s objectives make clear the pot is for future generations, unforeseen circumstances mean the country could begin to make withdrawals this year. Looking at August of last year, the fund racked up its biggest loss in four years, largely due to the downturn in China and the fallout from the VW scandal. In the third quarter the fund lost $32bn – 4.9 percent. While the losses are considerable, the threat from China and VW is considerably less than that posed by oil. A bright spell, in which the fund has expanded six-fold over the past decade, is about to come to an end.

Speaking in May, Norway’s government announced its non-oil budget deficit would reach a record NOK180.9bn ($20.6bn), and the country’s petroleum-derived income was close to 30 percent short of October predictions. Having chipped 13 percent off the national currency and caused tax revenue derived from petroleum extraction to slip 42 percent on the previous year, the oil slump is as much an issue for oil dependent Norway as it is for Saudi Arabia, Kuwait and other Gulf states.

“While not all sovereign wealth funds rely on oil sales for their inflows, some of the biggest or most high-profile SWFs are funded by hydrocarbons. A decline in oil prices means that there is less money available for governments to fund their SWFs”, said Selina Sy, Manager of Premium Publications at Preqin. “However, it is the stated aim of many SWFs to supplement government income when income from the sale of hydrocarbons declines, so we may see some of them fulfilling that function as governments seek to plug funding shortfalls.”

Changed focus
Essentially, the situation means SWFs in the here and now must adapt to a climate wherein proceeds from oil are no longer guaranteed. Whereas income has been overflowing for countries like Norway in years passed, for as long as the price hovers in and around the $50 per barrel mark, this will likely not be so.

Speaking in an interview with MarketWatch, Massimiliano Castelli, Head of Strategy of Global Sovereign Markets at UBS Global Asset Management, said: “It is a new era.” SWFs “will have to adapt to this new environment and work harder to achieve the return expectations of their stakeholders”. Castelli added that, while the market has enjoyed a 20 percent rise in recent years, the rate could slow to around seven percent for the next five years, should the situation remain more or less unchanged. “On the whole, funds from oil-rich economies are likely to keep more of their capital in liquid assets so it’s readily accessible in emergencies”, added Evans. “Other, less risk-averse funds are likely to scour the markets for countercyclical investment opportunities.”

Whereas last year it looked as though SWFs were shifting their attention to focus on local economic development, the unexpected collapse of oil prices has dampened ambitions on this front, meaning the focus today rests with macroeconomic stabilisation as opposed to development. For Kuwait and Qatar, balancing the budget is out of the question with an oil price below $60 a barrel, whereas in Russia the break-even point is a worrying $107, according to Citi Research. The three must now dip into their SWFs.

Of course there are exceptions, notably New Zealand’s Superannuation Fund, which, as of the fiscal year ending June, reported a 14.6 percent growth in assets. This and a handful of others are proof enough that the market for SWFs need not resign to the decline in oil prices, and the market need only adjust its focus accordingly. This shift away from a reliance on fossil fuels could be seen – albeit to a lesser degree – last year, when investments such as real estate enjoyed an uptick in popularity.

“It is impossible to apply a single expectation to all sovereign wealth funds, as each ranks differently in the concerns of the respective states, and has different aims and sources of income”, said Sy. “Continued low commodities prices are likely to depress the rate of inflows to SWFs, and it may be that some enter a different stage of activity as they seek to rely more on developing their previous investments.”

Evans pointed out that “overall, however, SWFs tend to have well-diversified portfolios and most are self-sufficient (they don’t rely on oil revenue for their ongoing funding streams) so they won’t be unduly worried unless prices stay low for several years”.

While the shift in strategy last year was in keeping with a more domestically minded focus among the SWF community, the same strategy could be employed in the here and now to equally good effect, to ensure the fate of any SWF is not dictated by the whims of the energy market. Essentially, the advice for oil-based SWFs is the same as it is for oil nations in general: that a reliance on any one revenue stream is a weakness.

People’s QE pros and cons

Posted on January 13, 2016January 14, 2016 by Helen

According to The World Economic Forum, approximately $5.7trn must be invested in infrastructure annually by 2020 if we’re to head off the threats posed by climate change. With priorities as they stand, the infrastructure gap shows no signs of abating in the immediate-term and the situation will likely worsen if governments choose to ignore the issues at hand. The challenge for public sector institutions therefore, is to use what limited resources they have to remedy the aforementioned issues of climate change and infrastructure spending.

In a period where governments are warming to expansionary monetary policies, some believe a similar stance – albeit one with a few modifications – could succeed in mitigating climate change and boost infrastructure spending. Certainly, more measures are needed if we’re to reduce the risks, though what form they might take is a matter for debate.

World Finance spoke to Richard Murphy, author of Corbynomics and The Joy of Tax, about the merits of a ‘people’s’ quantitative easing (QE) and how a programme of this type could plug the investment gap. As one of the most influential figures in global tax and a constant presence in discussions about tax justice, the anti-poverty campaigner and tax expert offered us his take on why a People’s QE is preferable to the conventional alternative.

You’ve been highly critical of QE in the past. Could you elaborate on some of its shortfalls?
The result of QE is that the central bank of a country owns debt issued by the government of that country. However, because the central bank is itself owned by the government of that country, then in reality the government owns its own debt.

There are three consequences of this. First, interest on that debt is effectively cancelled. After a QE purchase of debt by the government, any interest then paid on that represents the government, in effect, paying itself. That amounts to little more than the government shifting money from one of its pockets to another.

It is, of course, essential that any money invested by government or one of its agencies on behalf of society must be managed to good effect

Second, the debt that has been purchased is effectively cancelled. This is a hotly contested suggestion by some because technically the debt does still legally exist and the government does still technically owe it to its own central bank, but for all practical purposes an organisation that repurchases its own debt somewhere within in its own structure [does] effectively cancel it. This fact is confirmed by the UK Government’s own accounting; in that the debt is shown as effectively cancelled.

Third, because QE debt is not bought from the government by its central bank but is instead bought from the debt’s previous owners (usually pension funds, insurance companies or banks) then something else also happens: new money is created and injected into the financial system. It is important to understand that this is not new money raised from taxpayers. This is instead new money created by the central bank in the same way that all banks create money when they make loans.

How does the People’s QE differ from that of conventional QE?
People’s QE is different. Whereas conventional QE buys back government bonds already in issue and makes payment to the previous owner of that bond, without any condition attached to it, People’s QE has a quite different goal.

The bonds used in People’s QE are issued by a government agency with the task of investing for the purpose of ensuring that new infrastructure is created in the economy. That agency could be specially created for this purpose, or it could be a subsidiary of a central bank that directs the funds to those best able to use them, as loans or grants.

But the important point is that this agency will issue bonds to bond markets (which includes banks, pension funds, insurance companies, and of course individuals and companies) with a degree of expectation that at least some of those bonds will be bought by the central bank of the country that has, at least in part, been primed to buy them. The blatant intention of this exercise is to provide additional – and new – funding for the purpose of tackling a shortfall of investment and creating new jobs.

The proportion of funding that comes from the private sector, and that which will come from People’s QE, will be dependent upon the demand for the bonds at the time they are issued to the market by the agency responsible for their creation. If the entire bond issue is taken up by the private market then so be it: there would then be no need for the government to intervene because the funding would have been provided for the projects in any event. If, however, there was a potential shortfall in private sector demand for the bonds, compared to the need for funding for infrastructure that is believed to exist, then the government could make up the difference using People’s QE. In other words, People’s QE is used to ensure that there is no shortage of funds for this essential purpose.

Are there any questions of illegality in funding people’s change investment in this way?
Some questions have been raised as to whether it’s legal under European law for a government to arrange for the issue of bonds knowing that its own central bank might then acquire them. There are provisions in European treaties that forbid a direct loan from a central bank to the government responsible for its operations.

Governor of the Bank of England, Mark Carney, who is opposed to the People's QE proposal — Governor of the Bank of England, Mark Carney, who is opposed to the People’s QE proposal

There are two responses to this suggestion of illegality. The first is that, if it is true, then it is highly likely that the entire UK and all the EU QE programmes that have been put in place to date are illegal. We think it very unlikely that the governments responsible for these programmes would have undertaken them if they thought that was the case, and there is no sign of a legal challenge arising ever since German objections at the time the EU programme’s creation were dismissed.

Second, the People’s QE programme is designed to overcome this objection. All the bonds that will be subject to this programme would, in the first instance, be issued by the agency responsible for their creation to private sector buyers. It would only be after they’ve been placed with those private sector buyers (even if they were underwriters) that the bonds could then be repurchased by a central bank.

In this way we believe that all the requirements of European law will be met, even at the cost of paying a small fee, at the very least, to a private sector underwriter at the time the bonds are first issued.

To what degree do the bonds used for People’s QE represent a public/private partnership?
One of the reservations that some people have about the government being involved in deciding which project should be invested in as part of a People’s QE programme is that they believe the private sector has a better track record in deciding which projects are worthwhile investing in.

This is not the place to debate whether this is true or not, but what’s important to note is that every single bond that would be issued for the purposes of funding People’s QE would be offered to the private sector. Therefore, in each and every case the discipline that private sector ownership could impose upon the decision-making processes will exist.

What would you say to those who criticise People’s QE on the grounds that QE funds must be invested profitably?
It is, of course, essential that any money invested by government or one of its agencies on behalf of society must be managed to good effect. And because the bonds subject to People’s QE will, at least in the first instance, be sold to the private sector to satisfy EU legal requirements, there will be a need to demonstrate a return on investment.

In practice there are several ways in which that return could be paid. In some instances projects invested in will undoubtedly be expected to generate revenues. So, for example, People’s QE funds could be used to invest in carbon neutral housing, in which case profits on sale or from rental incomes could be used to finance a return.

Alternatively, People’s QE could be used to create new, carbon neutral, generating capacity, which would, again, make a return, and could therefore pay a return to investors.

Another possibility is that the government would decide to subsidise a particular type of activity, as has been the case with the installation of photovoltaic cells on housing during the development period.

It would also be entirely possible for some bonds to be created with a higher risk attached to them, and for them to be marked on that basis so that any return might be dependent upon technology breakthroughs. In these cases the return would come from the exploitation of intellectual property that the project generated.

By 2020 it is expected that climate change requirements might reach $100bn per annum

The point is that the creation of bonds to fund People’s QE does, in itself, impose the necessary discipline on those managing these investments and this is true whether or not these bonds will be held in the private sector or the central bank.

Can enough money be created to make a real, lasting difference?
One of the challenges posed by the current shortfalls in infrastructure investment, including those relating to climate change, is the sheer scale of the money required to tackle the issues that arise. By 2020 it is expected that climate change requirements might reach $100bn per annum, for example.

This sum is not, of course, required for each and every country: it is a global figure, and when global GDP is about $70trn a year the scale required is more readily understood – otherwise equivalent to about 0.15 percent of global income. The sum, when expressed in this way, is a little less daunting. It also seems more achievable when it is realised that over the last few years the global economy has been able to absorb around $1trn per annum of conventional QE without threatening the stability of the global financial system in any way.

What’s more, when that financial system has not suffered from inflation, but there has been a continuing and persistent unemployment problem in many of the world’s major economies, then it’s clear that the physical capacity to invest in the infrastructure needed to address fundamental issues such as climate change does exist. The role of People’s QE is to make that possible.

America’s education bubble

Posted on January 13, 2016July 21, 2016 by Helen

One of the fundamental purposes of government is to advance important public goods. But, if not handled carefully, the pursuit of significant social goals can have unfortunate economic and financial consequences, sometimes even leading to systemic disruptions that undermine more than just the goals themselves.

Mohamed El-Erian

This happened a decade ago in the US, with the effort to expand home ownership. It has been playing out more recently in China, following an initiative to broaden stock-market participation. And it could happen again in the US, this time as the result of an attempt to improve access to funding for higher education.

Cause and effect
In the first case, the US government eagerly supported efforts to make mortgages more affordable and accessible, including the creation of all sorts of ‘exotic’ lending vehicles. The approach worked, but a little too well. The surge in debt-enabled demand to drive up real-estate prices, while the banks’ greater willingness to lend led many people to purchase homes they couldn’t afford. The collapse of the subsequent bubble – a major contributor to the 2008 global financial crisis – nearly tipped the world economy into a multi-year depression.

In China’s case, the government hoped that broader stock-market participation – achieved through efforts to bolster equity prices and promote lending for investment – would make citizens more open to pro-market reforms. Again, the approach proved too effective, and a bubble formed.

Now, the government is trying to counter the risk of a disorderly deleveraging that would damage the Chinese economy and produce significant knock-on effects for the rest of the world. America’s effort to expand access to student loans – a fundamentally good initiative, aimed at enabling more people to pursue higher education – carries similar risks. Fortunately, there is still time to do something about it.

Universities are often slow to adapt their curricula to the economy’s needs, while new technologies and business models are exacerbating the winner-take-all phenomenon

No one doubts that investment in education is vital. Numerous studies have shown major returns for individuals and societies alike. Higher levels of educational attainment improve overall economic wellbeing and prosperity, lower retirement burdens, and enhance social mobility and satisfaction. The unemployment rate for college graduates in the US, at 2.5 percent, is roughly one-third the rate for those without a high school diploma. What policymakers must determine is how to invest in education in ways that maximise these benefits, without creating new risks. This is where the US risks falling short.

Over the last 10 years, the combination of higher tuition fees, more student enrolment and greater reliance on loans has caused the stock of outstanding student debt to nearly triple. It now stands at well over $1.2trn, more than 60 percent of which is held by the bottom quartile of households – those with a net worth of less than $8,500.

Today, seven out of 10 post-secondary students graduate with debt, with the total volume exceeding debt from credit cards and auto loans combined. Moreover, student loans constitute 45 percent of federally owned financial assets.

Making matters worse, the return on investment in education is falling, because the economy is growing slowly and changing rapidly, making it difficult for some graduates to secure employment that takes advantage of their knowledge and skills. Universities are often slow to adapt their curricula to the economy’s needs, while new technologies and business models are exacerbating the winner-take-all phenomenon.

Battling for investment
If the return on investment in education continues to decline, the servicing of student loans will tend to crowd out other consumption and investment outlays, especially given that student debt has considerable seniority in the capital structure. In this scenario, the risks of default and delinquency would rise, along with financial insecurity and general instability, all of which would exacerbate the inequality trifecta (income, wealth and opportunity).

The good news is that, though some 10 percent of borrowers already face repayment problems, the macroeconomic and financial tipping points remain some way off. But this is no excuse for complacency; it merely provides time for a concerted effort to implement measures that will ameliorate the destructive trends stemming from student loans.

The work to be done
First and foremost, US politicians need to take full responsibility for economic governance, seeking not only to boost growth, but also to avert a reduction in long-term growth potential. After depending on unconventional monetary policy for far too long, the US Congress needs to adopt a more comprehensive approach, with measures aimed at improving worker training and retooling, modernising education curricula, and incorporating transformational technologies more effectively into the economy. Increased infrastructure investment, better corporate-tax policies, and an updated budgetary approach are also needed.

For their part, universities – which have benefited considerably from the wide availability of student loans – should rein in their costs, while offering more direct financial aid funded through philanthropy. Some universities have already adopted ‘no loan’ policies; students’ demonstrated financial need is met entirely with grants financed by the university and other donors.

Not all universities need to go this far – and most can’t, because they lack large enough endowments to cover the costs. But a broader move in the direction of non-debt financing of higher education is needed.

Efforts could also be made to encourage households to save more, starting earlier, for education. Student loan disclosures should be made more transparent, thereby enabling applicants to make responsible decisions, with lower-cost two-year community colleges serving as a useful stepping-stone to a traditional college education. And more could be done to expand income-based repayment schemes.

None of these measures will be easy. But if implementation continues to lag behind realities on the ground, the challenges will be far greater down the road. As borrowers’ growing debt burdens limit their financial flexibility and productive contribution to the economy, the policy emphasis will shift from mitigating future risks to reducing indebtedness directly through loan forgiveness and bailouts. That would raise thorny issues of fairness and misaligned incentives, and could ultimately have the perverse effect of reducing educational access.

Mohamed El-Erian is Chief Economic Advisor at Allianz

© Project Syndicate 2015

Finding a reliable source

Posted on January 13, 2016July 21, 2016 by Helen

If one were seeking a perfect example of why it’s so hard to make financial markets work well, one would not have to look further than the difficulties and controversies surrounding crowdfunding in the US. After deliberating for more than three years, the US Securities and Exchange Commission (SEC) last month issued a final rule that will allow true crowdfunding; and yet the new regulatory framework still falls far short of what’s needed to boost crowdfunding worldwide.

Robert J Shiller

True crowdfunding, or equity crowdfunding, refers to the activities of online platforms that sell shares of start-up companies directly to large numbers of small investors, bypassing traditional venture capital or investment banking. The concept is analogous to that of online auctions. But, unlike allowing individuals to offer their furniture to the whole world, crowdfunding is supposed to raise money fast, from those in the know, for businesses that bankers might not understand. It certainly sounds exciting.

Regulators outside the US have often been more accommodating, and some crowdfunding platforms are already operating. For example, Symbid in the Netherlands and Crowdcube in the UK were both founded in 2011. But crowdfunding is still not a major factor in world markets. And that will not change without adequate – and innovative – financial regulation.

Crowd control
There is a conceptual barrier to understanding the problems that officials might face in regulating crowdfunding, owing to the failure of prevailing economic models to account for the manipulative and devious aspects of human behavior. Economists typically describe people’s rational, honest side, but ignore their duplicity. As a result, they underestimate the downside risks of crowdsourcing.

The risks consist not so much in outright fraud – big lies that would be jailable offenses – as in more subtle forms of deception. It may well be open deception, with promoters steering gullible amateurs around a business plan’s fatal flaw, or disclosing it only grudgingly or in the fine print.

It is not that people are completely dishonest. On the contrary, they typically pride themselves on integrity. It’s just that their integrity suffers little lapses here and there – and not always so little in aggregate.

In my new book with George Akerlof, Phishing for Phools: The Economics of Manipulation and Deception, we argue that unscrupulous behaviour has to be factored into economic theory in a fundamental way. The economic equilibrium we live should be regarded, above all, as a phishing equilibrium, in which small-time individual dishonesty can morph into something more systemically important when it is carried on by business organisations under intense competitive pressure. Yes, competition rewards the sharp and hardworking. But it also often compels them to keep the frontiers of subtle deception in view.

Most people, even the cleverest, cannot grasp the next breakthrough business opportunity

Phishing equilibrium
The SEC’s new rules for crowdfunding are complex, because they address a complicated problem. The concept underlying crowdfunding is the dispersal of information across millions of people. Most people, even the cleverest, cannot grasp the next breakthrough business opportunity. Those who can are dispersed. The economist Friedrich Hayek put it well in 1945:

“[T]here is beyond question a body of very important but unorganised knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of particular circumstances and place. It is with respect to this that practically every individual has some advantage over all others in that he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active cooperation.”

The problem is that the promise of genuine “unique information” comes with the reality of vulnerability to deception. That’s why channeling dispersed knowledge into new businesses requires a regulatory framework that favors the genuinely enlightened and honest. Unfortunately, the SEC’s new crowdsourcing rules don’t go as far as they should.

The 2012 US legislation that tasked the SEC with rulemaking for crowdfunding platforms specified that no start-up can use them to raise more than $1m a year. This is practically worthless in terms of limiting the scope for deception. In fact, including this provision was a serious mistake, and needs to be corrected with new legislation. A million dollars is not enough, and the cap will tend to limit crowdfunding to small ideas.

Trust, confidence, suspicion and fear
Some of the SEC rules do work against deception. Notably, crowdfunding platforms must provide communication channels “through which
investors can communicate with one another and with representatives of the issuer about offerings made available”.

That is a good rule, fundamental to the entire idea of crowdfunding. But the SEC could do more than just avow its belief in “uncensored and transparent crowd discussions”. It should require that the intermediary sponsoring a platform install a surveillance system to guard against interference and shills offering phony comments.

The SEC and other regulators could go even further. They could nudge intermediaries to create a platform that summarises commenters’ record and reputation. Indeed, why not pay commenters who accumulate ‘likes’ or whose comments on issuers turn out to be valuable in light of evidence of those enterprises’ subsequent success?

For the financial system as a whole, success ultimately depends on trust and confidence, both of which, like suspicion and fear, are highly contagious. That’s why, if crowdfunding is to reach its global potential, crowdphishing must be prevented from the outset. Regulators need to get the rules right (and it would help if they hurried up about it).

Robert J Shiller is Nobel Laureate in Economics and Professor of Economics at Yale University

© Project Syndicate 2015

When financial markets misread politics

Posted on January 13, 2016July 21, 2016 by Helen

When Turkey’s Justice and Development Party (AKP) defied pundits and pollsters by regaining a parliamentary majority in the country’s general election on November 1, financial markets cheered. The next day, the Istanbul stock exchange rose by more than five percent, and the Turkish lira rallied.

Never mind that one would be hard pressed to find anyone in business or financial circles these days with a nice thing to say about Recep Tayyip Erdogan or the AKP that he led before ascending to the presidency in 2014. And make no mistake: though Turkey’s president is supposed to be above party politics, Erdogan remains very much at the helm.

Confrontational politics
Indeed, it was Erdogan’s divide-and-rule strategy – fuelling religious populism and nationalist sentiment, and inflaming ethnic tension with the Kurds – that carried the AKP to victory. Arguably, it was the only strategy that could work. After all, his regime has alienated liberals with its attacks on the media; business leaders with its expropriation of companies affiliated with his erstwhile allies in the so-called Gülen movement; and the West with its confrontational language and inconsistent stance on the Islamic State. And yet financial markets, evidently placing a premium on stability, hailed the outcome. A majority AKP government – investors apparently believed – would be much better than the likely alternative: a period of political uncertainty, followed by a weak and indecisive coalition or minority administration. But, in this case, there was not much wisdom in crowds.

It is true that the AKP had a few good years after first coming to power in late 2002. But the party’s room for mischief was constrained by the European Union and the International Monetary Fund abroad and secularists at home. Once those limits were removed, Erdogan’s governments embraced economic populism and authoritarian politics. Investors’ apparent optimism following the AKP’s victory recalls Einstein’s definition of insanity: doing the same thing over and over and expecting a different outcome.

Turkey certainly isn’t the only case where financial markets have misread a country’s politics. Consider Brazil, whose currency, the real, has been hammered since mid-2014 – much worse than most other emerging-market currencies – largely because of a major corruption scandal unfolding there. Prosecutors have revealed a wide-ranging kickback scheme centred on the state-owned oil company Petrobras and involving executives, parliamentarians, and government officials. So it may seem natural that financial markets have been spooked.

Yet the most important outcome of the scandal has been to highlight the remarkable strength, not weakness, of Brazil’s legal and democratic institutions. The prosecutor and judge on the case have been allowed to do their job, despite the natural impulse of President Dilma Rousseff’s government to quash the investigation. And, from all appearances, the probe has been following proper judicial procedures and has not been used to advance the opposition’s political agenda.

We know from painful experience that financial markets’ short-term focus and herd behaviour often lead them to neglect significant economic fundamentals

Beyond the judiciary, a slew of institutions, including the federal police and the finance ministry, have taken part and worked in sync. Leading businessmen and politicians have been jailed, among them the former treasurer of the ruling Workers’ Party.

Predicting uncertainties
Financial markets are supposed to be forward-looking, and many economists believe that they allocate resources in a way that reflects all available information. But an accurate comparison of Brazil’s experience with that of other emerging-market economies – where corruption is no less a problem – would, if anything, lead to an upgrade of Brazil’s standing among investors.

Going back to Turkey, leaked recordings of telephone conversations have directly implicated Erdogan and his family, along with several government ministers, in a hugely lucrative corruption ring involving trade with Iran and construction deals. It is an open secret that government procurement is being used to enrich politicians and their business cronies. From all indications, corruption reaches higher and is more widespread than in Brazil.

But today it is the police officers who led the corruption probe against Erdogan who are in jail. Some of the media outlets that supported the probe have been closed down and taken over by the government. The AKP argues that the police officers are adherents of the Gülen movement and that the investigation was politically motivated, aiming to unseat Erdogan.

Both claims are most likely true. But neither justifies the blatant lawlessness with which the AKP government has clamped down on the corruption allegations. The upshot is that Turkey’s institutions, unlike Brazil’s, are being captured and corrupted to an extent that will hamper economic growth and development for years to come.

Nor is Turkey the only country where large-scale corruption is left unchecked. In Malaysia, Prime Minister Najib Razak has been at the centre of a major political scandal since nearly $700m in unaccounted funds was found in his bank accounts. Billions of dollars are said to be missing from the government investment fund 1MDB, which Najib controlled. Najib has promised a full reckoning, but he has sacked Malaysia’s attorney general, who was investigating 1MDB.

In Latin America, Argentina and Mexico both rank among the bottom half of countries in controlling corruption and maintaining transparency – much lower than Brazil. The dramatic abduction and gruesome killing in 2014 of 43 students north of Mexico City is only the latest example of collusion among the country’s criminal gangs, police, and politicians.

We know from painful experience that financial markets’ short-term focus and herd behaviour often lead them to neglect significant economic fundamentals. We should not be surprised that the same characteristics can distort markets’ judgment of countries’ governance and political prospects.

Dani Rodrik is Professor of International Political Economy at Harvard University’s John F Kennedy School of Government

© Project Syndicate 2015

Litigation finance on the rise

Posted on January 13, 2016January 14, 2016 by Helen

When one hears the words ‘litigation finance’, the image of relentless television advertisements promising large sums of cash for some misfortune that may or may not have ruined your life immediately springs to mind. Fortunately, however, this is not how the practice in question operates: litigation finance refers to the ability of a third-party – more often than not a private equity firm or wealth management fund – to invest in a court case in return for a percentage of the successful outcome. If someone – sometimes an individual, but more likely than not, a company – is attempting to bring a civil case against another person or firm, such investors will purchase a proportion of the case’s outcome, which will be used to pay for legal costs. In return, they will receive a dividend from the successful case.

The practice, while not new, is on the rise. As The New York Times noted, “The industry — which barely existed outside personal-injury cases until the mid-2000s — is growing rapidly, driven by increasingly permissive laws, the promise of high returns and hourly billing rates that run $500 or more for the largest and most sophisticated law firms”.

UK-based firm Burford Capital, which focuses on US ventures, saw its lawsuit investments increase from $150m to $500m between 2013 and 2014, allowing it to see its profits rise by “89 percent, with a 61 percent net profit margin”, according to the New York Times article (see Fig. 1). Gerchen Keller, a new entrant to the market, has a portfolio of $840m, while “IMF Bentham, an Australia-based funder, consists of 39 cases, which the firm values at just over $2bn”. What can be seen, according to the litigation crowdfunding platform Invest4Justice, is the phenomenon of lawsuits “making a transition from a private arrangement to a fully monetised asset class”.

Money already plays a huge role in the ability of a complainant to pursue justice – litigation finance merely levels the
playing field

A new age of legality
While this new asset class could be classified by some as capitalism run rampant – as a new form of profiteering in the age of neo-liberalism, or the further financialisation of the economy – the practice of a third party backing someone else’s lawsuit has a long history: since the ancient Greeks, certain groups bet on outcomes in legal proceedings; a practice which then continued in Ancient Rome. It was finally banned in the remaining Eastern section of the Roman Empire in the sixth century by the Byzantine emperor Anastasius, who argued that such legal disputes should only concern the original two parties.

However, the ban has not quite survived in the modern era. As Luke Gittos, a solicitor based in London, told World Finance, “Parties can be joined to civil cases after an original claim has been made, so I suppose Anastasius has been overruled. I am sure there remains a common law rule of some kind that says only the parties involved are entitled to be heard, but I don’t think this has any impact on the funding situation.”

In a similar way, litigation finance has been compared to the Medieval England concept of ‘champerty’, wherein respected individuals such as nobles or members of the royal court would attach their name to a lawsuit, with the intention of legitimating the claim, in return for a portion of the outcome. The practice itself was eventually banned, but by the 18th century champerty’s relevance – and its prohibition – had waned slightly. As the British philosopher Jeremy Bentham noted at the time, while in Medieval England “the sword of a baron, stalking into court with a rabble of retainers at his heels, might strike terror into the eyes of a judge upon the bench. At present, what cares an English judge for the swords of a hundred barons?… The judge of our days is ready with equal phlegm to administer, upon all occasions, that system… which the law has put into his hands”.

Cashless complainants
While some parallels may exist between the two methods, the ‘mischief’ of champerty – which Bentham described as the practice of “a man [buying] a weak claim, in hopes that power might convert it into a strong one” – doesn’t seem to apply to litigation finance, which in many ways allows the less powerful to pursue justice against the more powerful.

The idea of money playing a vital role in the dispensing and securing of justice, and then becoming a securitised asset in its own right, may raise some concerns. However, the defenders and proponents of litigation finance argue that money already plays a huge role in the ability of a complainant to pursue justice – litigation finance merely levels the playing field.

According to Invest4Justice, access to justice is a fundamental human right. In a post on its website, the firm points to Article 8 of the Universal Declaration of Human Rights: “Everyone has the right to an effective remedy by the competent national tribunals for acts violating the fundamental rights granted him by the constitution or by law.”

However, the group argues that the various means by which states have attempted to provide equal access to “effective remedy” before national courts has been inadequate: lawyers remain expensive and legal aid, where it exists, is often inadequate and “rarely produces good results”. As a consequence, allowing private backers to invest in lawsuits gives people better access to legal representation in their pursuit of justice.

Often in civil cases, those with the largest pot to draw from are the ones who are able to drag out proceedings. With the looming threat of financial ruin occurring as a result of the accrued costs of a long-running case, a larger company in a civil case can often force the other party to stand down or accept out-of-court settlements. Litigation finance, according to Gittos, has the potential to “provide helpful assistance to those defending claims and provide some assurance that fighting litigation is not going to make defendants bankrupt. Cases can often drag on for long periods, meaning that the financial burden on parties can be significant.”

In a recent article, outlined a scenario where litigation finance would help cases that otherwise would not have seen their day in court, mainly due to financial constraints: “A technology company in liquidation might have a patent-infringement suit that the bankruptcy’s administrators lack the time to pursue”, the article explained. “There may be money to be made by suing a joint-venture partner, but the prospect of a costly case dissuades managers from going to court.”

Different jurisdictions
While the idea of an underdog with a lack of resources pursuing legal recourse against a large company is the backbone of many stories in American popular culture, litigation finance is not only restricted to the US. As Invest4Justice noted, “Litigation funding also exists in France, Germany, Holland and many other civil law countries”. However, due to alternative options for funding cases and rules around conduct, some countries have less of a need for litigation finance.

According to Gittos, “Litigation funding is very rare in the UK”. His own place of work has never experienced it: “This is possibly because we have provisions in civil proceedings whereby successful parties can claim their costs back from the other side. We also have conditional fee agreements, which have become known as ‘no win, no fee’. Some firms also offer litigation insurance – [this] means that people are less likely to be completely disbarred from launching a meritorious case because of funding; they just need to find a lawyer who is willing take the case on the basis of one of our alternative funding mechanisms.”

Gittos also noted how the practice of some large firms bleeding smaller firms dry “is more relevant in the US context”. In the UK, “parties can be punished for failing to settle cases by being charged greater costs if they lose. Parties are actively discouraged from dragging cases on, although I am sure it does happen”.

Quid pro quo
Despite some consternation about the practice of turning lawsuits into an asset class from which dividends can be derived, it is hard to see who loses from litigation finance once you venture beyond the battle of the courtroom: firms with large funds to invest have the cash, and struggling complainants need it. Similarly, those who have cash that they wish to invest get to see a potential return, while those who may not have previously been able to access legal remedy are now able to do so.

Investment is essentially speculation; leveraging cash in hope of a return. Litigation finance is not based upon speculating whether some asset will merely appreciate in value, but is based upon a judgement of whether or not a case is worth investing in, to be pursued in a court of law, with the hope of a win. As each case is invested in on a case-by-case basis, the process seems generally immune from the sort of bubble-driven speculation some assets are prone to. The outcome of the case, based upon decisions in a court of law, decides the payout, rather than fluctuating market forces.

The gig economy and its long-term effects

Posted on January 13, 2016January 14, 2016 by Helen

The technological era has caused a major shift in all aspects of life, including the way we work. As such, online consumer driven services, free communication channels and globalised networks have created a much bigger space than ever before for outsourcing, contracting, temping and freelancing. Aside from the far greater ease and convenience in which companies can now employ non-permanent staff, the appeal of greater flexibility, more money-making opportunities and an enhanced work-life balance are luring increasing numbers into the ‘gig economy’.

Despite the increasingly popular trend, participants face an array of challenges that would leave many resigned to staying in traditional employment. At present, the majority of the labour force still prescribe to a conventional format, whereby they work an agreed number of hours for a set number of days per week for one employer, and usually with a permanent contract in place. In return, they receive a fixed and regular wage, which provides them with long-term financial security.

In addition, permanent staff are reassured in knowing that undoubtedly, they will receive paid annual leave and paid sick days, as well as a specified notice period. Additional employment benefits can differ considerably depending on the country, region, employer, or even the job itself. Health insurance is a common job perk in the US for example, while in Europe; employees tend to be offered more holidays each working year than their American counterparts. In essence, such pre-determined conditions and benefits widely help to keep the conventional employment dynamic in tact.

Despite the comfort of a financial safety net and having paid time off, many have grown weary of the lack of freedom that comes with the nine ‘til five paradigm

The dawn of a new age
Despite the comfort of a financial safety net and having paid time off, many have grown weary of the lack of freedom that comes with the nine ‘til five paradigm both in and outside of the workplace. Moreover, the monotonous routine can feel stifling, which can lead to career dissatisfaction. Some people thrive when working unsupervised, while the variety of contract work can make for a refreshing challenge each day of the week.

The gig economy is also especially helpful for those with young families, particularly women, who now have easier access to earning a wage at home or at times that suit them most. Although the figures have not yet been accurately quantified, it is clear that the number of gig workers is growing rapidly.

This shift in employment, which is still in its nascent stage, is very much a 21st-century phenomenon. “I think the opportunities for people who want to be gig workers has expanded significantly over the last five years; there’s now a much wider range of opportunity, in part mediated by digital platforms of different kinds that makes it possible for someone who actually wants to be their own boss and who wants to run a small business of one as a way of making a living”, said Arun Sundararajan, Professor of Information, Operations and Management Sciences at New York University.

Simultaneous to the materialisation of such technological platforms is a generational mind-set shift in regards to full time employment and entrepreneurship, which has also supported the realisation of the gig economy.

Essentially, the current generation is less predisposed to the shackles of a traditional employer and a set pay packet, and as Sundararajan explained, “the notion of entrepreneurship is far more in the cultural dialogue than it used to be 10 or 15 years ago, and that could also be a contributing factor”.

Given the increasing number and scope of sharing economy platforms, such as Airbnb, Lyft, JustPark to name but a few, millions around the world are signing up to participate in the gig economy, either as their sole income or as a means to augment their current earnings. In terms of the latter, countless individuals are now putting their spare time to economic use by retailing their creations on Etsy, content writing through Freelance.com or selling photographs on Flickr. As such, peer-to-peer exchange is undergoing a mass revival at present, which has been made possible through a visible change in societal consciousness.

“I think that over the last 10 years there has been a drastic improvement in the digital trust infrastructure. A big barrier in the past to widespread peer-to-peer exchange was the fact that you would rather buy from a company because you trusted their brand”, Sundararajan told World Finance. Yet there is now a wide range of digital signals available that make people more inclined to deal with semi-anonymous peers, including online review systems and digitised versions of real world social capital, such as Facebook and LinkedIn profiles. “All these different facets to your personality can create a much richer digital persona that makes people comfortable when interacting with you”.

Supporting the gig industry
Just as gig working can increase one’s earnings to an unlimited degree, the opposite can also be true, as pay can vary drastically, and by no means has a fixed minimum. For many, the ‘feast or famine’ style of income can be difficult and stressful; this fluctuation in earnings can make it difficult to save for the future, which is exacerbated further by not being entitled to some form of a retirement package or pension contribution. Then there is the formidable issue of no sick leave – if gig workers are unable to work, they simply do not earn.

The issue of health insurance is particularly troubling for gig workers in the US, given that citizens cannot fall back on national healthcare as they can in European states. In addition to being expensive, the process itself of obtaining medical insurance can be difficult and overbearing. “What a typical corporate human resources department does for you is really filter your choices”, explained Elizabeth Woyke, Business Reporter and co-author of Serving Workers in the Gig Economy. “Whereas online exchanges can take hours, it’s very confusing and you don’t really understand what is the best choice for you; so I think that in the health insurance space, it’s confusion over the wealth of options.” Moreover, the predominant reason why many US citizens choose to obtain health insurance through their employer is because doing so significantly lowers the price through attaining a group rate.

Democratic Candidate Hillary Clinton, who is largely opposed to the gig economy

Gig workers also face the difficulty of filing personal taxes and keeping track of expenses, which may be a daunting task for those who are not versed in bookkeeping, or which of their outgoings are deductible. For example, Uber and Lyft drivers must keep receipts and tabs on their petrol consumption throughout the year; not doing so at every given opportunity can make a significant difference to one’s pay packet. Then there is the process and self-discipline of putting aside money each month for the year’s end, which can be financially dangerous for many not in the habit.

In response to the increasing number of individuals that are walking away from the traditional employment relationship (see Fig. 1), specialist human resources companies are now emerging to cater for them specifically. “Some of them are focused on ride sharing drivers, others are focused more on the Airbnb hosts, some are really quite general”, Woyke added. Although one such firm may be able to assist with taxes or another can help with acquiring the best healthcare package at a group rate, no one company will offer everything in the same way that a conventional employer does.

Gig workers however, are entitled to the same crucial safety net as the rest of the labour force. That said, now is the time for political decision makers and the wider community to engage in a discussion about how gig workers can be safeguarded. Fortunately for the freelancing community, the debate has already begun and more online advice is now available to assist with the various aspects of adopting an individualistic employment framework. “In fact, what’s interesting is that gig work and the gig economy has become a bit of an election issue here in the US”, Woyke told World Finance. A number of high-profile court hearings are also contributing to the public debate, a notable example being Uber, which has been involved in various legal cases around the world to determine whether its drivers are in fact employees as opposed to contractors.

The UK’s sharing economy

5m

UK workers are self-employed

3%

of those in the UK earn up to

£5k

per week working in the
gig economy

At present, the role of the government in providing a safety net for gig workers varies considerably. In the US and the UK for example, the presumption lies on its provision through the full time employer, whereas Scandinavia’s flexicurity model is in its very nature aligned for providing welfare to gig workers. “The bottom line is, if you’re a country where the safety net is tied very closely to full-time employment, the short-term role of the government should be in facilitating the creation of a new funding model for a safety net – that is an individual government market partnership”, Sundararajan explained.

A modern economy
The gig economy is clearly here to stay. “If you think about it, the reason we have the gig economy is because of huge macroeconomic forces, like globalisation of work, global trade, outsourcing and technology shifts like the rise of smartphones. I don’t think anyone thinks that any of those trends are going away certainly, and so I think the gig economy is not either”, Woyke commented.

It represents a transition that is currently underway in the global economy – a new era in which employers can take their pick from talent across the world, as well as flourish with the help of the creativity and innovation of ‘happy workers’. Likewise, employees can have more freedom than ever in choosing where they want to work, how they want to work and how long for, and even potentially, how much they want to earn. Ultimately people can become the masters of their own careers, and in effect, of their own lives. Although there are various obstacles to be overcome in providing the support that gig workers need, this will come in time and when it does, the sky’s the limit for all.

Sundararajan is optimistic about what the gig economy can mean for the future. “I think that as we start to fulfil more of our everyday economic needs through peer-to-peer exchange, it’s going to shift how much we trust other people in general and [it will] potentially increase the level of trust that we have in society. I also think that there is an opportunity here for peer-to-peer exchange to be equalising in terms of income distribution, and the reason why I think this is because historically people who own the means of production tend to see a faster rate of growth in their wealth than people who simply provide labour.” Gig workers on the other hand are now able to own a small portion, and with the ownership of society’s production engines being more evenly distributed, the equalisation of wealth could be actualised one day in the not too distant future.

Gender blindness is the real measure of workplace equality

Posted on January 13, 2016January 14, 2016 by Helen

The business world has been focused on getting women into its upper echelons. Campaigns like 2020 Women On Boards, which seeks to increase the percentage of female c-suite executives by 20 percent or more by the year 2020, along with other initiatives proposed by corporations and international organisations, are all helping to erode barriers to gender equality in the workplace.

In the US, California became the first state to pass legislation (Senate Resolution 62), which was designed specifically to encourage corporations to promote more women to senior positions. In Europe, the EU Commission took decisive action in an attempt to shatter the glass ceiling, putting forward a proposal that will see 40 percent of non-executive board member positions of publically listed companies in the region filled by women in over the next four years. Developments such as these are not isolated to Europe and the US, however: throughout the world, governments and businesses are putting forward their own strategies and proposals for getting more women into the top-flight.

But despite all this, gender equality is proving difficult to achieve (see Fig. 1). In fact, a recent report by McKinsey & Company, a leading management consultancy firm, showed that women are still underrepresented at every level of the corporate pipeline; with women holding only 32 percent of senior manager roles and just 17 percent of c-suite positions among the 118 US corporations they surveyed. So why are women still struggling to fill top-level jobs when the world is working so hard to help them do so?

Real equality
Interestingly, the answer, according to two powerful women, lies in ending our collective obsession with measuring equality by the number of women at the top of corporate ladder and, instead, focus on cultivating a society that allows both men and women a wider array of equally respected choices. How they believe society should go about achieving this goal is where the two part ways.

The US public policy expert Anne-Marie Slaughter asserts that massive changes to work culture, policy and society are required to get there, while Claire Fox, a libertarian writer and founder of the think-tank the Institute of Ideas, is worried that by overstating the issue, advocates of gender equality are doing more harm than good.

Today, the world seems too content to value women on male terms. But by doing so it actually denies women fundamental freedoms

During her TED Talk, ‘can we all “have it all”?’, Slaughter explained how for years she had “accepted the idea that the most respected and powerful people in our society are men at the top of their careers” and, therefore, for her, “the measure of male-female equality ought to be how many women are in those positions: prime ministers, presidents, CEOs, directors, managers, Nobel laureates, leaders”. And while Slaughter admits that this metric is still important and that society must continue to work towards this goal, she concedes that pursuing this end alone will not result in real equality.

To achieve true gender equality, not only do business and society at large need to recognise that the breadwinning and caregiving roles are equally important, but more importantly, a cultural shift must occur, one where men and women are freed from traditional gender roles, or what Slaughter refers to as the “re-socialising” of men.

Nowadays, in developed countries at least, women are told they can have it all and are expected to want to have it all – to be breadwinners, caregivers and more. But men, according to Slaughter, are still where they’ve always been. “Men are still socialised to believe that they have to be breadwinners, that to derive their self-worth from how high they can climb over other men on a career ladder”, claimed the policy expert. “60 years after The Feminine Mystique was published, many women actually have more choices than men do.”

She added, “We can decide to be a breadwinner, a caregiver, or any combination of the two. When a man, on the other hand, decides to be a caregiver, he puts his manhood on the line”. Women are able to see themselves as much more than just mothers, but many men still struggle to view themselves as anything more than breadwinners. Part of the reason for that, asserts Slaughter, is due to the fact that many women judge the attractiveness of men largely on how successful they are in their career. “A woman can drop out of the work force and still be an attractive partner, [but] for a man, that’s a risky proposition”, said Slaughter. More and more women are raised to believe that they can be whatever they want to be, but that is not the case for men. In order to change this, Slaughter believes that parents and society must ‘re-socialise’ men.

This is not advocating a switching of traditional gender roles – far from it. What this aims to create is real equality: to cultivate a society that allows individuals to make choices based on what is most important to them, not what society has conditioned them to want or what they have conditioned themselves to want.

Free to choose
But in order for full equality to be realised, to construct a world where men and women are able to choose from a wide array of equally respected choices, what needs to happen? People like to talk about removing and breaking down social barriers, but it is often a case of easier said than done.

The answer, according to Fox, is gender blindness. For her, the biggest obstacle to real equality is our obsession with it – or, more importantly, our incessant need to overstate the issue and the harmful ways in which it is framed. “The problem [with framing gender equality] in terms of the glass ceiling, is that it distorts things”, said Fox. “It creates an endless discussion about why women aren’t reaching the top, with this conversation eventually ending up demonising the choices women make.”

In a recent op-ed in The Telegraph, columnist and former editor of the New Statesman, Cristina Odone, told readers how she was made to feel as if she was somehow “betraying the suffragettes and Marie Curie” for not encouraging her daughter to pursue STEM (science, technology, economics and maths) subjects at GCSE. The story exemplifies the problem with contemporary feminism and the obsession it has with measuring equality by the number of women in top-level jobs or the amount of girls going into careers in science instead of how free they feel go down the path they most desire for themselves.

Odone’s daughter freely decided to study English. She chose books over Bunsen burners. Her mother on the other hand talks of how she was made to feel like she was somehow betraying the sisterhood if she didn’t raise her daughter to become an “entrepreneur or a scientist”.

“The whole point about women’s equality is that we have choice”, said Fox. “Then we choose, and everyone says, ‘oh no, not that choice’”. Today, the world seems too content to value women on male terms, but by doing so it actually denies women fundamental freedoms. Women are expected to be some sort of wonder woman – to be all things to all people. There is so much pressure on women to ‘have it all’ that many risk feeling inadequate if they don’t. This is precisely why Fox wants everyone to stop overstating the issue. “I want people to be gender blind”, she said. “I don’t want people to think about it.

“There is, sadly, less enthusiasm for women to take up public or high-level positions than I would want there to be, but it is not up to me decide what other women should choose to do.” While many would like to see more women assuming high-level positions in society or more young girls choosing to do STEM subjects at university, those that do should be careful. Because when people use the argument, as many do, that ‘we need more women in X, because it will lead to Y’ and value women on male terms instead of as individuals, it can do more harm than good.

This is because measuring equality in this way assumes that ‘men’s work’ is somehow more important than ‘women’s work’, and this narrative, which has been adopted by many, is merely the old sexist stereotype given a progressive spin. The fact is that some people aspire to become the CEO of a Fortune 500 company, while some dream of being at stay-at-home parent. So, as society attempts to offer a wider variety of choices, it must also accept the fact that some people may not want them.

Escalating global debt threatens a new financial crisis

Posted on January 13, 2016January 15, 2016 by Helen

In the aftermath of the 2008 financial crisis, a global economic recession – possibly the deepest, and most definitely the longest that the world has ever seen – took hold. The billions of taxpayer dollars that had been spent on bailing out the banks, combined with huge amounts of quantitative easing and reducing interest rates to rock-bottom levels, resulted in advanced economies holding the highest public debt-to-GDP ratios that had ever been seen.

To make matters worse, that debt, even now, continues to grow. Currently, global debt has risen to more than $57trn and, according to the management consultancy firm McKinsey & Company, this has subsequently increased the ratio of debt-to-GDP globally by more than 17 percentage points. With global debt at these levels, the compound annual growth rate comes in at 5.3 percent; far exceeding the 3.3 percent global growth predicted by the International Monetary Fund (IMF) in 2015 and the 3.8 percent that the organisation expects the world to achieve by the end of 2016. In short, the world is going to struggle to pay off the interest, let alone make any meaningful dent in the debt itself.

This massive accumulation of debt around the world, combined with the fact that very little has been done to deleverage the global economy both in terms of household or public debt, has led many commentators to contend that the seeds for the next economic crisis have already been sown. Some are even predicting that another global meltdown is imminent. If that is the case, it is important to understand how the world has arrived at this position – and, more importantly, to try and ascertain what will happen when the world eventually buckles under its own debt.

Those who control society are living in a bubble where the belief is that the tiny adjustments that have been made since 2008 are adequate

Rapid reduction
In an attempt to balance their books, various countries have implemented austerity measures, with many states cutting back on spending and raising taxes – however, some have found that such moves come with a number of drawbacks: if governments cut back on spending and stop investing in infrastructure and other vital projects, there is less economic output with which to reduce the deficit.

As such, a number of different fiscal policies have been put forward in the place of these austere economic ideologies. One of the more interesting stemmed from a report constructed by three IMF researchers, which asserts that if a ‘green zone’ exists – a state of high debt and full employment simultaneously, such as in the US – then it is in the public’s best interest to take on more debt. The report, When Should Public Debt Be Reduced?, argues that ‘the boom, not the slump, is the right time for austerity at the Treasury’.

Shortly after the report was released, Managing Director of the IMF, Christine Lagarde, told NPR journalist Renée Montagne, “[The US] needs to have a medium-term fiscal policy that is aiming at reducing the long-term debt… In the immediate short-term, there is no great risk of increase of [increasing] that US debt… In the short-term, some measures can be taken in order to sustain growth, in order to encourage growth by way of infrastructural investment, for instance.”

Lagarde’s position attempts to provide a balanced solution for reducing the debt of those advanced economies that exist in the green zone: when economic growth is minimal, focus should be diverted away from debt reduction and instead placed on public capital projects, which will exceed market returns and generate growth for the economy, allowing debt reduction programmes to take place at a later date.

If this solution sounds simple, that’s because it is: as with most theories, the major problem with this scheme is that it sounds great on paper, but the conditions that it requires do not exist in reality. Focusing on debt reduction during boom periods is good advice, but to this day growth remains stagnant, and many countries are struggling to stay out of recession. Lagarde’s theory is also simplistic in its suggestion that governments will make the right choices, and public investment projects will provide rates of return high enough for debt reduction to begin in the first place.

Reliance on debt
Ultimately, so long as the ratio of debt-to-GDP remains high, the debate over what the best method for reducing public debt is, will rage on. However, a great many economists are beginning to question why so little attention is being paid to the extreme levels of private household debt being accrued in many advanced economies (see Fig.1). If left unchecked, this has the potential to hamper economic growth far more than cutting back on public spending could, especially in consumer-based economies, as during levels of extreme debt people have a tendency to tighten their belts. As in these circumstances, the middle and lower classes often use their disposable income to pay down their debt instead of driving economic growth through consumption, Lagarde’s rose-tinted theories of debt reduction have been essentially rendered ineffective.

In the US – as is the case across many developed countries at the moment – the single largest driver behind increasing private debt levels has been the stagnation of real wages. “You have to remember that the US, as a society, one of its uniquenesses – or what it likes to call its ‘exceptional quality’ – was that it did see a rise in real wage for workers pretty much continuously for the 150 years before the 1970s”, according to Professor of Economics Emeritus at the University of Massachusetts and Producer of the Economic Update podcast, Richard D Wolff. “This gave the US not only an extraordinary level of wealth, but it made [the] working class believe that it had arrived in the best possible place on the planet, because [the US] could promise endless waves of immigrants rising wages over time.”

Not only did the US deliver on that promise, providing many of the people that came to its shores a level of prosperity and a standard of living that was not afforded elsewhere, but it also saw the birth of what was known as the ‘American dream’, with workers’ wages rising to reflect the boom in economic activity. However, over the last 35 years, wages for many Americans have failed to grow – which, according to the Economic Policy Institute, is the primary cause of not only a depreciation in family income over the past generation, but also an increase in income inequality across the country.

This stagnation of real wages in the US resulted in the American working class trying to solve its problems with debt. The American people have sustained a rising standard of living in the only way that is available to them when real wages don’t rise: through borrowing. They did so partially by developing the mass credit card, a phenomenon of the 1970s. During the same period, there was an explosion of another relatively new phenomenon – mortgage debt, which took off in a big way.

Christine Lagarde's solutions for reducing global debt have been deemed too simplistic by some — Christine Lagarde’s solutions for reducing global debt have been deemed too simplistic by some

“You have a population that is addicted to debt as a way to sustain the so-called American dream”, Wolff told World Finance. “To give the mass of Americans… at least a sustainable illusion that their promised well-being – the promised progress of each generation living at a higher standard of living than the one that preceded it – [is still intact]… To keep all that going, which is absolutely crucial for the self-image of American society, debt has become the answer.”

The Bank for International Settlements (BIS) has seen debt-to-GDP rise to worryingly high levels in a number of countries of late, leading many commentators, including Wolff, to fear that another major banking crisis is on the cards within the next three years. “I certainly think we are heading for one”, said Wolff. “I do not see, in any significant way, that [any] response to date – whether it is the Dodd-Frank bill in the US or the various banking regulations imposed in Europe – are adequate to or proportional to the level of the crisis”.

Wolff isn’t the only person to think that the US has failed to learn many lessons from the last financial crisis: speaking at the IMFs’ annual meeting in 2015, José Viñals, Director of the Monetary and Capital Markets Department at IMF, said that all advanced economies have yet to address the legacies of the 2008 crash – something that he argued is essential if there is any hope of financial stability and growth returning. Considering how much is at stake, it is baffling to many why policy-makers have not done more to fix the broken financial system that was at the heart of the last economic crisis.

Working the system
As Wolff sees it, there is a fundamental and constantly evolving social split in American society between the ‘haves’ and the ‘have-nots’, where ‘haves’ are able to live comfortably, and ‘have-nots’ find themselves frequently worrying about their livelihoods (see Fig. 2). Once that divide is fully understood, he believes that it becomes clear not only why the US has found itself in this precarious position, but why little – despite Lagarde’s assertions – is being done to fix it. However, while the vast majority of people are still suffering as a result of the financial turmoil of 2008 and the on-going economic crisis, a small percentage of the American income pyramid has done spectacularly well: between the 1970s and the present day, this group of high-earners has seen extraordinary levels of growth in both their absolute and relative wealth.

Wolff noted, “Yes, things went bad in 2008, but [this group] had the power then to direct the government to bailing themselves out. So for them, everything is working out fairly well, and has gone that way for almost half a century. Therefore, they are deeply persuaded that this [way of life] can and will persist, and the notion that the mass of people are falling ever further behind… becomes unimportant. They just think that this is the way things are now, and the mass of the working class will need to accommodate itself to the changed world.”

For Wolff, the folks at the top understand that they have become extremely powerful by virtue of this highly concentrated wealth pyramid, and that this puts them in a vulnerable position in a society that offers universal suffrage. In the US, according to Wolff, the elites have taken very concrete steps to immobilise the political system and create a systematic barrier against anything that will change the favourable situation they find themselves in.

“America is now a place where, to be a credible political candidate, you have to satisfy 500 people who sit at the top of the economic ladder of this society. And if you manage to displease any significant portion of them, your political career is either over or capped at a point of incapacity to do anything, no matter what the mass of opinion is in the country.” The political system, therefore, has either grown insensitive to the economic problems that it faces, or it has become systematically stymied to them. It is for these reasons that the shortcomings of the economic system have been allowed to persist for so long – because there is seemingly little to no resistance to it.

According to Wolff, politically speaking, there are only marginal signs of discontent about the way in which the country is structured, with only a few high-profile figures, including US Senator Bernie Sanders, publicly addressing inequality levels. However, the real danger with setting up a society up in this manner is that political explosion becomes the only feasible method for bringing about meaningful change for those who oppose the system. Wolff said, “If I were the bank of international settlements, I would be far less worried about a financial crisis than I would about the social explosion that is bubbling below the surface.

“If you read the financial press, there are widespread predictions that 2016 and 2017 are lining up to be difficult years, with various kinds of adjustments, downturns etc. If they are bad enough, and they set off the kind of cascades of trouble that [they have the potential to] – [which certainly happened] in 2008 – it could be the catalyst to social, political and economic reforms on a massive scale.”

Catalyst for change
Since 2012, the world has been talking about an economic recovery, despite the fact that many people have yet to feel the effects of one in their daily lives: most people’s wages haven’t recovered, and while unemployment rates appear to be shrinking at long last (see Fig. 3), for those willing to look a little more closely at the labour market, they will notice that almost all of the jobs that have been created in the last four or five years offer much lower pay without any of the benefits that many have come to expect. There is also much lower job security overall.

All of this is being imposed on the working class, while the government endlessly talks about recovery. In effect, what this does is make the majority of people feel as though there has been a recovery that they have somehow missed out on. This in turn forces people to turn inward and blame themselves for something that is a larger social issue – however, there is no saying that this anger will stay internal forever.

Wolff noted, “If the situation does get worse and you allow the left to function in the US, which it is now doing on a scale that I’ve never seen in my lifetime… Combined with the fact… that a phenomenon like Sanders – someone that identifies as a democratic socialist – can even run for office in some significant way… All this acts as a sign that, just below the surface, there is a lot of anger and a lot of bitterness waiting to be unleashed.” What will eventually ignite this process is difficult to predict – however, what is clear is that the US is a tinderbox.

US Senator Bernie Sanders is one of few politicians willing to publicly speak on the matter of inequality levels

Separated from reality
Those who control society are living in a bubble where the belief is that the crisis is manageable, and the tiny adjustments that have been made since 2008 are adequate, meaning that nothing is likely to change anytime soon. Meanwhile, the general public is both aware and slightly afraid of the social cataclysm that they know is coming.

As it stands, the US has neither the leadership at the top or – for the time being, at least – the pertinent formations below that are necessary to bring about change in any meaningful way. It is a difficult time, but Wolff admits that the consciousness of the majority is changing. People are growing more and more discontented and less and less patient with the current state of affairs, and while in the past people would put up with capitalism’s shortcomings because it at least ensured a better standard of living to what was afforded to the generation prior, that is no longer the case.

“The mass awareness of the inequality, and the sense of it being unfair and out of control – I’ve never seen that in the US in all my life”, according to Wolff. “This is socially explosive. I don’t think that it is sustainable long-term. The truth of it is that you now have a system that is desperately trying to figure out how to be successful… for those at the top, without being so disastrous for everyone else that it destroys itself. It gives me a sense that the system is en route to sowing the seeds of its own demise.”

There is a level of instability in the economic system that can be disguised and covered over. We can all become Keynesians who believe that governments’ monetary and fiscal policies can still keep everything going, as Lagarde has assured us – but it’s a concern how much longer this can be sustained before cracks begin to appear, and the debt finally takes its toll.

RBS tells its clients to “sell everything”

Posted on January 13, 2016January 21, 2016 by Helen

The world economy is set for a cataclysmic year in 2016, with a global deflationary crisis on the table, according to Andrew Roberts, Research Chief for European Economics and Rates at RBS. In a note written to its clients, RBS warned that the best course of action was to “sell everything”, except for high-quality government bonds.

The note prophesised a number of flash points that could take place in 2016 across the global economy, including major stock markets plummeting by a fifth of their value, and the price of oil falling well below $20 per barrel.

Roberts’ pessimistic outlook for 2016 follows on from a similarly bearish projection for the year ahead, made in late 2015.

According to Roberts, following the 2008 financial crisis, Asia took up the role of driver of economic growth. However, this growth was largely driven by debt. The limits of debt build-up have now reached a climax, resulting in negative growth for both world trade and world credit. With no regions able to pick up the role of driver for the world economy, Asia will no longer be able to drive forward the world’s economic growth.

According to Ambrose Evans-Pritchard, writing in The Telegraph, Roberts sees China as the “epicentre of global stress, where debt-driven expansion has reached saturation. The country now faces a surge in capital flight and needs a ‘dramatically lower’ currency. In [RBS’s] view, this next leg of the rolling global drama is likely to play out fast and furiously”.

The RBS client note stated, “We are deeply sceptical of the consensus that the authorities can ‘buy time’ by their heavy intervention in cutting reserve ratio requirements (RRR), rate cuts and easing in fiscal policy.”

As a result of this pessimistic economic outlook, Roberts is warning clients to “sell everything”, with few exceptions. He informed clients that RBS is cynical about the performance of “mostly everything”, except for “high-quality, five-to-10-year government bonds”. He also warned clients that they should “stay short all commodities. Yes, especially oil”. Ominously, the note said that “this is about return of capital, not return on capital. In a crowded hall, exit doors are small”.

Not everyone, however, is convinced of such doom and gloom: Australian economist Stephen Koukoulas has cast doubt on the RBS note, confident that markets and global economic conditions will fare better in 2016. Writing on his website, Koukoulas lists 11 variables, including Chinese, Brazilian, Japanese and US stock prices, US house prices, and the price of copper and oil. According to Koukoulas, Roberts claims that each of these should be sold.
Challenging RBS’ dire prognosis, the Australian economist has offered Roberts a bet of $10,000 based on whether 2016 will end with six of the 11 variables at a lower number or not.

Climate change controversy could destroy big oil

Posted on January 13, 2016January 15, 2016 by Helen

The concentration of CO2 in the atmosphere recently exceeded 400 parts per million (ppm), according to data compiled by the Mauna Loa Observatory in Hawaii. The passing of this milestone cries out for immediate action to be taken by the international community to address dependence on fossil fuel and other contributors of greenhouse gases. It also serves as a reminder of the consequences of inaction.

But in order for decisive action to be taken on any issue, people must first agree that there is a problem in need of solving. However, it has taken far longer than many climate change campaigners would like for a consensus to be reached on the causes and effects of the continued rise in average global temperatures (see Fig. 1).

In the US, Republican presidential candidates are still sceptical over whether climate change is even real. Former Governor of Florida Jeb Bush told Esquire he thought “the science has been politicised”, and admitted he would exercise caution before taking any action that may “alter who we are as a nation because of it”. Donald Trump, in typical fashion, took an even harder line, calling global warming “a total hoax” during an interview on Fox News.

The left would like to blame conservatives’ denial of climate change science on pure pig-headedness. Sadly, as the recent ExxonMobil allegations suggest, their political position on the matter is more likely the result of them digesting misinformation produced and disseminated by corporations with vested interests in covering up the link between the burning of fossil fuels and global warming.

If the claims made by leading US environmental campaigners turn out to be true, it could end the debate over global warming once and for all. Not only that, but many climate activists hope it will bring about massive social change reminiscent of the attacks on the tobacco industry, which was sued en masse after information surfaced that companies knowingly spiked cigarettes with nicotine so smokers would become addicts. However, according to legal experts, while criminal prosecution and securities class action suits are definitely on the cards, climate change is not ideally suited for mass tort litigation – but Exxon should not underestimate the ingenuity and initiative of lawyers.

Investigate Exxon
In September, Inside Climate News and the Los Angeles Times claimed Exxon had known about the threat of climate change as early as the 1970s and 80s. But, instead of telling the world what it had deciphered from its research, the reports claimed that the oil company instead spent millions of dollars on setting up various think tanks and donating vast sums to various politicians in an attempt to spread doubt and misinformation about the existence of climate change, and the role fossil fuels played in its creation.

The reports led 350.org, an international environmental pressure group that wants to reduce CO2 levels in the atmosphere to 350 ppm, to call for an immediate federal investigation by the US Department of Justice (DOJ). “Despite Exxon’s wealth and power, people were eager to sign on to this statement”, said Bill McKibben, Co-Founder of 350.org, in press release requesting people petition the DOJ to take action. “Anyone who’s lived through 25 years of phony climate debate, or who’s seen the toll climate change is already taking on the most vulnerable communities, has been seething at these revelations.”

He certainly isn’t wrong about the public outcry that the allegations have caused; so far, more than 41,000 people have signed the petition calling for a federal investigation. Leading Democratic presidential candidates Bernie Sanders and Hilary Clinton announced their support, piling on the pressure for an official inquiry. Even Exxon’s hometown newspaper, The Dallas Morning News, has turned on it, with an editorial that said: “With profits to protect, Exxon provided climate change doubters a bully pulpit they didn’t deserve and gave lawmakers the political cover to delay global action until long after the environmental damage had reached severe levels. That’s the inconvenient truth as we see it.”

Exxon was quick to hit back at the media and environmental activists’ allegations that its climate research was inaccurate and deliberately misleading. “For nearly 40 years we have supported development of climate science in partnership with governments and academic institutions, and did and continue to do that work in an open and transparent way”, said Ken Cohen, Vice-President of Public and Government Affairs at Exxon, in a statement.

“Activists deliberately cherry-picked statements attributed to various company employees to wrongly suggest definitive conclusions were reached decades ago by company researchers. These activists took those statements out of context and ignored other readily available statements demonstrating that our researchers recognised the developing nature of climate science at the time which, in fact, mirrored global understanding.”

The company’s response has done little to quell the anger and intrigue surrounding the allegations. It certainly did not stop New York Attorney General Eric Schneiderman issuing Exxon with a subpoena requesting the company provide extensive information and documentation in order to ascertain whether it knowingly lied to its investors. Needless to say, New York’s decision to take legal action will be seen as a victory for the environmental movement, but in order for real political and cultural change to occur it will need to spread far beyond the Empire State.

Legal nightmare
When corporations are found to have lied, there is a significant risk of criminal prosecution and securities litigation being brought against them. This can be a fruitful area of litigation for lawyers and could lead to companies paying out large sums of money in penalties and fines. But if climate change activists really want to bring down Big Oil – which they do – then they will likely try and pursue massive class actions suits against Exxon in the same way many businesses did when they were harmed by BP’s Deepwater Horizon oil spill in 2010. The only problem they have, according to Howard Erichson, a civil procedure expert at Fordham University, is that it’s much harder to see how mass tort litigation will evolve with regards to climate change, because even though it is possible that it harms a lot more people than air crashes, cigarettes or even oil spills, the harms are diffused.

41,000

Signatories to a petition for a federal investigation of ExxonMobil

$2.03bn

Exxon’s ‘downstream’ earnings, Q3 2015

$603m

Exxon’s ‘upstream’ losses, Q3 2015

When plaintiff lawyers look to bring mass harm litigation, they need to identify a defendant or set of defendants who can be held liable to some identifiable set of claimants. The problem with climate change as mass harm litigation, Erichson explained, is that it becomes impossible to place the blame on any one individual, as the victims include every man, woman and child on this planet.

“One way to look at it, is you and I individually may bare some moral responsibility for climate change in the way we travel, heat our homes or any number of other things, but that doesn’t mean we are going to face civil liability to anyone”, said Erichson. “There are a small number of companies, such as Exxon, that are in the news right now that may bare more direct responsibility, but then the question is, to whom would they be liable? If the answer is to the public, then that is really an issue of regulatory enforcement and criminal liability, which may well be how things move forward. But as far as civil tort liability is concerned, the harms are so diffused. Virtually everybody is a potential victim.”

The question that needs to be answered is whether or not civil litigation over mass harms caused by climate change can be envisaged. Considering how the impact of climate change is so varied, widespread and therefore dispersed, it naturally becomes pretty difficult to picture mass tort litigation proceeding – but Big Oil would be foolish to underestimate the endless creativity of lawyers.

For years, the tobacco litigation over nicotine spikes went nowhere: for more than 40 years, people were filing lawsuits against the industry for cancer brought on by cigarettes, and losing. That all changed in the 1990s, when plaintiffs began to win. That means there is still hope for mass tort litigations cases against Exxon.

Perhaps lawyers will manage to find a way to make companies civically liable for harms caused to others. The diffusion of responsibility remains and climate change is lacking a well-defined group of plaintiffs similar to cigarette smokers. But if lawyers managed it then, who is to say they won’t do it again?

In the meantime, Exxon will continue to deny the allegations. Environmental activists will continue to put pressure on state attorneys general and the DOJ to take action against the company. And while it is yet to be seen if Exxon will be found guilty, the fact remains that the levels of CO2 emissions in our atmosphere continue to rise. Regardless of the eventual verdict, energy companies, governments and politicians the world over need to act, and fast.

What does the future look like for Glencore?

Posted on January 13, 2016January 14, 2016 by Helen

The largest commodities trading company on the planet is in bad shape. Back in September 2015, its share price took a nosedive and fell more than 29 percent – an event that wiped billions off its value – sending a shiver down the spine of investors and raising a lot of concern over the company’s ability to reduce its vast amounts of debt. In an attempt to quell shareholders’ jitters, its CEO Ivan Glasenberg put forward a debt-reduction plan, which had the desired effect. But analysts remain worried: if commodity prices do not pick up some time soon, negative shareholder sentiment is sure to return.

The core problem for Glencore is its debt, which currently stands at over $31bn, though there are fears that it is much higher than that, which has led to many market commentators contemplating the prospect of the company collapsing completely. If that does happen, as many people are predicating it will, it will send shockwaves through the entire financial system, as it holds billions of dollars worth of derivatives – leading some to wonder if Glencore could trigger the next financial meltdown in a similar fashion to how the debt-riddled Lehman Brothers did in 2008.

Unsustainable debt
When the firm’s share price plummeted, Glasenberg was quick to react; issuing a statement explaining to shareholders how Glencore would reduce its debt and take necessary steps to mitigate the risks brought on by the depressed commodities market. “Notwithstanding our strong liquidity, positive operational free cash flow generation, lack of debt covenants, modest near-term maturities and the recent affirmation of our credit ratings, recent stakeholder engagement in response to market speculation around the sustainability of our leverage, highlights the desire to strengthen and protect our balance sheet amid the current market uncertainty”, said the CEO and CFO, Steven Kalmin, in a joint statement.

“We remain very positive on the long-term outlook for our business and this is reinforced by senior management’s commitment to take up 22 percent of the proposed equity issuance. Copper and zinc are both supply-challenged and an essential ingredient of future global growth. In seaborne thermal coal, a capex drought and low prices have helped rebalance the market. We are confident that thermal coal’s position and availability as the lowest cost fuel source for many large economies will underpin its key role in the global energy mix for many years to come”, they added.

Analysts and investors are naturally worried about the future of Glencore because nobody really knows when the commodities market
will rebound

Pledging to reduce debt is one thing, but analysts at the global investment bank and securities firm Jefferies warned at the time that whatever action the company did decide to take would need to happen fast, as the company “does not have the luxury of time”. Glencore must have got the memo, because it quickly identified a number of assets that it was ready and willing to sell in a bid to balance its books. During the second week of October, it announced that it would begin the process of selling of two of its wholly owned copper mines: Cobar in Australia and Lomas Bayas in Chile.

The move has helped the commodities giant to recover from its record low share price, which now rests a touch above 90p as it headed into the new year, up from 68.62p in late September. However, it still has a long way to go before it is to return to 300p+ range that it held at the start of 2015.

The debt reduction plan is clearly working. Its success at rallying the share price has certainly reduced shareholders fears, but there are a number of analysts that argue that there is still a lot more to do, as Glencore’s debt is much higher than many may like to admit or even realise. “We estimate the financial system’s exposure to Glencore at over $100bn”, explained Bank of America analysts in a note to investors, “and believe a significant majority is unsecured. The group’s strong reputation meant that the build up of these exposures went largely without comment. However, the recent widening in [Glencore’s] debt spreads indicates the exposure is now coming into investor focus.”

The note to investors continued, “To us, it seems that the world has changed. With increased regulatory scrutiny on bank commodity exposure, we think that ‘business as usual’ won’t be an option. While we don’t see an imminent liquidity crisis we note that bank credit may inevitably tighten, albeit over time.”

Bank of America broke down the company’s debt as follows: $35bn in bonds, $9bn in bank borrowings, $8bn in available drawings and $1bn in secured borrowing, along with an estimated $50bn in “committed lines against which it can draw letters of credit with which to finance its trading inventories”. There is a clear divide among analysts regarding Glencore’s prospects. The financial services firm, Investec, made headlines after it claimed that the company maybe worthless on account of the fact that with debt levels in the hundreds of billions, the enterprise is “solely working to repay debt obligations” and, therefore, unable to concentrate on generating value for shareholders.

Paul Gait, an analyst at Sanford C Bernstein, is far more optimistic about the Swiss-based resource company – extremely so in fact. He thinks that Glencore will eventually rally to around 450p a share, one of the highest predictions of any market researcher. He also has taken umbrage with those analysts that beg to differ and who have been quick to predict the demise of the commodity trader.

Gait is certainly the most confident of all buy side analysts, but he isn’t the only bull out there. Deutsche Bank came out in support of the commodities trading company after initially warning investors to hold tight; upgrading its rating to ‘buy’ in early November, albeit with a much more modest target of 200p.

“The rapid debt reduction plans should remove the balance sheet and trading fears that have overly impacted the share price”, analyst Rob Clifford said in a note to investors. “Through to first quarter 2016 we should see a number of positive catalysts, including additional asset sales.”

The review of Glencore that got the most attention, however, was the one by Investec’s Mark Elliot, a leading analyst on the commodities giant. When things turned sour for Glencore, the bank, like many others gave it a ‘sell’ rating, and stuck with that sentiment in November, even when the Swiss-based mining company agreed to sell future silver output from its Antamina copper mine in Peru – a move that brought in more than $900m to the cash-strapped firm. Elliot and his team even cut their target price to 77p, down from 125p in September, solidifying their position that Glencore is not out of the woods yet.

“We haven’t really changed our position on Glencore. What we’re seeing in copper and across the commodity space shows that there are tough times ahead”, (see Fig. 1) Elliot said. “If US rates are going to rise and emerging markets are struggling, so commodity demand is weaker than we would all hope, and debt costs are going to go up, it doesn’t bode well for leveraged miners with thinner margins.”

Shrinking exposure
Analysts and investors are naturally worried about the future of Glencore because nobody really knows when the commodities market will rebound. The market’s prolonged period of depressed prices is an indicator that all is not well in the global economy. Demand from China has fallen considerably as result of its government opting for more sustainable growth rather than constantly striving to support the rest of the world through double-digit levels.

China’s decision to slowdown has hit commodity producers hard. For the last decade, they’ve grown accustomed to high levels of demand, increasing their supply accordingly. They are now adapting to slower growth in China and it will take time for commodity prices to adjust to this new reality. Glencore is certainly hoping that it doesn’t take too long for prices to rise, because the longer they stay low, the harder it is for them to drive down their debt. The bad news is that prices seem destined to remain low in 2016. In fact, according to a recent report by BMI Research, analysts “do not expect significant recoveries in the coming quarters, rather stabilisation”.

The combination of depressed prices, Glencore’s massive debt obligations and global investors high level of exposure to the company has some commentators fearing that the commodities giant could be the next Lehman Brothers, capable of dragging the world into another financial crisis before having the time to fully recover from the last one.

There are certainly comparisons to be made between Lehman and Glencore, but its financial market exposure is nowhere near the former investment bank. The commodities trader has done well to reduce its exposure, with it reducing its holdings in derivatives considerably from roughly $19bn at the tail end of 2014 to $9.8bn in Q2 2015. This trend is likely to continue in 2016 on account of poor commodity price forecasts. This doesn’t mean that another financial crisis is not on the cards, as commodities prolonged period of depression will drive greater market volatility and uncertainty this year – it’s just unlikely to be triggered by Glencore.

How independence could save Puerto Rico from financial ruin

Posted on January 13, 2016January 14, 2016 by Helen

Puerto Rico is up to its eyeballs in debt; so much so, in fact, that one commentator dubbed it “America’s little Greece”. Currently, the island owes more than $72bn to creditors. Combine this with the fact that debt-to-GDP ratio is more than 70 percent, and it is clear that the US territory is going to struggle to pay that off. In an attempt to try and make a dent in all this debt, Puerto Rico’s government sat down with its creditors, but negotiations broke down in October after the two sides were unable to reach a debt-restructuring deal.

The Puerto Rican government has implemented austerity measures and raised taxes in a desperate bid to shrink spiralling budget deficits, but so far these reforms have done little to reduce public debt in any meaningful way. The situation has become so bad that the Obama administration chose to enter the fray, looking for some way of helping its debt-laden territory out of the red and back into the black.

The proposed plan is ambitious to say the least. The White House wants to provide unparalleled bankruptcy rights to the territory and ramp up fiscal oversight of the island. It also plans to increase its federal Medicaid spending, as there are serious fears about local authorities’ ability to provide adequate services to its people. It is even looking to extend labour supply tax credits to the territory in order to offset the impact of
rising unemployment.

The comprehensive proposal has the ability to protect Puerto Rico from falling into the abyss, but for the plan to be implemented it must be approved by Congress, and fast. Administration officials in a joint statement stressed this point with the National Economic Council Director, Jeffrey Zients and the Health and Human Services Secretary, Sylvia Mathews Burwell.

“The Administration has been working with the Puerto Rico government to ensure that the Commonwealth is able to access all available, existing federal resources”, the statement said. “We have helped Puerto Rico attract job-creating investments, secure new funds to accelerate infrastructure projects, and lower energy costs on the island.

“These efforts are ongoing, but administrative actions cannot solve the crisis. Only Congress has the authority to provide Puerto Rico with the necessary tools to address its near-term challenges and promote long-term growth.

“Working together, Congress and the Administration can help Puerto Rico emerge from the current crisis. Without congressional action, Puerto Rico will face a long and difficult recovery that could have harmful consequences for the residents on the island and beyond.”

Getting any legislation through a Republican-majority Congress has been an uphill battle for the Obama administration, but the President will be hoping the GOP can leave its politics at the door and work with him to save the Puerto Rican economy.

The US mainland is pulling out all the stops in an effort to help the island navigate the tough economic time finds itself in. But despite the administration having the best intentions, there is a strong argument to make that Puerto Rico would be best off if it was left alone.

Welfare payments and Medicaid benefits can exceed the average worker’s salary
on the island

Go away US
Puerto Rico was colonised by Spanish expeditions in 1493 and remained under their control for more than 400 years. In the late 19th century, the American frontier was closed, ushering in a new era in US history – one in which expansion was necessary overseas because it was no longer possible at home. This desire to expand acted as a catalyst for the Spanish-American War, a conflict that would result in the handover of various territories from to the US, Puerto Rico among them.

After the US took control of the island, it introduced a government that was subject to federal law, but that was also granted certain rights that gave it autonomy over specific policies. This arrangement is still in place today, with Puerto Rico considered an unincorporated US territory. It is because of this unique arrangement that the island is unable to make the relevant structural reforms necessary to kick-start its economic recovery.

While it exercises some control over its economic fate, with the local government able to set its own tax policy, for example, the power exerted by the mainland dilutes the effectiveness of these local powers.

The Caribbean heavily relies on tourism to sustain itself, and while Puerto Rico may be home to just as many palm trees and sunny beaches as the Dominican Republic, it is struggling to keep pace with its rivals. Its inability to compete with its neighbours has a lot to do with its ties to the US mainland and the fact that the federal minimum wage of $7.25 applies in Puerto Rico, pushing the cost of labour up. What this means in real terms is that a member of staff working a 40-hour week at a hotel in San Juan will take home $290. Compare that with the $60 a week that a member of staff will take home working at a hotel in the Dominican Republic, and it becomes clear why Puerto Rico is struggling. Not only that, but with the US and Cuba in the process of rebuilding relations, it has yet another rival destination vying for American dollars.

Puerto Rico is also required to adhere to federal labour laws, which means employers must pay employees a mandatory bonus over the Christmas holidays, and are not allowed to ask staff to split shifts, pushing the cost of labour even higher. Not to mention the fact that welfare payments and Medicaid benefits can exceed the average worker’s salary on the island. In short, you have a relatively poor economy that, due to its status as a US territory, is forced to adhere to structural policies it simply can’t sustain.

Governor Alejandro Garcia Padilla has tried to bring down debt by imposing higher taxes, but all that has done is provide Puerto Ricans with an even bigger reason to leave the island for the mainland – a trend that is expected to grow as the economic crisis deepens.

Former IMF economists Jose Rajgenbaum, Jorge Guzmán and Claudio Loser, now working for Centennial Group, produced a report that outlined the steps Puerto Rico should take for economic recovery. Their advice: slash spending by as much as $2bn a year by 2020, and as much as $2.5bn by 2025. Naturally, the cuts will hit those at the bottom hardest, with the report recommending the island lay off teachers in order to “fit the size of the student population”, along with cutting excess Medicaid benefits.

$72bn

Puerto Rico’s debt

70%

Debt-to-GDP ratio

$2bn

Recommended annual spending cuts by 2020

$2.5bn

Recommended annual spending cuts by 2025

It should perhaps be unsurprising that a group of former IMF economists believe the best option for pulling an economy out of crisis is radical austerity, as it is what the IMF has been pushing on the other side of the Atlantic in Greece.

Keeping the island afloat
In many ways, Puerto Rico and Greece are facing very similar problems and both need similar solutions. Just like Greece, Puerto Rico has spent cheap money with complete disregard. They are both now unable to pay the price of all that reckless spending and have GDP-to-debt ratios that leave little to no hope of them ever being able to repay lenders. But, most problematically of all, they are controlled by a currency they are unable to devalue, making their exports unattractive.

The logical step for both countries is to bite the bullet and take control of their own destiny. Many would be understandably nervous to take such a big step, but the economic situation is only going to get worse if decisive action is not taken. As it stands, Puerto Rico’s level of debt, combined with its lack of autonomy and an inability to find the growth that is essential to paying off its debts, has left the island in limbo.

The plans for recovery put forward by the Obama administration will help the island stay afloat in the short-term, but it is essentially kicking the proverbial can down the road. As is the case in Greece, officials are too focused on the here and now, rather than looking at long-term solutions that will provide a way out of the crisis. It appears political leaders are unwilling to rip off the sticking plaster and address the issues at the heart of the economic crisis. If they do not act soon, an economic collapse may finally force their hand.

Why Indonesia urgently needs to address the burning issue of palm oil

Posted on January 12, 2016January 20, 2016 by Helen

Many people will be unaware of just how often they come into contact with palm oil or palm oil derivatives during their daily lives. The highly versatile ingredient can be found in products ranging from toothpaste and washing detergent to baked goods and chocolate. In fact, palm oil alone accounts for 65 percent of all vegetable oil traded worldwide, is used in around 50 percent of all packaged products sold in supermarkets, and is found in 70 percent of all cosmetics. Moreover, as a result of various governmental commitments to reduce the consumption of fossil fuels, palm oil is also increasingly used to generate bio-fuels.

Having a much higher yield in comparison to other crops, palm oil is cheaper to produce and more economical in terms of land use than its alternatives (see Fig. 1), making it the commodity of choice for mass-produced goods. With consumer spending on disposable products rising exponentially and the logistical ease of globalised networks ever-increasing, demand for palm oil has grown rapidly over the past few decades.

Dr Amanda Berlan, an expert in ethical business research and a fellow at the Centre for Business in Society at Coventry University, told World Finance, “One of the reasons for the growth in demand for palm oil is the rise in processed food, which also involves a much more significant carbon footprint and use of resources than ‘slow’ home-cooked food.”

Economic progression
Despite its attributes in terms of versatility and cost-effectiveness, palm oil is steeped in controversy due to the damage that it does to the environment. Such destruction includes the deforestation of some of the most bio-diverse areas on the planet, as well as being responsible for a shocking level of greenhouse emissions.

Although the plant is native to West Africa, cultivation in Malaysia began in the 1930s and soon spread to Indonesia. The two Asian countries now account for approximately 85 percent of the global production of palm oil, with Indonesia producing the lion’s share. With global demand having doubled in the past decade – and being set to double again by 2020 – the commodity has become a key driver in Indonesia’s developing economy. “It’s a major contributor to the Indonesian economy – either directly or indirectly, as it supports several million jobs”, said Mark Driscoll, Head of Food at the Forum for Future. “In the context of 2014, when the last figures came out, palm oil contributed roughly $20-21bn to the Indonesian economy.”

Palm oil has therefore become the archipelago’s biggest agricultural export and a vital earner of foreign capital. Given its fundamental financial role to the developing nation, the industry continues to expand at an unprecedented rate. According to a 2015 report by the Rights and Resources Institute, the production area for the commodity has almost tripled since 1997, now nearing eight million hectares, while a further 15 million hectares of production zones have been licenced to start development.

With over half of Indonesia’s population living in rural areas, palm oil production has become an important source of employment for the country. “It contributes to the employment opportunities of local people directly through producers, both large and small, and also indirectly through the manufacturing, processing and exporting of palm oil”, Driscoll told World Finance. Moreover, according to the World Bank, smallholders in Indonesia report a significantly higher income for palm oil cultivation than subsistence farmers or growers of competing cash crops, such as coffee and cocoa. Palm oil’s cultivation has also prompted a similar economic boost in Malaysia, serving to diversify the country’s agricultural sector, as well as providing employment to nationals and migrant workers from countries such as Bangladesh and Thailand.

Yet, despite the job creation and income levels afforded by the palm oil industry, some argue that the work is actually inconsistent, which can be disruptive to the labour force. Many allude to the unsatisfactory safety measures and poor working conditions for workers in the field, particularly among women, immigrants and casual workers, while several organisations have also raised concerns regarding forced labour, child labour and discrimination, in addition to a lack of government policy.

Irreversible damage
In the 2000s, news of the damage caused by the palm oil industry began spreading throughout Western media and the international NGO network. The rapid deforestation and illegal logging of Indonesia’s rainforests and peatlands then raised alarm among environmentalists across the globe, as did threats to a multitude of species in Sumatra and Borneo, including tigers, rhinos and elephants, as a result of the destruction of their natural habitat.

“The iconic orang-utan is probably the key species associated with deforestation and palm oil plantations”, Driscoll explained. “[Around] 20 percent of all global emissions are associated with food and agricultural production in some shape or form, but if you look at indirect land use change as a result of deforestation globally, that’s an additional 10 percent.” Palm oil production has also severely impacted several indigenous and local communities, as they have been permanently removed from their ancestral lands as a result of plantation development.

What is perhaps most shocking, however, is the amount of toxic chemicals that are emitted by the highly destructive enterprise. When peatlands are cleared and drained, huge quantities of greenhouse gases are released into the atmosphere, a phenomenon that is exacerbated further by producers’ chosen method of razing: deliberately setting forest fires. According to research conducted by the VU University Amsterdam, 122,568 active fires were detected in Indonesia from January until mid-November 2015, which collectively emitted over 1.5bn metric tonnes of carbon dioxide, nitrous oxide and methane.

Considering palm oil’s economic contribution to the nations that produce it, one thing is clear: cultivation will continue

Usually, the carbon dioxide discharged from forest fires is offset somewhat by the regrowth of vegetation. However, this compensation is not realised when land is cleared for monocropping. Furthermore, with methane being over twenty times more harmful to the environment than carbon dioxide, this particular concoction of pollutants is exceptionally damaging in the long-term.

So bad are Indonesia’s fires that the toxic haze they produce sometimes reaches Malaysia and Singapore, causing cancelled events and flights throughout the region. Last September, the smog reached such a critical level that the Indonesia National Board for Disasters declared a state of emergency in six provinces and closed 2,000 schools. According to the World Vision website, the haze has so far affected over 43 million Indonesians, caused acute respiratory infections in around 500,000, and killed 12 individuals.

The strongest haze for two decades also caused significant damage to the palm crops themselves, reducing production by between 10 and 20 percent in some areas, according to IJM Plantations Bhd. There have been various indirect implications as well, including traffic incidents, unemployment and disruptions to local businesses – yet the full cost to the Indonesian economy is unknown. “I have seen estimates ranging from $18bn to $34bn”, Dr Erik Meijaard, a Jakarta-based expert in environmental science, biogeography and zoology told World Finance. “Many costs remain unquantified, however: how do you cost unknown long-term health impact? How do you cost loss of wildlife… [or the] destruction of insect pollinators that will reduce crop yields for years? Many of these factors remain unstudied.”

The 2015 crisis has been a huge economic setback for a state that is already struggling with sluggish growth and a falling currency. But in spite of the evident social, environmental and economic damage caused, the Jowoki-led government has not yet implemented the necessary measures to bring an end to the currently legal practice.

Fighting back
In 2008, various multinational corporations came under fire from Greenpeace activists for the use of unsustainable palm oil in their products. Unilever, the world’s biggest buyer at the time, was among those targeted, with Dove – its leading beauty brand – being singled out in particular. The attack received widespread attention, as did the unwanted publicity for Kraft, General Mills, Cargill, HSBC and Nestlé.

The online spoofs, office raids and widespread criticism worked, causing big players in the consumer products industry making a marked shift in their respective policies towards palm oil. Following the publicity attack, Unilever announced a plan to acquire all of its palm oil from sustainable sources by 2015, while Nestlé, Danone and Kellogg’s have all since been rated as having a “strong commitment” to the cause in WWF’s latest Palm Oil Scorecard.

All too aware of the importance of trust in highly competitive markets, more and more consumer brands are taking extensive measures to ensure that their goods are ethically sourced. As such, over the past decade, numerous high-profile companies have gained membership to the Roundtable on Sustainable Palm Oil (RSPO), an organisation that strives to promote sustainability by setting a global standard for the industry. RSPO certification can only be obtained after undergoing a validation process that examines all participants along the supply chain, and can be withdrawn at any time. According to the website, RSPO’s criteria are based on extensive evidence that “sustainable palm oil production is comprised of legal, economically viable, environmentally appropriate and socially beneficial management and operations”.

A global perspective
Although encouraging multinational companies to guarantee that they will only use sustainable ingredients is in itself a big step, this is only a small part of the puzzle. Despite the success that environmental groups have had in publicising the havoc that the palm oil industry wreaks on rainforests and biodiversity, as of 2014, RSPO-certified farms still only account for 18 percent of global production, which in itself continues to rise exponentially every year (see Fig. 2).

An underlying problem is that many large companies buy from traders and processors, as opposed to from plantations directly. Moreover, due to the cost of international shipping, sustainable and unsustainable palm oil are not always segregated during transport, and so differentiating between the two can be unmanageable for even the most well-meaning corporation.

Even though companies that are headquartered in the West are increasingly taking notice of the issue of sustainable palm oil, the region only accounts for a small portion of the global supply. “We need to take a global perspective on this question”, according to Berlan. “Western consumption of palm oil is of course significant, but it is also important to realise that the largest global importer of palm oil is India, where it is commonly used in cooking. With a population of over one billion people, this represents an estimated 15 percent of the global supply of palm oil. In order to make the palm oil industry more sustainable, this is where major change needs to happen. However, there is no business case for companies in India to adopt certified sustainable palm oil if consumers are not demanding it – and this is problematic”.

The lesser evil
Hoping to tackle the problem, some firms are switching to alternative commodities, such as coconut oil. However, doing so actually exacerbates the problem further: as palm plantations produce as much as 10 times more oil than sunflowers, soybeans or rapeseed per hectare, in essence, this approach simply moves the problem elsewhere. What may help, however, are technological breakthroughs in finding alternatives that are even more economical to produce, such as microalgae, an ingredient that is currently being investigated for its potential as a palm oil replacement in cosmetic products.

Just like we reject slavery and child labour, the international community needs to develop a system that rejects unsustainable palm oil

Considering palm oil’s economic contribution to the nations that produce it, one thing is clear: cultivation will continue, and so simply finding alternatives is not the answer. In order to bring a halt to the damage inflicted by the industry, the support of the Indonesian and Malaysian governments is key. A drastic shift in policy is needed, whereby the agenda is pushed all the way through to the grassroots level: every plantation must be reviewed and certified on an on-going basis, while border controls can also stem the export of illegal palm oil. “Oil palm is the most profitable oil-producing plant, and it is not going to go away”, said Meijaard. “Consumer and buying governments need to recognise the difference between good and bad oil… as developed under the criteria of RSPO. Trade in bad oil needs to be phased out. Just like we reject slavery and child labour, the international community needs to develop a system that helps reject unsustainable palm oil.”

Indonesia’s fire and haze crisis still remains the most pressing issue at hand, however. “A lot has to do with land use planning”, according to Meijaard. “Oil palm expansion and related land speculation, especially at the small and medium-scale, are a major driver of fires. Lots of people with some cash are seeking access to land. The government is continuously changing and updating its land use maps, sacrificing more and more forest to development. What they do not realise is the major social and environmental impacts that are related to deforestation. These undermine the very fabric of Indonesian society.

“[There needs to be a] full fire ban on peat, with the means to enforce it, [which will involve] phasing out slash-and-burn cultivation, stabilising land use planning by permanently recognising which areas should remain forested, and providing the means to implement such planning.” Perhaps applying international political and economic pressure to the Jowoki regime may force the issue further, just as the international media spotlight forced the Indonesian government to take reactive action to the 2015 fires.

In any case, this is not an issue just for ‘animal lovers’ or for ‘tree huggers’ – this is a problem that faces the entire globe. We each have a role to play in it through our purchase of goods containing palm oil derivatives: no shampoo or confectionary product is worth the irreversible damage that is inflicted on the planet and the ozone layer as a direct result of palm oil plantations. A noticeable transformation will take time, and this is a luxury that we are quickly running out of – however, nothing is impossible with collective action in the right direction.

Reshoring the US manufacturing industry

Posted on January 12, 2016January 20, 2016 by Helen

America was originally thought of as the perfect place for an agrarian society composed of small-time farmers. Thomas Jefferson imagined the US, upon its founding, to be a republic made up of individual property owning farmers known as yeoman. This ideal was central to the republican liberty the country’s founding fathers thought themselves to have secured. Yet it was not meant to be. Within its first 100 years of existence the United States became the preeminent industrial power in the world, with one of the world’s most prosperous workforces. America and industry became synonymous. Following its rapid catch up with Britain in the late 19th century, the US became one of the centres of world manufacturing.

Key to America in the 20th century, manufacturing defined how the country viewed itself and how it related to the rest of the world. The well-paid industrial union jobs of the mid 20th century provided a comfortable wage, allowing US citizens to live in historically unrivalled mass prosperity. US industry in the post-war era allowed the dream to be lived up to. Throughout US history, manufacturing has often been seen as the back-bone of the nation’s prosperity. Now, however, industrial America is widely seen to be a thing of the past. In the popular American TV show The Wire, one of the general themes throughout is that the illicit drug trade thrives in the hollowed-out, post-industrial cities of America. Though the series focused on Baltimore, the same is true of Detroit, once considered the core of US manufacturing.

Indeed, there exists an idea in American politics that the US is no longer the industrial power it once was. There is a general sense, orthodoxy even, that the US no longer has the manufacturing base it did, contributing to its stagnating prosperity and frozen wages. The term ‘offshoring’, in reference to American firms relocating production abroad, became a political buzzword in the late 20th century. Globalisation was said to be dispersing American industry. Now however, the opposite is said to be taking place. There is increased talk about industry returning to American – known as ‘reshoring’ (see Fig. 2). Throughout US history, industry has often been seen as providing the back-bone of the nation’s prosperity – suggesting perhaps the US is also on the cusp on a new bout of prosperity.

Bringing trade home
In 2011, the Boston Consulting Group released a study titled Made in America, Again. The paper argued many goods manufactured abroad for American consumers would once again be made in the US. They argued 2015 would be the tipping point of such a trend. According to Michelle Comerford from the publication Trade and Industry Development, “the global economic indicators that led the Boston Consulting Group to predict a shift of manufacturing operations from China to the US, otherwise known as ‘reshoring’, are seemingly coming to fruition”.

The study forecasted that a number of industrial production sectors would see investment return to the shores of the States. The sort of products said to be seeing their manufacturing return included transport goods, electronics and IT goods, heavy machinery, synthetic materials such as plastic and rubber, and white goods such as appliances, electrical goods and furniture.

There is a general sense… that the US no longer has the manufacturing base it once did, contributing to its stagnating prosperity and frozen wages

One of the main reasons cited was that wages in China are on an upward trajectory (see Fig. 3). Of course China retains a comparative advantage in terms of labour costs, with average wages being around a 10th of American workers’. However, wages have risen, and when factored in with the rise of other costs such as transportation and logistics – as the goods in question produced are destined for US markets – the advantage is lost. Wages in China have risen rapidly since 2011, and show no sign of abetting, as the Communist Party of China adopts a plan of developing its internal market and reaching its stated target of becoming a middle-income country. As Comerford noted: “According to the National Bureau of Statistics in China, average yearly wages in manufacturing have increased by over 50 percent since 2011.”

When this rise is taken into account with other costs and liabilities of offshoring production, it becomes less economically rational to locate industry in the traditional low-waged areas of offshored production. For instance, as Comerfield wrote, the “costs to ship ocean freight from China to the US are higher than ever, with further rate hikes on the horizon. Delivery times also have been jeopardised by both natural and man-made risk factors. The longshoremen’s union strike at the Port of Los Angeles/Long Beach is the most recent example of delivery delay issues, which resulted in products stuck sitting on ships in the harbour for weeks while store shelves dwindled”. For companies with a primarily American consumer base, being closer to places of consumption allows quicker changes to reflect consumer behaviour and demand patterns. According to the Financial Times, some recent examples of companies announcing “plans to shift production from China to the US include K’Nex, the toy manufacturer, Trellis Earth Products, which makes bioplastic goods such as bags and utensils, and Handful, the bra manufacturer”.

A manufacturing factory in Lawrence, US. The US was once one of the world's foremost manufacturing powers — A manufacturing factory in Lawrence, US. The US was once one of the world’s foremost manufacturing powers

However, at the same time – despite Frank Sobotka’s opining of his country’s industrial demise – America has actually continued to ‘make stuff’. As an article in The Atlantic recently noted: “According to Martin Baily and Barry Bosworth of the Brookings Institution, for the past 50 years industrial production in the US has grown at the same rate or even faster than the economy as a whole. This means that contrary to conventional wisdom, manufacturing has not lost ground in terms of its importance in the US economy. Until 2011, when China inched slightly ahead, the US boasted the world’s largest manufacturing sector, and it continues to be an industrial powerhouse.” Much of the decline in manufacturing is localised in certain areas, while other areas have continued to expand.

Speaking to World Finance, radio host and editor of Left Business Observer Doug Henwood made a similar point. “US industrial production, as measured by the Federal Reserve’s index, is up 24 percent from the recession low, following a deep decline. It’s 12 percent above where it was in 2000, and 119 percent above where it was in 1980. Important sectors, like motor vehicles remain strong. Production is up 162 percent from the recession low, and 20 percent since 2000.”

Personally affected
Where the decline really has been in industry is within employment – not in actual output. As Henwood further explained: “The trend rate of growth [for employment in manufacturing] went negative in the early 1980s and has been ever since. Job losses in recessions have been savage, and growth in recoveries or expansions largely non-existent. Factory employment is 1.4 million, or about 10 percent, below where it was on the cusp of the Great Recession. It’s about five million below where it was in 2000, and in absolute terms about where it was in 1941, even though the workforce has quadrupled. It was about 30 percent of overall employment in 1950; it’s under nine percent today.” This has largely been the result of increased productivity and cost savings – part of which has been the export of some manufacturing jobs.

This raises the question, then, of what the impact of this so-called reshoring effort will be on the US economy. Clearly, as the figures show, it won’t lead to a ‘revival’ in American manufacturing output, for output has not really suffered a decline. What America has seen, however, is a fall in the number of people employed in manufacturing jobs – perhaps then, as jobs are repatriated, it will lead to a revival of America’s previously prosperous industrial working class, as in the past. The Boston Consultancy Group has predicted the end of the decade will see potentially over one million new manufacturing jobs in the US. Indeed, if the past is anything to go by, bouts of industrial job creation in the US have coincided with increased American prosperity, particularly for those employed in manufacturing.

The story of American industrial might began in the post-Civil War era. With the slave society of the South defeated, the US began to rapidly industrialise. This era saw the widespread introduction of railroads, telegraph and telephone communications, and the internal combustion engine, the steam turbine and electricity – as a result, industry took off. Americans and immigrant labour, primarily from Europe, flocked to new centres of industry in the US, forming a new industrial work force.

Known as the Gilded Age, this was an era of rapid economic expansion. Between the 1870s and 1880s, the US expanded at a faster rate than any time in its history, in terms of output, with wages and capital formation. Between 1865 and 1898, coal output rose by 800 percent. In 1860, national wealth was $16bn; by 1900 it had grown to $88bn. By 1895, the US had surpassed Britain in industrial output. This was a time of prosperity for American workers.

Within its first 100 years of existence the United States become the preeminent industrial power in the world, with one of the world’s most prosperous workforces

According to James Livingston, Professor of History at Rutgers University, US workers were in a relatively strong position, allowing them to benefit from this new industrialisation, accruing higher incomes. “There were two moments in the post-Civil War history of the US when labour held its own against capital”, he told World Finance. “These were roughly between 1873 and 1896, and 1933 and 1973. In the first moment, income shares shifted away from capital, toward labour.” Despite myths of the era characterised by ‘robber barons’, much of the population saw meaningful improvements in their living standards, thanks to wage increase. According to Hugh Rockoff, wage growth for unskilled labour was nearly 1.5 percent annually.

As Livingston also noted, the period from the 1930s to the 1970s saw workers in a relatively strong position to extract higher wages from employers. A large part of this came from the industrial expansion the US saw after, and partially during, the Second World War. The post-war era was a time of unbridled prosperity and economic growth. A huge expansion in the defence sector and a self-perpetuating (for a time at least) dynamic between growing wages and growing consumer demand resulted in an expanding industrial centre for manufactured consumer goods, with firms such as Ford being archetypal.

Not on these shores
It might therefore seem that reshoring offers a new era of industrial production, and, if the past history of manufacturing expansions in the US is anything to go by, this could mean a new wave of prosperity is also about to reach the shores of the US along with repatriated jobs. This, however, seems not to be the case.

The very reason for the return of manufacturing to the US shows how it is perhaps unlikely to boost American prosperity, as past waves of industrial expansion have done. Although logistics costs and transport costs have played a role in firms deciding to relocate back to the US, the fact is that the US has become, in recent years by advanced economy standards, a low-waged economy.

The production line at the Ford factory in 1931, in Detroit, US

Wages in the US have, for the most part, stagnated since the 1970s. According to Henwood, the fact is “that the US is a ‘low-wage’ country by first world standards. New hires in Mississippi auto plants can make less than Walmart workers. To European and Japanese manufacturers, the US has become a relatively low-wage country, which is why we’re seeing so many auto plants in the non-union[ised] South.” At the same time, he said, “state governments, like those of Mississippi and Tennessee, have showered so many subsidies on carmakers that their plants end up being practically free”.

As the publication Manufacturing noted, the US’ “23,914 reshored jobs — tracked mostly between 2010 and 2014 — were fuelled by South Carolina, whose 7,530 reshored jobs nearly doubled that of its closest rival… Each of the top five reshoring states, however, were located in the South. Texas saw 3,792 jobs returned from overseas, followed by Kentucky at 3,412 jobs, Georgia at 3,145 jobs and Tennessee at 3,137 jobs”.

Jobs may come, but they won’t be the high-waged union jobs of yesteryear. As Henwood concluded: “You could argue that having more manufacturing here has ancillary benefits – every new factory job, for example, can result in another job or two at suppliers. But manufacturing employment, though up, is growing at only about a third of the rate of overall employment, meaning its share of the job market continues to shrink – and its hourly wage advantage over service work has disappeared.”

Perhaps then, as jobs are repatriated, it will lead to a revival of America’s previously prosperous industrial working class

An uncertain homecoming
It is not clear how significant reshoring itself will be to the US economy. Clearly it is not something plucked out of thin air – the examples of firms returning exist. However, there are doubts over its true significance, with some citing relatively low numbers of firms returning. For instance, a study by Jim Rice, Deputy Director of MIT’s Center for Transportation and Logistics cast doubt on the extent of the rise in job repatriation and significance of reshoring. “In the majority of cases, the companies involved plan to invest in US-based production capacity; they have not actually made the move”, reported the Financial Times.

“The data indicates that there are relatively few published instances of reshoring”, the newspaper went on, citing Rice’s observation that, “even among reshoring projects that had gone ahead… some had produced only modest employment growth. One widely touted case – the return of some manufacturing of Wham-O Frisbees to California – had led to the setting up of a factory employing eight people”.

Livingstone concluded: “The repatriation of those jobs is a fool’s errand that cannot solve the problems of wage stagnation and income inequality. It won’t re-enfranchise the labour movement, either. Nothing can change the fact that output increases without larger inputs of labour or capital.” While America may see some new job creation from manufacturing, the idea of it returning to its glory days of highly paid industrial work for a large amount of the population is a little optimistic.

Reshoring is providing some jobs to more impoverished sectors in the South, but the sort of wages received are still part of America’s new reality of being a low-wage economy. The US continues to be an industrial powerhouse – it just doesn’t need so many residents working in one place. The solution to low and stagnating American wages must be sought elsewhere.

The UK’s sharing economy

5m

UK workers are self-employed

3%

of those in the UK earn up to

£5k

per week working in the gig economy

41,000

Signatories to a petition for a federal investigation of ExxonMobil

$2.03bn

Exxon’s ‘downstream’ earnings, Q3 2015

$603m

Exxon’s ‘upstream’ losses, Q3 2015

$72bn

Puerto Rico’s debt

70%

Debt-to-GDP ratio

$2bn

Recommended annual spending cuts by 2020

$2.5bn

Recommended annual spending cuts by 2025

per week working in the
gig economy