Author: itsupport

How artificial intelligence is changing the face of banking

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Artificial intelligence is changing the dynamics of businesses and the banking system is no exception. From mobile banking to customised customer service, the role of AI technology is transformational. The hassle of standing for long hours to get banking services is slowly becoming a thing of the past for retail consumers. Consumers’ desire to reach banking services from the comfort of their homes has increased the demand for mobile banking. A recent study by Insider Intelligence showed that more than 45 percent of respondents considered mobile banking among the top three features that influence their selection of financial institutions.

The Big Tech billionaires of the world including Mark Zuckerberg, Elon Musk, and Bill Gates have given life to AI. They are using AI tools and apps in determining consumer preferences and are now influencing other businesses to adopt AI-based technologies. Consequently, banks are investing heavily in AI and predictive analytics to make better decisions and provide customised services.

Even banks that have been reluctant to use AI technology in their processes are using AI chatbots to handle customer queries. As predicted by Elon Musk, “there certainly will be job disruption because what is going to happen is robots will be able to do everything better than us.”

Risk management
Money laundering is an emerging issue for banks because these institutions, in most cases, are unintentionally facilitating such processes. The Financial Action Task Force (FATF) considers money laundering an international issue and stresses the importance of global cooperation. A study conducted by The United Nations Office on Drugs and Crime (UNODC) also highlighted this, stating that nearly 3.6 percent of global GDP, which is equal to $1.6trn, is being laundered each year. A recent report by Zippia showed that the US is dealing with money laundering worth $300bn each year. These figures are alarming for the banks and it is crucial that action is taken when the recessionary pressures on global economies are approaching 2008 levels.

Leading banks are using real-time AI risk management technologies to determine customer behaviours and transaction patterns to combat terrorist financing and money laundering. It closely monitors high-risk accounts by matching a customer’s expected monthly turnover with their actual monthly transactions to raise red flags. This ultimately assists banks in implementing controls to safeguard against losses, fraud and in turn enhances ROI for their consumers.

However, it is worth noting that implementing AI technologies is not the end of the story. AI processes will need optimised frameworks and hardware accelerators to manage AI assignments. Furthermore, financial institutions also need to prepare processes and effectively communicate them with staff to achieve their AI goals rapidly. “Artificial Intelligence technology invariably needs human beings,” says Simon Carter, Head of Deutsche Bank’s Data Innovation Group.

And, as pointed out by Deloitte’s survey, organisations that can communicate a bold vision with an AI strategy are approximately 1.7 times more likely to achieve high outcomes as compared to enterprises that do not. Thus, by using big and complex data sets, banks can create risk frameworks that can provide precise and timely analysis.

Consumer behaviour and AI
Banks offer services and products integrated with AI to customers based on their preferences and searches. One of the best features of AI in banks is its ability to learn. It matures and becomes more intelligent over time. Standard Chartered is using machine learning that helps the bank to decode complex data compilations and slim down the related information.

Banks are using these data analytics to develop their marketing strategies. “Ensuring transparency and explainability in AI-based decision-making is not just a competitive advantage for us, but also the right thing to do by our client,” says Standard Chartered’s Retail Banking Group Head, Vishu Ramachandran. In this way, they are identifying consumers’ preferences and offering targeted products and services, which has helped it to decrease costs and increase productivity.

However, data breaches are a continuing concern for banks that are using AI technology in their processes. Every bank records a large number of transactions daily. The collection of data is a never-ending task, one which raises considerable security issues. A recent data breach in Flagstar Bank, one of the largest banks in the US, has put its 1.5 million customers at risk.

Of course data protection remains a challenge for banks, but they cannot ignore the significance of AI in modern banking. Implementing robust data protection protocols is necessary to counter such threats. On the other hand, banking institutions need to lay the groundwork to support AI teams who can promise efficiency, consumer satisfaction, and improved ROI.

AI offers tantalising opportunities and modern banking must include accessible, secure, and consumer-driven data centres to accelerate data collection and analytics.

Is inflation here to stay?

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Charles Goodhart has seen it all: recessions, stagflation and boom years. In his book, The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, co-authored with Manoj Pradhan, the former Bank of England adviser predicted the revival of a beast long thought dead by most economists: high inflation. It was cheap Chinese and Eastern European workers who kept inflation rates low over the last decades, rather than central bank policies, Goodhart argues, but the tide has now turned. Ageing populations will bring about higher inflation and interest rates, but also less inequality, he argues in an exclusive interview with World Finance’s Alex Katsomitros, while explaining how we can deal with climate change and musing over what central bankers and sheep have in common.

What prompted you to write the book?
When Manoj and I were working at Morgan Stanley, we were asking ourselves why inflation was running below target, despite the expansionary policies of central banks. We came round to the view that there was an underlying trend, caused by the weakness of labour markets and the sluggishness of wages. We put that down to demography and globalisation, notably the arrival of China and Eastern Europe into the world’s trading system.

As you predicted, inflation and interest rates have increased. Do you feel vindicated by recent events?
Yes and no. Mainstream economists still believe that current inflation is temporary. Central banks forecast that we will return to inflationary targets in two or three years, and interest rates will come down. We believe that COVID-19 was a trigger for a change to a more inflationary period from now to 2050.

Some put the blame on the war in Ukraine for rising inflation, others focus on the pandemic. What is your take?
We wrote the book in 2019. We thought that the momentum of weak labour and reduced trade union membership would carry on, although we also believed that demography and deglobalisation would change this. But we didn’t know when the shift would take place. COVID-19 and the war brought this change forward. What remains to be seen is whether inflationary pressures will persist when these temporary developments disappear.

The economist Michael Pettis recently told World Finance that China can only sustain current growth levels by increasing the household share of GDP and reducing government consumption. Do you think they can reform their economy?
They will have to. They are trying to move up the value chain by shifting from low-tech to high-tech products, and they will have to increase internal consumption. The rift with the US, which will not go away, means that the growth rate of exports will decline. Aggregate growth rates have been between six and eight percent in real terms, and with a declining workforce, they will be lucky if they have 2.5 percent growth. If your workforce is falling by 1.5 percent annually, you are lucky to have aggregate growth of 2.5 percent. That means that your productivity per worker rises by four percent, which is huge.

You argue that inflation will rise due to a shortage of workers. However, there’s still a big pool of cheap workers globally. In the book you discuss India and Africa, but what about Vietnam, Indonesia and Pakistan?
In Vietnam and Indonesia birth rates have already started declining. The areas where high birth rates remain are Africa, certain Muslim countries and perhaps India, although it is falling there too. The problem is how to use this workforce.

One possibility is massive migration, but this is politically unpopular, as we saw with the election of the far right in Italy. So if that is not an option, you have to take manufacturing to those countries. To do that, you need political stability, administrative competence and a well-educated workforce. It is possible and desirable that Africa may have these, plus a degree of unification, so perhaps Africa and parts of South Asia could become the next China. But it hasn’t happened yet.

What about automation?
We need all the robots we can get. As the proportion of the old increases, we will have more incapacitated people. The problem is not age itself, but incapacitating illnesses like Alzheimer’s, dementia, Parkinson’s, arthritis. Those suffering from these diseases cannot carry out ordinary activities. They need supportive care and human sympathy. Robots are not sufficient. They could help to get people into a wheelchair, but we need people.

Many youngsters believe that the postwar generation is enjoying undeserved privileges. Is this anger justified?
To some extent, yes. We, the old, have support in the form of care, medicine, NHS, and pensions, paid by the working-age population. There are relatively few of us and many younger people, which means they can support this fiscal generosity. But when they grow old, there will be fewer workers to support them. If the future old have the same level of benefits and retirement age, there will be a higher tax burden on younger generations and they will not like that. Tax rates will have to go up or support to the old go down. One reason why this has happened is that the old vote at higher proportions than the young. If the young voted for lower taxes and fewer benefits to the old, they would get somewhere, but the proportion of voting 20-year-olds is much lower than that of 60-year-olds.

Economists who espouse modern monetary theory believe that deficits and debts don’t matter. What do you think?
They say that deficits and debt are not so much a problem, but inflation is. Taxation will have to be raised to control inflation, if this goes out of hand. The problem is that rising deficits lead to unsustainable fiscal problems, which tend to cause inflationary pressure and require higher taxation.

 

Another issue you discuss in the book is central bank independence. Why do you think it is in danger?
The difficulties facing the UK recently {the week after the since U-turned mini-budget was announced} are instructive. The underlying problem is that we cannot bring back inflation to target without the fiscal position becoming more sustainable. If you try to deal with inflation solely by raising interest rates, you get two effects.

First, that reduces demand and output growth and increases unemployment, which brings a recession with rising expenditures on unemployment benefits and lower taxes. Higher interest rates also increase public debt immediately, particularly because of quantitative easing, which has effectively substituted long-dated government debt for overnight government debt. So with higher interest rates, you are making the government’s fiscal position worse.

And if people start thinking that public debt becomes unsustainable, they flee the government bond market, as happened in the UK. If the government bond market starts to collapse, the only thing that can be done, which the Bank of England did, is reverse course and go back to quantitative easing, which brings more inflation. You cannot defeat inflation in the long term, unless fiscal and monetary policies are sufficiently restrictive to make the public debt position seem sustainable. When you get policies such as those Truss and Kwarteng tried introducing, it is clearly not there.

You argue that labour will gain the upper hand due to a shortage of workers. Does that mean that we will see less populism?
It is very likely. I hesitate to make political forecasts, but I believe we will see less inequality. The massive increase in the availability of labour, particularly due to offshoring to China, will be reversed. In many countries, particularly the US, there has been little real income growth for unskilled workers. We now see a reversal, and with interest rates going up, we will see a decline in asset prices. Because of the shortage of workers, the unskilled will see relative growth in real wages and those with capital will do less well, so inequality within countries will decline.

Another issue that looms large over monetary policy is climate change. Is there some kind of balance between the economy and the environment?
Where I think there should be a balance is on how we pay the expensive effects of carbon usage reduction. Economists think that we should adopt a carbon usage tax. However, such a tax would make the carbon-intensive segments of industry, like steel and cement, very uncompetitive compared to countries where there is no such tax. Opposition from industries subject to heavy taxation would be sufficient to stop it. Also the net-zero activists do not support carbon taxes. I don’t know how they think we will finance the extra expenditures needed to move towards renewables.

In the book you approach an economic issue through a non-economic lens: demographics. Many people believe that economics has lost its way, that it’s too mathematical and just out of touch.
I am with the latter, as I am more of an economic historian rather than a pure economist. Our book has two defining features. The first is that macroeconomists tend to focus on their own country, which is too narrow. We have two chapters on Asian countries, Japan and China, but no chapter on the US, Europe or the UK, because we think that the rise of China has been the most important feature of the last 30 years. The second difference is that they focus on demand-side policies, whereas we focus on supply.

You own a sheep farm in Devon. Has farming taught you anything about economics?
Sometimes I make this analogy: central bankers and economists in some ways are like sheep. They tend to flock together. If you are in a position of power where what you do has important effects on everyone, you like being able to defend and protect yourself by saying ‘well, I am doing exactly what everyone else thinks is right.’ They have a flock mentality.

Nuclear’s new resurgence

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Europe is bracing itself for a long, cold winter. Blackouts, gas shortages and unheated homes could well become a reality for millions across the continent in the months to come, as the ongoing energy crisis continues to escalate. Already grappling with skyrocketing bills, many families are fearful of what the winter will bring, while thousands of small businesses may be forced to close if they can’t keep up their energy payments.

By January, experts warn that two-thirds of UK households could be pushed into fuel poverty, with sustained higher prices set to impact families at all levels of the income spectrum. Despite a package of planned government interventions, the outlook appears bleak. The energy crisis – exacerbated by the ongoing conflict in Ukraine – shows no signs of abating as we head into the coldest months of the year. In the worst case scenario, the UK’s National Grid has cautioned that families could face daily three-hour blackouts, bringing back memories of the power cuts that plagued Britain in the early 1970s.

As political leaders across Europe look to deal with the immediate impacts of the crisis, it is becoming increasingly clear that there will be long-term ramifications from the events of the past year. The crisis has, in many ways, changed the continent’s energy landscape forever. Despite recent commitments to phasing out fossil fuels – including most notably at last year’s COP26 conference – Europe remains largely dependent on imported oil and gas. Russia, the largest supplier of natural gas and petroleum oils to the EU, has cut its exports of gas to Europe by 88 percent over the past year. Against this backdrop, energy security has suddenly rocketed up the political agenda.

After years of scepticism and apprehension, countries around the world are now reassessing their position on nuclear power – persuaded by its potential to provide an efficient and reliable domestic source of energy in the long term. Not everyone is convinced, however, with the catastrophic disasters in Chernobyl and Fukushima looming large in the public consciousness.

But with the Russia-Ukraine war exposing fundamental weaknesses in Europe’s energy supplies, is the tide set to turn on nuclear power?

Firing up
Few issues are guaranteed to generate as polarised a debate as the question of nuclear power. For those in favour of nuclear investment, it represents a clean and efficient form of energy, with a smaller carbon footprint than both solar and geothermal alternatives. Its opponents, meanwhile, argue that the risks simply outweigh the benefits: over 30 serious nuclear incidents have occurred at nuclear plants around the world since the early 1950s, with Japan’s 2011 Fukushima disaster stoking significant fears over safety.

Now, a decade on from the Fukushima accident, public reservations on nuclear power look unlikely to deter its expansion. For the first time since the 2011 disaster, the International Atomic Energy Agency (IAEA) has raised its projections for annual nuclear electricity generation, reflecting a significant shift on nuclear policy around the globe. Japan is unexpectedly at the very forefront of this nuclear revival, with Prime Minister Fumio Kishida announcing plans to restart a number of the country’s idled nuclear plants, and setting intentions to develop next-generation nuclear reactors.

Europe economies are following suit, with even staunch nuclear sceptics beginning to revise their policy position. Germany, which firmly turned away from nuclear following the Fukushima disaster in 2011, is now rethinking its approach, with plans to postpone the closure of its remaining nuclear plants. The country’s last three nuclear power stations were due to be permanently switched off in December, as part of plans to completely phase out nuclear energy by the end of 2022. Two of the three plants will now remain operational until at least mid-April, in order to provide an ‘emergency reserve’ this winter as the energy crisis rumbles on. While the German chancellor Olaf Scholz has insisted that he remains committed to the country’s nuclear phase-out, the decision to extend the lifespan of its last power stations marks a significant U-turn for the nuclear-adverse nation. It’s a similar story across the border in Belgium. The nation had previously committed to abandoning nuclear power entirely by 2025, but has since decided to extend the lives of its two newest reactors by at least another 10 years. Reversing a decision made in December 2021 to shut the plants, the extension will keep nuclear as a key component of the Belgian energy mix for years to come.

Britain, meanwhile, is taking inspiration from its pro-nuclear neighbour across the Channel. In September, outgoing Prime Minister Boris Johnson pledged £700m for the construction of the new Sizewell C power station in Suffolk, committing to nuclear as one of the final acts of his premiership. Calling on his successor to “go nuclear and go large,” Johnson’s million-pound pledge sent a clear message that nuclear power will undoubtedly be at the heart of the UK’s future energy strategy.

Too little, too late?
While there certainly appears to be renewed enthusiasm for nuclear energy – both in Europe and further afield – this recent change in direction may do little to resolve the current energy crisis. Keeping soon-to-close power stations on standby may be a reassuring back-up plan for countries facing energy shortages over the winter, but the strategy won’t create energy independence overnight.

One of the strongest arguments for investing in nuclear power is that it grants nations greater energy security and independence – with France standing out as an obvious success story. Deriving almost 70 percent of its electricity from nuclear power (see Fig 1), France boasts an energy independence rating of 53.4 percent – one of the highest rates in the EU. While this level of autonomy means that the nation is less exposed to Russian cuts to gas supplies, replicating the French model is not easily achieved.

Nuclear power stations are famously time-intensive to build, with the average construction time for reactors coming in at just under 10 years. Compared with renewable alternatives, nuclear power plants are also much more costly to both build and operate – and then there are the additional expenses of decommissioning and waste disposal to consider. For any country wanting to follow in France’s nuclear footprints, they will need to be prepared for high costs and slow progress.

It’s clear that nuclear isn’t a short-term solution. The immediacy of the current crisis requires swift action to keep bills down and keep lights on, and nuclear is anything but swift. Investing in nuclear power won’t solve this winter’s energy crisis – but it could stop the next crisis from hitting as hard. With the energy landscape so dramatically transformed by the events of the past year, energy security is understandably a long-term priority for the EU, and nuclear power could prove crucial to achieving this goal.

Finding balance
If the recent energy crisis has sparked a renewed interest in nuclear power worldwide, it has also exposed the dangers of nuclear over-reliance. Nuclear-dependent France is facing its very own energy predicament while the rest of Europe grapples with cuts to Russian gas supplies. This year, 57 percent of the country’s nuclear reactors have been shut down due to corrosion problems, technical issues and long-overdue maintenance works – with repairs outstanding from the multiple COVID-19 lockdowns. With so many plants offline, French power output has fallen to a 30-year low, making the country a net importer of energy for the first time since records began a decade ago.

After years of scepticism and apprehension, countries around the world are now reassessing their position on nuclear power

France’s recent nuclear strife illustrates the importance of creating and maintaining a diverse energy mix. Over-reliance on a single form of energy – whether that be domestic nuclear power or imported natural gas – can only leave a country exposed when unexpected setbacks occur. A hybrid energy system, combining cutting-edge renewables with nuclear power, may just be the future of the European energy landscape.

Achieving the ambitious targets established in the landmark Paris Agreement on climate change will require a dramatic transformation of the global energy system, and a pivot towards carbon-zero sources. Whether nuclear power can be classed as truly ‘clean’ remains hotly debated, given that each reactor generates not-insignificant quantities of long-lasting radioactive waste. However, it is true that it remains an efficient and reliable source of carbon-free electricity – and one that isn’t affected by meteorological fluctuations, as is the case with solar and wind power.

While 100 percent renewable energy may be the ultimate goal for climate-conscious countries around the world, a hybrid approach may be more readily achievable in the near term. Already, major economies such as Sweden have been able to completely decarbonise their power grids through a blended use of nuclear, hydropower and other renewables, demonstrating the potential of a hybrid system.

Nuclear isn’t a magical cure-all for the challenges of fossil fuel dependence and energy insecurity, but it could provide some welcome relief in the years to come. Long-sidelined and still met with opposition from many, nuclear’s new resurgence may not be popular but it may prove necessary – if Europe wishes to make this energy crisis its last.

The evolving digital landscape of banks

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An All Party Parliamentary Group (APPG) has recently said the UK should widen its open banking model to speed up the growth of fintech as part of a broader evolution in financial services. The APPG has called on the UK government to start a new ‘big bang,’ imitating the deregulation of the financial markets in the 1980s. The group has said that by eliminating the shackles from fintechs, the government can make strides in levelling up the country by reducing economic imbalances between different parts.

Meanwhile, in the US, a new report from the cloud-based digital banking provider Alkami Technology, a leading cloud-based digital solutions provider for banks and credit unions, highlighted five trends banks and credit unions should be aware of during their digital evolution. One of them regards the possibility of partnerships with fintech companies, which may be the easiest and cheapest way to complete the digital journey.

This report showed that 73 percent of the population trusts financial institutions with their personal information, but fintech is not far behind, with 63 percent saying they trust the companies with their data. Around 50 percent of banks and 40 percent of credit unions have partnered with a fintech company within the past three years due to competitive pressure.

Sanat Rao, CEO of Infosys Finacle, a global banking software and platforms business, considers the digital journey as a way to create and deliver value to customers. “Digitisation enables banks to acquire more customers, build better products and services faster and at lower cost, manage risks well, and run operations efficiently. In other words, it’s the key to sustaining the business,” he said.

In the age of ecosystem-driven banking, a partnership is the natural order of things

Rao explained that over time, banks have realised that collaborating – rather than competing – with fintech usually creates value and synergy for both. While banks are looking to embed their services in the primary journeys of other providers, fintech will enable this transition, for instance, by helping banks to evolve marketplaces or insert their offerings in different consumer journeys.

“As long as the partnership is a net positive and not a zero-sum game, the price the partners have to pay is irrelevant. And there is so much room for growth and untapped opportunity that most partnerships end up increasing value for everyone. In the age of ecosystem-driven banking, a partnership is the natural order of things,” he said.

Rao claimed that every bank would work with several partners across the value chain to create and deliver products in ecosystem banking. While many partnerships will have no conflict of interest, in distribution partnerships, however, some conflicts may arise. “For example, if customers use Google Pay to open deposit accounts, banks will lose that part of the engagement. Banks need to ask whether they can deliver greater value to customers via these partnerships than by serving them independently. If the answer is yes, that is how the industry will go. Then the only option for banks is to stay in those partnerships, even if it means becoming embedded in other product journeys because that is what customers will want,” he added.

Silvia Davi, chief marketing officer of the fintech firm Symbiont, with its headquarters in New York, believes that the digital journey consists of moving from inefficient ‘paper’ or manual processes to benefit from the tools that digitised solutions bring to the table, such as smart contracts. “Via this technology, for example, we are enabling market participants globally to automate the reconciliation process, and there are multiple solutions that can be built on top of these high-quality data sources,” she said.

Davi highlighted that while in the short term there is a time and budget commitment – with inaction way more expensive in the long run – the long-term consequences are immensely positive, driven by the immutability, transparency, and apparent efficiencies that will result from utilising distributed ledger technologies.

“There may be some growing pains and tweaks needed to optimise the benefits of these relationships. From our experience, driven by our desire to constantly evolve and introduce new technology releases, we are committed to that process, and the banking sector is as well,” she added.

Working through conflicts
Likewise, Carol Hamilton, senior vice president of Provenir, a global leader in AI-powered risk decisioning software, sees the digital journey as “a non-stop set of continuous interactions between an organisation and their customers.” It starts from that first moment of contact, either a customer browsing a website online or applying for a product on a mobile device. Financial services providers want to maximise every digital interaction along the journey. To do that, they need to up their game for consumers who demand that digital interactions be quick and informative. This is why such organisations are utilising more data and more sophisticated technology to understand better who they’re doing business with and use that intelligence to optimise every component along the way.

“Embracing digital is very powerful; however, some organisations digitise processes on paper or legacy technology and move to more updated online systems. But true digital transformation shifts how that company is thinking and how it is interacting with customers to meet their needs for a more engaging and memorable digital banking experience,” she said. Nevertheless, Hamilton does not deny that there are a few other disadvantages of moving to complete digital transformation, especially as it gets even more intelligent.

“We are at a solid place in the industry where even organisations who weren’t historically operating in financial services can offer intelligent financing products through an app or other digital interactions. Successful digital transformation offers more intelligent products and services to the end customer. These are more valuable to that end customer and thus the organisation offering them,” she added.

Hamilton explained that to compete in such a busy market, the profile and needs of a customer need to be identified more quickly than ever, and data-driven actions need to follow in order to be successful. “For most customers, this is about embracing speed and optimised communication and products. For the minority, data-driven actions at speed also ensure the organisation is protected,” Hamilton said.

Also, in contrast with what Sanat Rao stated, she does not exclude a conflict of interest between the two businesses, highlighting that as traditional banks diversify, fintechs could soon do the same. “Data could be commoditised. It’s always about finding out that next layer of value and staying ahead to meet customer expectations. There will always be conflicts – it’s all about working through them,” she suggested.

However, there are plenty of options to accelerate this digital transformation. As Hamilton suggested, one of them is diversifying the business, for example, leading banks launching neobanks and targeting different parts of the market while diversifying their portfolio. Open banking has also been a groundbreaking development in the financial market. Regulation will also play a role in accelerating or decelerating digital transformation.

Adapt or die
Eric Bierry, CEO of the French fintech Sopra Banking Software, said that the digital journey is about more than meeting consumers’ changing expectations; it is also a reaction to shifting business models and industry regulations. “To take full advantage of these new business models, banks need to work with fintechs and avoid the mistake of trying to become them. This means providing fintechs with access to the core competencies that are part of banks’ DNA, like licensing, lending and security, freeing them up to focus on innovation and consumer experience. The result is a relationship where both parties can bring their strongest capabilities to consumers,” said Bierry.

He pointed out that banks are unequivocal about their decision to enter the digital ecosystem, and those unwilling to transform digitally will face extinction. “Fintechs are increasingly becoming the main point of contact for end-customers, from lending money to opening bank accounts and making payments. Banks will eventually be disintermediated from the value chain without digital infrastructures to enable partnerships with these companies. For banks that do leap to participate in the digital ecosystem, partnership opportunities in any industry, not just finance, are endless. Supporting fintechs and neobanks is the first and most obvious stop. Still, by offering their lending, security and compliance services to an auto manufacturer, banks can bring financing directly to consumers in any industry and cement their position in the industry for years to come,” Bierry added.

Undoubtedly, every bank in the world is working to transform. However, according to the Innovation in Retail Banking 2021 survey conducted by Infosys Finacle alongside Qorus, a non-profit organisation in the financial services industry, 14 percent of respondents said that their organisations had deployed digital transformation at scale and delivered as expected.

Sanat Rao explained that this result does not mean that other banks are not trying, but the reason for this low number is the constantly advancing goalpost of digital transformation (see Fig 1). “While banks are moving ahead, so is the transformation horizon, making it seem like banks aren’t going the distance. But that is not true,” he concluded.

The price of pageantry in a time of crisis

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Many millions of people around the world watched at least some of the Queen’s funeral, with figures from the Broadcasters’ Audience Research Board (BARB) estimating over 26 million BBC viewers across the service in the UK alone. The global and streaming audiences would have been many times this amount. The eyes of the world were firmly fixed on the UK in what is thought to have been the biggest television event in history, but once the grandeur and ceremony were concluded, the headlines reverted to ever more desperate reports of fuel poverty, political crisis and economic woe. Summer was officially over and with the incoming chill of the weather, reality soon started to bite.

Almost all the mainstream UK media was sympathetic towards the royal family in the lead-up to the dazzling solemnity that was the state funeral. Regardless of political stripe, any one of us who has lost someone can recognise the pain of going through the motions while stunned with your own grief.

Brexit, Covid, and now the cost of living have all led the left and right to point fingers at each other, and meanwhile the climate is in literal meltdown

But far fewer of us will inherit vast wealth, property, and privilege as a result, and perhaps that’s where the sympathy runs out. The royal family’s finances are as complex as its relationship with the public, and opinions and estimations around these vary wildly. Whether or not you believe that ultimately they contribute more to the economy than they take out, now the country is back to humdrum, can the royals realistically expect to feel genuinely relevant, cushioned as they are from the financial woes facing the average citizen?

Within a week of the Queen’s funeral, the reshuffled Conservative government announced a raft of financial measures in a much-maligned ‘mini budget’ that included the intention to abolish the additional rate of income tax, disproportionately benefitting the highest earners. This in turn sparked days of fierce debate, with then PM Liz Truss and her then Chancellor Kwasi Kwarteng being called to defend the move everywhere from local radio to the Tory party conference.

The plan was eventually dropped just 10 days later, but not before close to 1,000 mortgage products had been withdrawn from the market, and international stock markets had been well and truly spooked.

Disunited Kingdom
At times like these it is hard for households to bear the financial strain of matters that are outside of their control. Spiralling prices of gas and electricity, the geopolitical instability caused by Russia’s war in Ukraine, and global climate breakdown all provide an overarching context that any government would find challenging to thrive in, but when such rash political moves as Kwarteng’s mini budget feel like a choice to make things harder for most, it adds insult to injury and sends a very clear message about Britain’s crumbling sense of unity. In the meantime, the new coin featuring Charles III’s face was unveiled, but otherwise, all was quiet from the palace, even beyond its extended period of private mourning.

Whether you lean in favour of the royal family or not, it is important to acknowledge the magnitude of the Queen’s passing. She was a constant, for good or ill, in a country that feels increasingly polarised with every passing crisis. Brexit, Covid, and now the cost of living have all led the left and right to point fingers at each other, and meanwhile the climate is in literal meltdown. At times like these, no wonder almost half the UK population tuned in to bid farewell to one of the world’s longest serving figureheads, and yes, perhaps for a little distraction as well. Like it or not, we will all remember where we were when we heard the news, however we felt upon hearing it.

The well-worn argument of the royal family being good for UK tourism (not to mention the media) may not hold much water if Charles III does as he is rumoured to want to do and slims down the operation, reducing the number of senior working royals who enthral the visitors and capture the imagination. Although no longer able to lean on parliament the way he has purportedly done while heir to the throne, it is well known that King Charles is extremely concerned about climate change.

Perhaps he could be the figurehead that presses forward with Britain’s environmental imperative. There’s something we can surely all unite behind.

Going against the stream

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In 1997, so the story goes, Reed Hastings spent the best $40 of his life. At the time, he was frustrated. He had just returned a rented copy of Apollo 13 six weeks late and was slapped with a huge late fee. Why, he wondered, could the price of renting films not be more like a gym membership, where you pay a flat price to work out as much or as little as you want? At the time, DVDs were a new but untapped technology poised to explode in the US market. Not only were they a burgeoning market, but they were also perfectly sized for slipping into post boxes. Off the back of his fine, Boston-born Hastings dreamt up a business model for mail order movies. With one start-up already under his belt, he would go on to found DVD-by-post turned streaming behemoth Netflix within the year.

Twenty-five years on, Hastings’ origin story has become legend in the world of business. However much truth is in it, his success is undeniable. Netflix, which turned over nearly $30bn in 2021, has gone from plucky, cult-status start-up to Silicon Valley veteran. Hastings steered the ship through periods of choppy waters, but with questions over just how long he will remain at the helm and where he will take Netflix in the so-called ‘streaming wars,’ World Finance looks back on his legacy.

Don’t listen to the sceptics
While Netflix would be Hastings’ big lightbulb moment, it wasn’t his first spark of brilliance in the business world. After earning a mathematics degree from Bowdoin College – he “found the abstractions beautiful and engaging,” he later told The New York Times – Hastings went on to earn a master’s degree from Stanford in computer science. By 1991, at the age of 31, he had co-founded his first business, Pure Software, with Raymond Peck and Mark Box.

The business, which originally offered a debugging tool for engineers, was a success. Revenue doubled each year before it went public in 1995, Hastings told Inc. magazine, and it was soon snapped up by a competitor, Rational Software, for $750m. The deal wasn’t particularly well received by Wall Street, but Hastings didn’t worry about what others thought. “I was doing white-water kayaking at the time, and in kayaking if you stare and focus on the problem you are much more likely to hit danger,” he told The Times. “I focused on the safe water and what I wanted to happen. I didn’t listen to the sceptics.”

After inspiration for Netflix struck, Hastings wasted no time in making his idea a reality. In 1997, he launched the business with co-founder and entrepreneur Marc Randolph.

Winning the rental wars
In its first year, Netflix gained 239,000 subscribers, and it wasn’t long before its red DVD envelopes became ubiquitous in the United States – and beyond. Hastings made waves by situating the business at the cutting edge of entertainment and technology. While Netflix first offered a pay-per-rental model for each DVD, by 2000 it had a monthly flat fee in place, nixing the need for late fees and due dates. “It was still a dial-up, VHS world, and most video stores didn’t carry DVDs, so we were able to sign up early adopters,” he told Inc.

The business went from strength to strength in the run-up to its initial public offering in 2002, when it listed its stock at $15 per share.

The company posted its first profit the next year, earning $6.5m on revenue of $272m. By 2004, its profits had ballooned to $49m, and in 2005 it was sending out a million DVDs every day. But 2005 marked the time of peak DVD in the US market, with sales reaching a height of $16.3bn. For Hastings, the next goal was to move into video streaming. He told Inc. that same year: “We want to be ready when video-on-demand happens. That’s why the company is called Netflix, not DVD-by-mail.” But the transition wasn’t without its problems. In 2011, Hastings announced Netflix would divide its DVD and streaming businesses into separate subscriptions with separate fees – and names. The streaming service was to retain the name Netflix while the DVD side would be renamed Qwikster. Neither customers nor the markets were happy, and Netflix’s share price fell 75 percent by the end of 2011, according to Forbes. After initially doubling down, Hastings eventually cancelled plans for Qwikster.

Despite the missteps, Hastings was winning the film rental wars. In 2010, Blockbuster, which once had 9,000 video rental shops in the US, filed for bankruptcy after being crushed by nearly $1bn in debt and torn apart by internal disputes. Blockbuster’s demise occurred just a decade after Hastings and Randolph offered to sell their business to the video rental giant for a mere $50m. Following the meeting, which took place during the dot-com bubble, former Netflix CFO Barry McCarthy said Blockbuster executives had “laughed us out of their office.”

Throwing out the rulebook
At Netflix, Hastings is known for being a hands-off leader. “Incredible people don’t want to be micromanaged,” he once told Forbes. “We manage through setting context and letting people run.” Hastings currently shares responsibilities with co-CEO and chief content officer Ted Sarandos, who became joint head of the company in 2020, having worked at the business since 2000.

In 2020, Hastings published No Rules Rules: Netflix and the Culture of Reinvention with business school professor Erin Meyer. The book outlined his leadership philosophy and how it plays out at Netflix. “We wanted to make the case that it’s good business to run without rules – which is a surprising statement,” he told Variety. The key, he said, is “embracing managing on the edge of chaos. And as long as you are tolerant of managing on the edge of chaos, of course there’s going to be some mistakes” – take Qwikster, for example – “but there’s also going to be a lot of innovation.”

Netflix’s annual leave policies are one case study of the ‘no rules’ strategy. Hastings plays the long game with employees, encouraging them to take time off via unlimited vacation policies and unlimited parental leave, in the hopes that any loss in efficiency will be regained by employee loyalty and innovation. “We’re willing to take some inefficiency narrowly and in edge cases to create an environment that’s extremely flexible because we think that outperforms in the long term,” he told Entrepreneur. Hastings said he takes six weeks off per year, explaining at The New York Times DealBook Conference that the time away from work “hiking some mountain” or “reading something not connected to work,” helps him get a different perspective and provides inspiration.

But it’s not all positives with the ‘no rules’ philosophy, and Hastings admits it’s not a perfect strategy. Some of Netflix’s policies have been challenged for creating a culture of fear. The infamous ‘keeper test’ is a process where managers are told to consider if a person on their team were to quit whether they would try to get them to change their mind or whether they would accept the resignation, perhaps even with relief. If their answer is the latter, they may as well send them packing now and look for someone they would fight to keep, the ‘keeper test’ advises.

“Think of a great athlete,” Hastings told Variety. “You kind of know you could get injured, maybe even a career-ending injury, in every game. But if you think about that and if you obsess on it, it’s only going to hurt you. So we have to hire the psychological type that can put that aside and who aspires to work with great colleagues and that’s their real love, is the quality of their colleagues or the consistency of that, versus the job security.” If job security is your priority, Hastings said Netflix’s message is clear: “We’re not a good place to come. We don’t want people to feel debilitating fear; obviously that’s not productive.” But, he said, Netflix is looking for “a special kind of person who can ignore that fear.”

Hastings believes this strict approach to weeding out mediocrity is key to maintaining Netflix’s competitive edge and innovation. He saw the alternative at Pure Software. “We stopped being innovative. We were all about process. And then the market shifted, and we were unable to pivot and ended up selling to our largest competitor,” he told Variety. “So it ended up as a really good success financially, but it did not become an epic, world-changing company in the way we want to make Netflix.”

Changing tack
Flexibility and innovation are important to keeping Netflix’s offering fresh and its business model agile, but the business’s recent change in strategy regarding advertising is more akin to a U-turn. Hastings had long committed to keeping advertisements off the platform, with Netflix’s chief financial officer saying advertising was “not in our plan” as recently as March 2022. But in April, Netflix reported its first quarterly decline in subscriber numbers in more than a decade, and a tumbling stock price forced a swift rethink. Now, the streaming giant’s plan is to funnel in more subscribers through its cheaper, ad-supported service.

The television advertising industry was buoyant on the news, with Brian Wieser, president of business intelligence at WPP-owned GroupM telling the Financial Times that Netflix poses “a great untapped audience.” And the advertising world, which brings in more than $60bn a year, offers an equally large opportunity for Netflix. However, Netflix has to battle the perception that by offering an ad-supported service, it is compromising its brand. As Rich Greenfield, an analyst at LightShed Partners, told the Financial Times, “It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience.”

Being an entrepreneur is about patience and persistence, not the quick buck

Hastings himself has admitted that advertising is no fast-track to growth. “Advertising looks easy until you get in it. Then you realise you have to rip that revenue away from other places because the total ad market isn’t growing, and in fact right now it’s shrinking,” he told Variety in 2020. And in a 2019 letter to investors, the business said, “We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”

Market researcher Kantar noted in a July report that streaming growth was most significant in paid ad-supported streaming and free ad-supported streaming, while paid streaming without ads grew at a slower rate.“Value is increasingly important to retaining streamers as platforms are competing for screen time or risk being cancelled and replaced,” said Nicole Sangari, vice president of Entertainment on Demand at Kantar Worldpanel Division. “This upward trend of significant [paid and free ad-supported streaming] growth is correlated to high stacking [of multiple subscriptions]. As stacking reached new heights, consumers were willing to reduce their overall streaming costs for ads. Streaming has gone full circle, once being the destination to avoid cable TV ads, to increasingly relying on ads to drive growth.”

Of Netflix’s ad-supported tier, Sangari said the move was a “suitable strategy to combat losing subscribers due to its cost and value.” Offering an ad-supported tier “can help win back its lost subscribers,” she said, as customers who had planned to cancel their subscriptions can switch to a cheaper service instead. However, as the business fights password sharing, it is expected to lose customers. “Their strategies are having lingering effects on how loyal customers perceive its features and value.”

While Netflix teeters on the unknown, two of its rivals, HBO Max and Hulu, have seen growth. “The platforms have focused on cost-savings to prove value and created a content niche that over time they expanded: HBO Max with new releases and Hulu with next-day cable to Hulu TV series,” Sangari said. “Both started by offering something unique to the market, and with greater competition have focused on diversifying their offerings to drive engagement.”

Netflix’s Chief Content Officer, Ted Sarandos, and CEO, Reed Hastings

Changing the world for good
While Netflix’s shift to ad-supported advertising is welcomed by some industry experts, seeing Hastings’ commitment to ad-free viewing crumble overnight may cause investors to wonder if other commitments will be dropped. From live news and sports to gaming, there are a multitude of ways Netflix’s content offering could shift.

Speculation over when Hastings will leave Netflix is also emerging. With Sarantos sharing the position at the head of the business and making the big calls on Netflix’s content, Hastings appears to be putting the wheels of a succession plan in motion. In a recent earnings call he suggested he would be leaving the business by 2030. But he insists he’s committed to Netflix. “What I don’t want people to think is that I’m checking out,” he told Variety. “I guess it is the beginning of the end in the sense that eventually, I’ll be gone. At least for the next decade, I’m super-excited by what we’re doing and full-time, so it was a statement that it’s not a short-term situation.”

Outside of his work at Netflix, Hastings is known for his philanthropy and political contributions. Through Netflix, Hastings accumulated a substantial fortune. In 2017, he was added to Forbes’ 400 list of the richest people in America, with the group estimating his fortune sat at $5bn. Between 2001 and 2011, Hastings spent $8.1m on political donations in California, according to the Silicon Valley Business Journal. In 2020, he donated $1.4m to Joe Biden’s presidential campaign, Business Insider reported, having previously gifted $89,000 to Barack Obama’s 2012 re-election campaign.

Hastings and his wife, producer Patty Quillin, also joined a philanthropy pact founded by Bill Gates and Warren Buffett to give away the majority of their fortune. “It’s an honour to be able to try to help our community, our country and our planet through our philanthropy,” Hastings and Quillin said in a statement at the time. “We are thrilled to join with other fortunate people to pledge a majority of our assets to be invested in others. We hope through this community that we can learn as we go, and do our best to make a positive difference for many.”

Education has been a consistent theme in Hastings’ philanthropy, and he has made a pledge to spend $100m of his fortune reforming the US public school system. In 2020, he and Quillin gave $120m to fund scholarships for black students through a partnership with two historically black colleges in the US and the United Negro College Fund, and he also spent $20m building a training facility for teachers. “Being an entrepreneur is about patience and persistence, not the quick buck,” Hastings told Inc. in 2005. “If we can transform the movie business by making it easier for people to discover movies they will love and for producers and directors to find the right audience through Netflix, and can transform public education through charter schools, that’s enough for me.”

The streaming wars
Netflix has indeed transformed the movie industry. Not only the way films were delivered, but also through the content itself. In 2012, the business produced its first TV series, House of Cards, which went on to receive over 56 Emmy nominations, winning seven. Since launching the political thriller, a stream of critically acclaimed successes has flowed from Netflix’s original content production machine, including Stranger Things, The Crown, Bridgerton and Sex Education.

Netflix has proven it has significant strengths in the market, despite losing subscribers

Netflix’s streaming service has now expanded into 190 countries, and the business’s next aim is to become content king. In the second quarter of 2022, Netflix commissioned 160 film and TV show titles in total, with most of the originals being produced outside of the US. “What’s next is becoming a great Turkish developer of content, becoming a great Egyptian developer of content, and sharing that with the world,” Hastings told Variety. Indeed, content is one differentiator in the ongoing streaming wars. “Netflix has proven it has significant strengths in the market, despite losing subscribers. It has the content and easily navigable interface to keep subscribers engaged,” Kantar’s Sangari said.

The use of streaming services continues to grow. The proportion of US households with streaming services reached 88 percent as of June 2022, according to Kantar, with 113 million households accessing streaming products. According to the research, the average household has five subscriptions to streaming services. But Netflix’s competitors aren’t confined to its streaming peers, according to Hastings. In 2017, Hastings said Netflix’s biggest rival wasn’t Amazon or traditional broadcasters, but sleep. “You know, think about it, when you watch a show from Netflix and you get addicted to it, you stay up late at night,” he said. In 2019, he said video games were causing the business to lose more subscribers than rivals. “We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) Fortnite more than HBO – there are thousands of competitors in this highly fragmented market vying to entertain consumers.”

But Hastings isn’t afraid of a little competition, and he is confident of Netflix’s position, even as rivals like Disney+ make bigger gains in subscribers. In a recent letter to shareholders, the business effectively said it was winning the streaming wars: “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10bn, vs. Netflix’s $5bn to $6bn annual operating profit.”

Hastings said it himself: he isn’t in this for the quick money. He wants to build a “world-changing” company – one subscription at a time.

Attempting to save the planet

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When, or if, the Earth stops heating up and the planet is saved, historians will probably look back to August 16, 2022 as the landmark date. For that was the day when the US President Joe Biden administration’s anti-climate change package, the Inflation Reduction Act (IRA), became law. The biggest and most far-reaching legislation of its kind by far, the IRA throws a guaranteed $479bn at all forms of energy that will reduce noxious emissions while experts predict that it will also trigger trillions of dollars of similar investments in the US and beyond.

“Legislation of this magnitude and duration lasting through the 2030s and beyond is likely to have profound and lasting impacts across US and global climate and energy systems, supply chains, industries,” summarises the Boston Consulting Group (BCG) in a detailed analysis of the impact of the IRA that echoes the views of other think tanks. “Trade and US legislation on climate and energy also have the potential to trigger policy actions from other nations, both large energy producers that compete across these value chains, and large energy consumers.”

The IRA is a cleverly designed package that wields both a carrot and a stick. Although US Congress pledged to spend this unprecedented sum between now and 2030, amounting to over $68bn a year, there will be a cascading effect through tax credits and incentive funding. As the BCG notes, these credits and incentives are intended to create investment multiplier effects that are certain to catalyse an avalanche of similar actions beyond America.

How will this happen? According to BCG, there will be a multi-pronged effect. First, the adoption of electric vehicles will accelerate, lowering the price of entry for passenger and heavy-duty vehicles. Further, incentive-style funding will materially reduce the costs of renewable and other carbon-free forms of energy, with up to 80 percent of electricity being carbon-free as early as 2030. Simultaneously, manufacturing, which is a hard-to-abate sector, will be encouraged to use manufacturing tax credits to embrace cleantech.

Nor, having set a new direction, is the Biden administration stopping with the IRA. In a surprise decision, given the Republicans’ blind eye to climate change during Trump’s fossil fuel-friendly term in office, the US senate has ratified the so-called Kigali amendment to the Montreal Protocol that aims to protect the much-damaged ozone layer through a rapid phase-down of climate-deadly hydrofluorocarbons (HFCs). According to scientists, HFCs are hundreds to thousands of times more powerful than CO2 in accelerating climate change.

And although the Biden White House is not hostile to Big Oil and has, in fact, passed measures that encourage the production of shale gas and drilling, government agencies have recently moved to keep the industry honest. Three separate hearings are under way into how Big Oil used deceptive advertising campaigns to purportedly mislead the public about the risks of climate change.

Also, the Environmental Protection Agency, which Trump tried to hamstring, is considering tougher rules for heavy trucks so more zero-emission haulers are put on the road. Almost every week, the White House and government agencies launch initiatives aimed squarely at climate change. Buildings, another hard-to-abate sector that covers everything from homes to schools and offices, will get more than $50bn to slash pollution. A $1.5bn programme will speed up electric vehicle-charging infrastructure over 75,000 miles of highways that will, promises Secretary of Energy Jennifer Granholm, “lessen our oversized reliance on fossil fuels.”

Nearly $50m will be poured into deep-water floating wind turbines. The energy efficiency of semiconductors – vital components in everything from air conditioners to smartphones – will be increased by a factor of 1,000 times within two decades. The Department of Energy (DoE), another agency targeted by Trump, has unveiled $7bn in funds to create clean hydrogen hubs, one of the biggest investments in the agency’s history. And looking further ahead, the DoE released a road map that has the US aviation industry running exclusively on sustainable fuel by 2050.

And now for the stick. Industry will have to foot some of the bills for cleaning up the climate, for instance in the form of a 15 percent tax on companies with profits over $1bn. And from 2024, oil and gas companies will pay a penalty of $900 a tonne for methane emissions, rising to $1,500 by 2026. Some exemptions will apply, notably for small producers, but otherwise the writing is on the wall.

Big targets
President Biden’s ambitions are nothing if not big. This avalanche of funds is intended to slash economy-wide greenhouse gas emission in the US by 40 percent as soon as 2030 compared with the levels pertaining in 2005 (see Fig 1). The power companies that make up the grid are expected to do even better by cutting emissions by around two thirds. Further out, the Holy Grail of a net-zero carbon economy is set for 2050. Biden’s attack on fossil fuel-induced pollution has come in the nick of time. “Climate change is accelerating rapidly, with a narrow possibility to escape its worst environmental and socioeconomic consequences,” warns the International Monetary Fund in a sobering recent analysis. “The global average surface temperature has already increased by about 1.1°C compared with the pre-industrial average during 1850–1900, amplifying the frequency and severity of climate shocks across the world.”

The numbers are turning against humanity. So far, 2022 is already the sixth hottest year ever on the planet, according to data from the US National Oceanic and Atmospheric Administration. All of the 10 warmest years recorded in the last 140 years have occurred in the past 17 years.

The IMF’s latest alarming assessment predicts that if greenhouse gas emissions continue growing at their current rate, global warming is projected to reach 4–6°C by 2100. That would trigger “an unprecedented shift with greater probability of larger and irreversible environmental changes unseen in millions of years that threaten devastation in swathes of the natural world and render many areas unliveable.”

Until the Inflation Reduction Act saw the light of day, much of the action was little more than rhetoric in many – or perhaps most – of the 189 countries that pledged to slash CO2 emission by 30 percent by 2030. In fact, global CO2 emissions have risen steadily since the 2015 Climate Accord. In the latest figures, in 2021 they had jumped by 2.3 percent to 36.3 billion metric tons, the highest level in history.

The long-term consequences are all too obvious, as the IMF study explains. Current projections assume sea levels will surge by two or three metres over the next 300 years and by five to seven metres if the warming of the planet isn’t slowed. At those levels entire countries in the South Pacific will find themselves below the oceans.

And that’s just water. Extreme heat waves, like the deadly ones that fried North America in the summer of 2021, are considered five times more likely to occur at the current rate of warming, which is about 1.3 percent. But at a rate of two percent, heat waves are 14 times more likely to occur. Similarly, severe droughts will happen two or three times more often in what climatologists call ‘weather whiplash’ – wild swings between dry and wet extremes.

Unless other countries follow Biden’s path, there’s worse to come in the long term. “The risk of extreme weather events, such as heat waves, wildfires, droughts, flooding, and severe storms, is projected to increase over the next century, as the global mean temperature continues to rise,” warns the IMF.

As the World Bank points out in a recent paper, the consequences of climate change aren’t always as dramatic as hurricanes and heat waves, but they are just as pernicious. Nigeria, for example, faces a collapse of about 30 percent in its GDP by 2050 because of “severe water stress” caused by climate change-induced droughts, the organisation warns. Although this is small change compared with the Inflation Reduction Act, the World Bank will pump $700m into projects in Nigeria that will at least slow down the effects of droughts by creating sustainable oases and wetlands. Highly active in climate-change initiatives, the World Bank will pump a record $31.7bn into projects in the 2022 fiscal year that mitigate the damage resulting from climate change.

Pipeline politics
The IRA arrives on the wider front of the war in Ukraine that has highlighted the critical importance of a fossil-free environment where nations’ energy security does not depend on oil and gas pipelines. As numerous studies point out, sanctions against Russia as well as the latter’s response by pumping dramatically smaller oil and gas volumes into Europe has unsettled global energy markets.

The price of crude oil has nearly doubled from an average of $68 per barrel in 2021 to $124 in 2022. Much worse, the price of natural gas in Europe jumped to a record high of €345 per megawatt-hour, a stratospheric increase that is the oil equivalent of $600 a barrel.

Other nations are watching closely the effects of the IRA and hoping for rapid results. According to the Democrats’ majority leader in the senate, Charles Schumer, the package adds up to the “strongest one-two punch against climate change that any Congress has ever taken.” But will other countries follow suit?

The dangerous growth of shadow banking

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Until last September, few people beyond the close-knit world of pension asset managers had heard of ‘liability-driven investment’ (LDI), a trading strategy deployed by many pension funds. When the then UK Chancellor Kwasi Kwarteng announced a mini-budget that included unfunded tax cuts, markets went into a wild tailspin. The pound plunged into depths not seen since the global financial crisis of 2008, while the yield of gilts, as UK government bonds are known, shot up precipitously. LDI would become the fuse that would set markets on fire, eventually burning Kwarteng and Liz Truss’s government.

Beyond the political mayhem, the crisis highlighted the risks engulfing the so-called ‘shadow’ financial sector: non-bank institutions acting as lenders or intermediaries. These include institutional investors that are not prone to speculation, such as pension funds. It is risk aversion that forces pension funds to hold gilts. However, in a low interest rate environment, even institutional investors have been tempted to experiment with riskier ventures. Based on derivative hedging, LDI strategies have allowed pension funds to tap into the gilt market without necessarily holding the bonds, with some estimating that before the crisis around £500bn held by UK pension funds had been turned into over £1.5trn in investment.

When gilts started losing value the day Kwarteng announced his ill-fated budget, pension fund managers were forced into a massive sell-off to meet long-term liabilities. The result was a flurry of margin calls, as counterparties demanded more cash as collateral, creating a vicious circle of illiquidity.

Given that pension funds are the main buyers of long-dated gilts, this was an idiosyncratic demand shock. Effectively, the market had run out of buyers. It was only the £65bn intervention of the Bank of England (BoE) that saved the day by providing extra liquidity. “If the BoE had not intervened, a doom loop would have started with gilt and other asset prices crashing in an attempt to meet the margin calls,” says Professor David Blake, an expert on pensions who teaches at City, University of London.

This would have possibly spiralled out of control, affecting banks and insurance companies holding gilts, says Jonathan McMahon, chairman of UK wealth management firm Parallel Wealth Management and former Head of Financial Institutions at the Central Bank of Ireland: “They must have judged that the downstream consequences of not intervening would have led to a run on gilts, and possibly insolvency events in other areas.”

That 2008 feeling
A strict definition of ‘shadow banking’ includes only financial institutions that carry out credit intermediation, such as collective investment vehicles, broker-dealers and structured finance vehicles.

But once a broader set of ‘market-based finance’ intermediaries are included, the sector becomes a broad church that encompasses all non-bank financial institutions involved in lending: insurance firms, mutual funds, hedge funds, payday lending services, pension funds, currency exchanges and microloan organisations. Many finance practitioners avoid the term altogether, dismissing its dark connotations that echo the credit crunch in 2008. Non-bank lending played an important role in the global financial crisis, with insurance providers and mortgage associations like the US government-sponsored enterprise Fannie Mae being at the centre of the subprime mortgage storm. However, it was the traditional banking sector that attracted the attention of regulators and the ire of protesters; there was no ‘Occupy Wall Street’ movement for little-known hedge funds and insurance providers. The sector escaped the crisis relatively unscathed, while regulators imposed higher capital requirements on banks, restricting their ability to lend.

As the banks retreated, shadow banks filled the gap by offering riskier credit options, while facing little supervision and enjoying low-interest rate liquidity through quantitative easing in Europe and the US. Since the crisis, non-bank lending has almost doubled in size. Currently, it accounts for almost half of the global financial sector, according to the Bank for International Settlements (BIS), up from 42 percent in 2008, controlling $226.6trn by 2021. Across the EU, shadow banking institutions hold the majority of total assets, while non-bank institutions in the US match traditional banks in lending numbers. In the UK, ‘market-based’ finance accounts for almost half of all lending activities.

“This time round the search for yield was fuelled by persistent overreliance on monetary policy to stimulate economic recovery,” says Sir Paul Tucker, a veteran banker who served as deputy governor of the Bank of England in the aftermath of the global financial crisis (GFC), adding: “Post-GFC reregulation of banking incentivised that to happen outside of de jure banks. There is no surprise in the regulatory arbitrage, which is why the G20 agreed a decade ago to develop policies to contain the problem.”

One reason for that precipitous growth has been the idle, growing savings of the Western middle classes, seeking profitable investment opportunities, says Matthias Thiemann, a political economist and expert on shadow banking who teaches at Sciences Po, Paris. “These savings lead to large cash pools, which in turn seek to invest in profitable opportunities.” The post-crisis withdrawal of banks also provided ample opportunity for non-deposit taking lenders who rushed to deliver customer-orientated solutions, with managers promising quick lending decisions in towns where high street banks were shutting down branches, says Andy Copsey, non-executive director at ABL Business, a UK commercial finance consultancy: “Gone are the days that SMEs could only trot along, cap in hand, to their local bank manager when they wanted a loan.” One reason why micro-lending in particular has skyrocketed is the increasing number of people who find it difficult to get larger loans, says Tommy Gallagher, founder of Top Mobile Banks, a UK website dedicated to digital banking.

Proponents of shadow banking highlight its advantages, notably the fact that it offers borrowers a wide range of options. This also means that risks are more spread out; few non-bank institutions are too big to fail, like banks back in 2008. The smaller ones, like peer-to-peer lenders and fintech firms, offer financial services to those traditionally excluded from the mainstream banking system. “It would be very difficult for capitalism to work in the 2020s if banks were the only source of capital,” McMahon says, adding: “Banks are very good at one thing, which is typically lending to property, but not at providing cash flow-based financing to businesses.”

The flip side is that the non-bank sector has increased in complexity, making it harder to discern the nature and scale of risk embedded in the system. High leverage can cause uncontrollable ripple effects. Unlike banks, which have to meet capital requirements set by regulators, shadow banks hold collateral set by their counterparties, which thus creates a complex network of interconnected parties. The system worked well in the pre-pandemic era of historically low interest rates and unlimited liquidity, but now many non-bank institutions need to have access to substantial collateral, as shown during the LDI crisis. Flexibility and innovation prowess are two of the greatest advantages of non-bank financial intermediaries (NBFI), but they can also turn into disadvantages when markets turn south, says Professor Barbara Casu, Director of the Centre for Banking Research at Bayes Business School: “These structures are inherently fragile and they lack an official backstop, such as a central bank. Regulators intervene because of the interconnectedness between banks and the NBFI and the potential risk of spillovers to the banking sector.”

More worryingly, the sector shows signs reminiscent of the credit crunch, as low interest rates have encouraged asset managers to beef up portfolios with leverage. Critics claim that non-banks are not prepared to deal with tighter credit conditions, a problem that will be further exposed by higher interest rates. “The shadow banking system is an unstable system of leverage, asset bubbles and crashes, and then the regulator and the central bank have to step in to prevent the whole financial system – and after that the economy – from collapsing,” says Blake from City University.

Since the crisis, non-bank lending has almost doubled in size

The lack of transparency makes it more difficult to identify potential sources of systemic risk in the non-bank sector, although finance linked to real estate seems to be in a particularly perilous state in the advanced economies. In the US, rising interest rates have already shaken mortgage lenders, which have seen refinancing activity plummet.

Mortgages could also be a problem for many UK households that borrowed at low interest rates, according to Blake: “As these fixed rate deals are coming to an end, mortgage rates are rising rapidly and house prices are falling – so we could get a doom loop developing as people are forced to sell their houses because they cannot pay higher mortgage rates.”

China’s message to the world
For those raising the alarm about the perils of unbridled shadow banking, one case study stands out: the world’s largest economy. Following the global financial crisis, the Chinese government fuelled growth through fiscal stimulus and easy credit, largely channelled to the economy through shadow banks that in many cases were associated with traditional banks. In 2009, the non-bank sector accounted for eight percent of the country’s financial sector; by 2016 this had grown to a third (see Fig 1). The Chinese government tacitly abetted, and for some even encouraged this trend. “Shadow banking expanded rapidly based on a combination of regulatory arbitrage by banks trying to channel credit to restricted sectors, along with a widespread perception that government guarantees at some level, central or local, would ultimately backstop any losses,” says Logan Wright, Director of China Markets Research at Rhodium Group, a research firm.

As the system built leverage, problematic loans were gradually burdening Chinese financial markets with dangerously high levels of credit risk, while many inexperienced retail investors were entering the local stock market. Its crash in 2015, which caused major shares to lose up to a third of their value within a month, convinced the authorities that the non-bank sector’s growth posed a threat to financial stability. In response, regulators implemented reforms constraining the lending abilities of shadow banks, mainly by cutting down the interest rates they could charge. As a result, the country’s shadow banking assets dropped from over 100 percent of GDP to around 80 percent, shrinking by RMB11.5trn ($1.6trn) from 2017 to 2020.

Although the reforms were successful in reducing the size of the sector and limiting risks on the liability side, they also had negative side effects. “The result was that credit risk rose sharply on the asset side of the balance sheet as more defaults occurred, because many institutions were cut off from financing,” says Wright. Effectively, the crackdown reversed the deepening of the financial system that had benefitted underserviced borrowers, such as lower-income households, while undermining the government’s plan to build a more equitable growth model, known as ‘common prosperity.’ SMEs, traditionally shunned by banks that prefer to lend to large state-run firms, were particularly hit, although their reliance on shadow banks increased during the pandemic.

The shadow banking system is an unstable system of leverage, asset bubbles and crashes

One sector that has also been hit hard is real estate, as some of the main users of shadow banking channels are property developers. Currently, the sector, which represents up to 30 percent of the country’s economy, is embroiled in an acute crisis, with some of China’s largest property developers facing the possibility of bankruptcy. “The deleveraging campaign contributed to the property market crisis by encouraging property developers to rely more heavily on pre-construction sales as a primary mode of financing,” says Wright, adding: “Presales effectively became a substitute form of credit for shadow financing channels, which were contracting under the deleveraging campaign. This process also produced a significant expansion of housing supply and new construction at a time when fundamental demand among owner-occupiers was slowing.”

The crisis is now coming back to bite the financial sector, as falling property sales test the solvency of many non-bank institutions. Chinese trusts defaulted on roughly $9bn in financial products linked to real estate in the second half of 2022, according to data provider Use Trust. One possible response would be further deepening of the country’s bond and stock markets, according to professor Sara Hsu, an expert on China’s shadow banking system who teaches at the University of Tennessee. Although the West doesn’t have an exact parallel to China’s shadow banking system, there are lessons to be learned, Hsu says: “The Chinese shadow banking system underscores the need to provide finance to SMEs and early regulation, as well as the need for market-based solutions.”

Shadows all over the world
Shadow banking has rapidly grown in many other emerging economies where small businesses remain unbanked. A case in point is Mexico, where the banking sector’s small size and limited trust in SMEs has fuelled their appetite for alternative funding sources. The bubble burst last winter, with loan provider AlphaCredit defaulting first, followed by Credito Real and Unifin. Since then, contagion has shaken many other non-banks, currently funding themselves at increasingly high interest rates. Overall, the three bankrupt companies had lent about $6bn, on top of issuing around $4bn of unsecured bonds and foreign bank debt. The crisis has spilled over into the real economy, as thousands of smaller businesses face the prospect of running out of credit. “Contagion has already set in, and it is very difficult for all remaining players to obtain funding and refinance maturities,” says Victor Herrera, Partner at Miranda Ratings Advisory, a Mexican financial services firm, and former CEO of S&P Global Ratings in Mexico.

Default on shadow bank bonds has a broader impact on the country’s economy. “Normal Chapter 11 procedures have not been followed and bond holders feel they have been mistreated because of Mexican debt restructuring practices,” Herrera says, adding: “All bond issuers in Mexico, regardless of the sector they are in, will suffer the reputational effect.” The overarching problem, according to Herrera, is the lack of regulation and supervision. “One questions why a $100 deposit in the bank benefits from ample regulatory supervision, but if a doctor or teacher buys a $100 bond, no government body monitors the risk the retail investor is undertaking, many times without knowing it.”

Is decentralised finance a systemic risk?

Of all the increasingly complex niches of non-bank lending, one has captured the imagination of both tech visionaries and more pragmatic finance practitioners: decentralised finance, widely known as DeFi. Based on the blockchain, the technology that underpins Bitcoin, DeFi applications use pre-programmed algorithms to provide credit in crypto without a central authority. Like many other technology trends, DeFi’s appeal rests on the elimination of intermediaries, such as banks and financial advisors. Although the market was born just a few years ago, it has grown exponentially with the total amount of funds handled by DeFi firms hitting $13.6bn by 2022, according to the market research firm Grand View Research.

The sector’s abrupt growth has focused minds on its disruptive potential. Last December, the BIS expressed concerns over its global expansion. The authors of the report argued that DeFi applications can become a threat to financial stability if they expand into mainstream financial activities, partly because the sector lacks any significant shock absorbers, such as a central bank. The collapse of the crypto exchange FTX last November, widely seen as a lender of last resort that had previously bailed out problematic DeFi firms, seems to confirm these fears. What makes DeFi particularly vulnerable to crises, according to the report’s authors, is its perilous structure and lack of supervision: “There is a ‘decentralisation illusion’ in DeFi since the need for governance makes some level of centralisation inevitable and structural aspects of the system lead to a concentration of power.”

For the time being, most analysts believe that the sector is too small to cause any systemic risks. Although there are examples of failure, there is nothing inherently riskier about the DeFi market compared to traditional finance, says Campbell Harvey, an expert on decentralised finance teaching at Fuqua School of Business, Duke University: “At some point all finance – centralised and decentralised, poses some systemic risks.” He added: “Importantly, in DeFi all loans are fully collateralised or they are closed out.”

However, many regulators have already taken action, fearing that such an untested market could cause problems that could spiral out of control in an already febrile economic environment. In the UK, the regulator has banned the sale of cryptocurrency-related ‘derivatives.’ The European Union’s ‘Markets in Crypto Assets’ law is also expected to tackle this issue, including establishing a watchdog to supervise the sector. For its part, the BIS suggests that policymakers should focus on the founders and managers of DeFi platforms.

“{There is} no reason why DeFi should be less prone to excessive leverage and liquidity risks,” says Tucker, adding: “Technology can alter the details of finance, but not its functions and pathologies. To think otherwise is delusional, and maybe worse.”

The next crisis
As dark clouds gather over the global financial system, many analysts fear that regulators will soon find out that they have even less control and understanding of the non-bank financial sector than they thought. “The problem with ‘shadows’ is that they do not foster transparency – so the size of the correction is difficult to predict,” says Copsey from ABL Business. Higher interest rates may shrink asset valuations that were previously inflated due to cheap debt, leading to liquidity challenges and even insolvencies. The energy crisis and the war in Ukraine also pose problems for the financial sector, but perhaps the biggest one is complexity, McMahon from Parallel Wealth Management says: “We just don’t know what the trigger event will be.”

Capital-based pension funds are a major reason why we are in this mess

One particular problem is the lack of co-ordination between regulators. In the case of the LDI crisis, the pensions regulator was monitoring individual pension funds, but not systemic risks across the sector, while the central bank lost sight of pension funds altogether. “Capital-based pension funds are a major reason why we are in this mess: they invest a lot in shadow banking. We need to go back to a pay-as-you-go system,” says Thiemann from Sciences Po. Other proposed solutions include conducting rigorous stress tests for non-banks and setting up special regulators, or expanding the remit of existing ones, such as the US Financial Stability Oversight Council, to monitor the shadow banking system and detect potential threats.

“Where they can, the authorities should quietly be encouraging very careful deleveraging in some places,” says Sir Paul Tucker, adding: “They should be much less reluctant to use their powers to get providers of leverage, including clearing houses, to set higher minimum margin and excess collateral (haircut) requirements. That might have been done from around 2016-17, if not earlier.”

Optimists believe that the financial sector is better prepared to face a crisis, compared to its pre-2008 naivety. Data coverage of the shadow banking sector has dramatically improved since the crisis, according to Martin Hodula, Head of the Financial Research Coordination Unit at the Czech central bank. One way forward, he suggests, is broadening the regulatory framework covering traditional banking to encompass the shadow banking sector on a global scale, and thus create a level playing field: “A unified global regulatory framework seems vital because local financial regulation is subject to the prisoner’s dilemma and cross-country regulatory arbitrage.” Alternatively, policymakers and regulators could completely separate traditional and shadow banking, while pledging that they will never bail out a non-bank institution. “The real solution would probably lie somewhere in between,” Hodula says. If a crisis does erupt, however, governments across the world may have to face the same dilemmas that haunted them during previous financial crises, McMahon believes: “Ultimately governments will have to stand behind the banking sector and corporations, but with government balance sheets under stress, how is all that going to be financed?”

Top 5 forces that will shape international finance in 2023

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2022 was, by any measure, a difficult year in Europe. War on the continent, runaway inflation, energy security and even a corruption scandal in the European Parliament. These problems are not going away and will continue to dominate the political arena. However, 2023 will be an important year for the financial services sector and its policymakers.

2023 will be an interesting year as it precedes 2024. Although that sounds obvious, 2024 will see a new European Parliament and Commission and, in all likelihood, a general election in the UK (not to mention a Presidential election in the US). In Brussels, there will be a focus on getting the programme of the current Commission finalised as far as possible and, in the UK, the current Government will be pushing to demonstrate it should be given an extended mandate.

Pressure will be building on policymakers to act, and this will need close attention. Companies should be ready to act to influence the process, whether directly or indirectly (for example through the media). Here I set out a few drivers for those of us watching closely where the EU and UK are going.

1) Competitiveness
Despite some thawing in relations in 2022, the shadow of Brexit continues to loom over both the UK and EU and competitiveness between jurisdictions has become a key concern. In the UK, the Financial Services and Markets Bill will provide regulators with a secondary objective to consider the UK’s competitiveness. The UK government has also set out its strategy for regulation in the form of the Edinburgh reforms. These focus mainly on reform to parts of the UK system that have proven unpopular and have been badged as using Brexit freedoms. Ironically, some of the highest profile reforms are in areas, like ringfencing and the senior managers’ regime, that were not actually related to EU law.

In the EU regulation aims to provide the single market with ‘open strategic autonomy.’ This nebulous label intends to boost the efficiency of the single market and the competitiveness of EU firms while not relying on ‘third countries’ such as the UK. The EU is looking to make tangible progress on its Capital Markets Union agenda, and tech and data will be important features in the regulatory work of the EU in 2023.

A regulatory focus on competitiveness might sound attractive, but memories remain of the financial crisis, before which competitiveness was a regulatory objective, so there may be reluctance to embrace it. Also, regulators do not have a great record of promoting innovation and data driven change in Europe, so a close eye will need to be kept on this.

2) Crypto
2022 has been dubbed the crypto winter with huge falls in the value of crypto currencies and some high-profile failures in the sector, including FTX and Terra. This has led to a dilemma for policymakers in Europe. The focus on competitiveness means some want to welcome this innovative technology that many people continue to believe has an exciting future. However, the risk to investors, financial stability and even the ability to police and control the supply of money is causing sleepless nights in some institutions.

The EU is, as usual, ahead of the international game when it comes to producing regulation. Its flagship regulation, MICA, is agreed and ready to pass into law (although it will be some time before it needs to be adhered to). The EU has also advanced its work on digital currencies and the ECB is currently pulling together a group on rulebook development.

Similarly, the UK is preparing consultations on crypto asset regulation and digital currency. Except for new powers around financial promotions, new regulation is not expected in 2023. However, the direction will be set in 2023.

Whether the UK and EU adopt similar approaches remains to be seen. A competitive environment could emerge where each jurisdiction seeks to be at the forefront around, for example, blockchain adoption or central bank digital currency. This might introduce risks around intended consequences, where regulatory approaches are not properly analysed in a rush to move forward.

Equally, there could be excessive caution that limits the development of the sector in Europe. It will also be interesting to see how the UK and EU overcome the dichotomy of regulators, who will be very concerned about the risks, versus those who want an environment focussed on innovation.

3) Sustainability and productive finance
In an environment where public finances are suffering from severe stress, governments have been focussed on how private sector finance can be used for public policy purposes and how investors can be sure their money is used for such purposes. This is most apparently seen in the regulation around climate change where the EU’s impressive array of rules, including the Taxonomy and disclosure requirements, are becoming a huge compliance challenge for many firms operating in the EU. The UK is pursuing its own agenda and there’s an ambitious approach being developed where the divergence from EU rules is creating its own challenge.

There are also plans to consider how changes in regulation can increase sustainable investment and, in the UK, other policy objectives such as levelling up and promoting innovation. Last year saw the candidates to become UK Prime Minister talking in public debates about how changes to regulation such as Solvency II could be used to promote more of this type of investment in the UK.

Changing regulation in the EU and UK will create risks, burdens and opportunities for the firms that fall into scope. New disclosure requirements are likely to be hard to meet but changing investment rules could play to particular businesses’ strengths. Firms should ensure policymakers understand what’s practical and effective.

4) Energy
The events of 2022 mean that energy security and cost are a top priority in Europe and politicians have been quick to act to support markets and consumers. When it comes to financial services, there are three main concerns. First, can investment be increased to help reduce the reliance on fossil fuels generally, and Russian gas specifically. Second, have markets delivered efficiently for European consumers. Third, could energy market turbulence lead to turbulence on financial markets, as seen in markets such as the London Metal Exchange.

Of these three, the first concern has increased the urgency around creating a regulatory framework to increase investment in non-fossil fuels (as described above). For the second point, appetite for direct intervention by authorities in markets has been rising, particularly in the EU. This is very uncomfortable for those firms active in energy markets where price caps and public sector produced financial instruments (like price benchmarks) are likely to distort markets and could undermine confidence if not properly calibrated. Policymakers, lacking specific expertise, are going to need a great deal of assistance.

Finally, the third point about risk moving from energy markets to financial markets is likely to be challenging, particularly for those firms who prefer to avoid operating under the burden of financial regulation. Without proper calibration, new measures are likely to raise the costs of operating on energy markets and lead, ironically, to higher energy costs.

5) Financial crime
Finally, a focus for regulators will be around how to reduce the levels of financial crime and keep investors safe. The losses to investors caused by the collapse of crypto-currency prices have been part of the story, but there have been a number of misselling scandals that have embarrassed regulators and shaken confidence in investing. In the UK we can expect to see the FCA act to strengthen the approach it is taking to protect consumers. We should also see regulation that helps reduce scams by increasing the requirements on banks and social media providers.

In the EU there is a package of measures around anti-money laundering under development to ensure a more harmonised approach across the single marker and also create a new EU-wide regulator to enhance supervision. This is likely to mean increased compliance and due diligence costs for those brought into scope.

Egypt’s economic woes

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Egypt has desperately been looking up for white smoke. In better times, the country is often a political and economic powerhouse in the Middle East and North Africa (MENA) region. This year, however, the tides have shifted. Egypt has sunk into a deep economic crisis that is not only putting the country on edge but has also diminished its influence in MENA.

Openly and loudly, there are no echoes of the 2011 Arab Spring. Thanks to President Abdel Fattah El Sisi’s iron fist rule, his boisterous tendency of chest thumping and repeated rhetoric that his government has the wherewithal to pull the country out of the current economic crisis, Egyptians have remained largely subdued amid widespread suffering, widening inequality and deepening poverty.

“President El Sisi is an autocrat who wants all the power but does not want to take responsibility for the economic mess,” says Timothy Kaldas, Policy Fellow at the US-based Tahrir Institute for Middle East Policy. He adds that Egypt’s economic fundamentals have been weak for quite some time due to mismanagement. Though the impacts of Russia’s invasion of Ukraine on the country’s economic plunge cannot be downplayed, they have only served to expose the underlying rot. “Egypt needs significant change in how the economy is run and a dramatic reduction in the predatory political interventions,” he notes.

The need to change the management of the economy is already having casualties, the biggest so far being Tarek Amer. The former Central Bank of Egypt governor unceremoniously resigned in August, causing pandemonium in the monetary sphere. Despite being widely praised for sound monetary policies, Amer had endured a torrid year. Most of his interventions geared towards arresting the deteriorating economic woes, including policy tightening, largely came to naught. Amer, who was appointed as a presidential advisor, was replaced by Hassan Abdalla in an acting capacity. Though the reasons behind Amer’s resignation remain unclear, Kaldas believes his replacement was aimed at offering a signal to the International Monetary Fund (IMF) and the international market actors that Egypt’s government is prepared to move away from the surreptitious manipulation of the Egyptian pound that Amer oversaw during his tenure. “For years Amer insisted that the Egyptian pound was freely floating while everyone knew it wasn’t,” he avers.

Destructive dependencies
By all accounts, MENA’s most populous nation is going through a tough period. Notably, the government maintains the crisis has not ravaged the economy substantially. Its data show that in the 2021–22 fiscal year, gross domestic product (GDP) expanded by 6.2 percent and is projected to grow at 5.5 percent in the 2022–23 financial year (see Fig 1). The IMF forecasts a lower growth of 4.8 percent after reducing its projection from an earlier forecast of five percent. GDP for Egypt is measured by fiscal year from July to June.

The numbers, however, do not tell the story of Egypt’s economic malaise. The country, which in 2020 was among the few that escaped recession due to the pandemic, has emerged as one of the biggest casualties of the conflict in Russia and Ukraine. As a net importer of both fuel and food commodities and with huge dependence on tourists from Eastern Europe, the country has been forced to bear the brunt of the conflict.

Overall, Egypt imports 62 percent of its wheat needs. Of these, 82 percent come from both Russia and Ukraine. In 2021, Eastern Europe contributed the largest chunk of tourists to Egypt, accounting for half of the eight million tourists who visited the country according to government data. Rising crude prices due to the invasion have also hit Egypt hard. With an average of 120 million barrels of crude imports annually, the import bill has more than doubled to $15bn. The surge has wiped benefits accrued from exports of natural gas and liquefied natural gas, thus failing to close the wide balance of the payment gap. The country raked in $8bn for the 2021–22 fiscal year from gas exports.

“Egypt’s economy is one of the most vulnerable to the war in Ukraine given its position as a net commodity importer. This has left the country more at risk of the large swings in commodity prices and has exacerbated strains in the balance of payments that were already present following the pandemic,” explains James Swanston, MENA Economist at the UK-based Capital Economics.

Egypt’s economy is one of the most vulnerable to the war in Ukraine given its position as a net commodity importer

Disruptions occasioned by what is shaping up as President Vladimir Putin’s ‘forever war’ is having devastating impacts on Egypt. Apart from instigating a food crisis, the country has witnessed a surge in inflation, a local currency in free fall, widening trade and budget deficits, dwindling foreign reserves, worsening burden of public debt, rising poverty and weakening private sector competitiveness, among other challenges.

In August, annual inflation stood at 15.3 percent compared to six percent in the same month last year. Following a 50 percent devaluation of the Egyptian pound in 2016, officials have maintained a tight grip on the local currency. However, since March, the Egyptian pound has depreciated by about 20 percent. “Egypt has long needed to adopt a more flexible and weaker exchange rate regime to absorb external strains and avoid rebuilding external imbalances,” explains Swanston.

A population in poverty
Apart from ripple effects emanating from a weakening currency, poverty is on the rise. Roughly a third of Egypt’s 104 million population live in poverty. The country’s plight is worsened by debt, a huge chunk of which Kaldas contends has been accumulated by borrowing to finance unnecessary vanity projects as well as excessive arms imports. “The government needs to be much more prudent about its spending priorities and subject any new project to a credible and well-studied cost benefit analysis that shows such spending is worthwhile,” he notes.

With foreign debt currently standing at $157.8bn, Egypt is spending nearly half of all state revenue to service debt. The problem is worsened by the low tax to GDP ratio while the weaker currency is also pushing up the cost of servicing the debt that is denominated in foreign currency. Capital economists estimate the decline in the value of the local currency has pushed up the debt-to-GDP ratio by three to four percent of GDP. Further weakening of the pound will only add to the upwards pressure.

The economic woes have been exacerbated by a largely struggling private sector. Purchasing Manager Index (PMI) surveys show that Egypt’s non-oil and gas private sector has been in contraction for 63 of the past 72 months, well before the pandemic. In September 2022, the S&P Global Egypt PMI stood at 47.6, unchanged from August’s seven-month high. Still, it was the 22nd consecutive month of contraction in the non-oil private sector.

A weak private sector is the last thing Egypt needs, not when the country is witnessing an unprecedented surge in birth rate. In February 2020, the country’s population crossed the 100 million mark. Since then, Egypt has been adding a million people to its population every 240 days on average. The government, including President El Sisi, has admitted the growing population is fast becoming a burden on the national economy. Measures are being put in place to cut the growth including support for family planning. Being a largely Islamic nation, some of these measures are facing opposition.

Finding a way out
For Egypt, coming out of the current economic malady is a matter of urgency. Going by events witnessed a decade ago, the current state of forbearance can easily mutate to an uprising. For that reason, the government is pursuing and implementing strategies to get the country out of the crisis. Top on the list is pursuit of an IMF bailout. Egypt is optimistic the IMF will soon approve a financing package of about $5bn to $6bn. The optimism has been heightened by an assurance by IMF Managing Director Kristalina Georgieva in early October that a deal was imminent.

Egypt is optimistic the IMF will soon approve a financing package of about $5bn to $6bn

Egypt would have hoped for more considering the package covers roughly 10 percent of its financing needs in the coming year. However, previous financing packages mean that Egypt has already borrowed from the IMF to the tune of 223 percent of its quota. IMF sets an upper limit of borrowing at 435 percent of a country’s quota. In the current situation, any amount would be welcome. Apart from providing some respite to the country’s financing needs, an IMF deal would greatly help restore investor confidence and affirm the backing of policymaking.

Besides, it would restore the country’s creditworthiness and allay fears of near-term default particularly after rating agency Moody’s cut its outlook on Egypt’s credit rating to negative in May.

Another strategy the government is implementing to get the economy out of a hole is privatisation. The country hopes to raise $10bn by disposing of stakes in government-owned companies annually over the next four years. Investment by MENA partners has kick-started the programme. In August, Saudi Arabia’s Public Investment Fund committed $1.3bn to acquire stakes in four state-owned companies.

Over the next four year period, Egypt is also keen to attract significant foreign direct investment (FDI) inflows with a target of drawing $10bn annually. With net FDIs increasing by 183 percent in the first quarter of 2022 to reach $4.1bn compared to $1.4bn in the same period of 2021, the country believes that FDIs can be an essential driver of economic recovery.

The prediction trick

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Prediction is often compared to a kind of magic. Indeed, it is a key component of many magic shows. It also plays an important role in science: as the physicist Richard Feynman once said, “The test of science is its ability to predict.” Economists have a more complicated stance. In fact, the great prediction of mainstream economists is that they cannot predict. Economist John Cochrane, for example, wrote in 2011 of the Great Financial Crisis that, “It is fun to say that we did not see the crisis coming, but the central empirical prediction of the efficient markets hypothesis is precisely that nobody can tell where markets are going” (it wasn’t that fun).

Still, just as ancient mathematicians constructed elaborate machines of the cosmos to make astrological prediction, so economists enjoy building elaborate mechanistic models of the economy. An example is the dynamic stochastic general equilibrium (DSGE) models – the so-called workhorses of macroeconomics – that are used to simulate the economy and predict the effect of things like policy interventions.

Crystal ball
These models, whose development goes back to the 1960s, represent producers and consumers using a handful of representative agents, who act to maximise their utility by trading some representative good. These agents are assumed to know how the economy works, and how to react if something changes. Among other talents, these imaginary inhabitants of the DSGE economy live forever, are perfectly rational, have a perfect model of the economy in their head, and – like World Finance readers – have access to all relevant information.

The net result of their enlightened actions, channelled through the forces of supply and demand, is to drive prices to their unique and optimal equilibrium point.

The model therefore treats something like a crash or recession not as the result of the economy’s internal dynamics, but as an unfortunate event imposed from outside.

More recent versions of these models do account for so-called frictions, which refer to things like the difficulty some firms have in raising funds, or the possibility that not everyone is perfectly rational. But a financial crisis is not the result of friction – instead it is the opposite of friction, when something suddenly snaps or gives way.

After the 2008 crisis, which was not characterised by equilibrium, economists of course tried to distance themselves from the whole business of prediction, which made sense given how bad they obviously were at it. As one group of scholars protested, “We are not astrologers, nor priests to the market gods.” Economists seem to want to have it both ways – they want to be seen as serious scientists, but when it comes to prediction all they have is that the economy can’t be predicted (which is convenient, since it means that their theories can’t be falsified). So given the poor predictive track record of economists, why are their soothsaying services so much in demand? And why have their DSGE crystal orbs not been shattered into a million pieces?

Peace is restored
The reason is that as with any kind of magic, prediction is all about the story. People don’t go to fortune-tellers or astrologers expecting a perfectly accurate prediction about the future; instead what they are looking for is a story that helps to make sense of their lives and justify a decision. In the same way, models don’t need to be accurate, they just need to produce something that gives a feeling of meaning and closure – which, in economics, is supplied by the notion of a stable and optimal equilibrium.

Another perennial favourite in magic shows is the restoration trick. This involves the destruction of an object, which is then miraculously restored to its original state – as when a watch is smashed and then restored, or an assistant is sawn in half before being returned to life. The trick plays with our fear of damage, our desire to turn back time and make things right again, as well as with our need to attain closure and restore order. The same narrative appears also in fiction, and in politics, in the image of the hero who brings order to chaos.

The real masters of the restoration trick, though, are economists: even after something like the 2008 crisis, they are always ready with a trite explanation about how the forces of supply and demand will soon bring the economy back to a state of peace and balance. After all, it’s there in the models.

As heterodox economist Steve Keen observes, “This image of a self-regulating market system that always returns to equilibrium after an ‘exogenous shock’ is a powerful emotional anchor for mainstream economists.” And their audiences.

But as the world seems to tilt ever further away from the cosy notion of a stable equilibrium, the magic is wearing off, the story is looking old, and the onlookers are losing interest.

Time for mainstream economists to develop some new tricks – or learn them from more entertaining sources such as systems dynamics, complexity theory, and quantum economics.

What happens when a country runs out of money?

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Picture the scene: ordinary people splash in Sri Lanka’s presidential pool while another dozen or so pump iron in the presidential palace gym. Hundreds more enthusiastically wave the national flag in gilded offices, atop balconies, and on manicured lawns. Others loudly sing the national anthem, raising homemade banners and linking arms.

Though this is no celebration – it’s a snapshot of a country turned upside down and the culmination of a months-long struggle against rampant corruption and crashing living standards. Worse, there is more to come, not just for Sri Lanka but for many other low and middle-income markets saddled with heavy and increasingly expensive sovereign debt.

They are exhausted
The island nation with a population of 22 million is no stranger to turmoil. This is a country still reeling from a civil war in which up to 100,000 lives were lost. Its economic fallout was severe. And still, the economic crisis unfolding today is the country’s worst – worse even than the crisis borne by a quarter-century-long war.

Budget and current account deficits, hyperinflation, a devalued currency, and a huge sovereign debt that it can no longer pay, Sri Lanka’s economy could hardly be in worse shape. The reality for people on the ground is stark. As recently as October, inflation reached a fresh record of 73.7 percent from just a year ago (see Fig 1). Transport costs were up 150.4 percent, food prices 94.9 percent.

“These days, we don’t have a proper meal but eat only rice and gravy,” one woman told the World Food Programme (WFP). But at these rates, even staples like rice are becoming unaffordable. The average monthly cost of a nutritious diet has soared 156 percent since 2018. The causes pre-date 2018, some say by decades, though it was only this year that the consequences crept into the wider public consciousness. In June the government ordered employees to work from home to reduce the rush on public transport. Then in July sales of fuel for private vehicles were banned against a backdrop of nationwide school closures and prolonged power cuts.

The signs aren’t just in the workplace, but in homes too. According to the World Food Programme (WFP), over a third of people are facing moderate to severe hunger. “They are exhausted,” says the organisation’s Country Director for Sri Lanka, Abdur Rahim Siddiqui. “More than 60 percent of families are eating less, and eating cheaper, less nutritious food.”

This is in a country that, until recently, was a leader in South Asia on many important indicators, including health and education. By all accounts it was a middle-income country. Its GDP was on par with South Africa’s. But Sri Lanka relies on imports for essentials like fuel, food and medicine. Essentials that, as of today, it simply cannot afford. So when in May it failed to make an interest payment on its foreign debt for the first time in history, its people took to the streets en masse.

First hundreds and then thousands rallied outside parliament, staging sit-ins and sticking placards in the faces of their wildly unpopular government. It wasn’t just students either. By May, people of all stripes had joined a collage of peaceful protestors.

Over a 100-day period, the protests forced president Gotabaya Rajapaksa and prime minister Mahinda Rajapaksa – both brothers – to resign

United as they were, the protests were unusual in that they were mostly apolitical – not so much concerned with installing a rival party per se, but calling rather for the removal of one President Gotabaya Rajapaksa and the wider Rajapaksa regime. This, by the way, is an oversimplification of their demands, but it was the one that really cut through.

They were successful – to a point. Over a 100-day period, the protests forced president Gotabaya Rajapaksa and prime minister Mahinda Rajapaksa – both brothers – to resign. Eventually the president was forced to flee the country to escape the uprising. A third brother, former Finance Minister Basil Rajapaksa, also resigned. But three is hardly a clean sweep for the powerful Rajapaksa clan. All said, the Rajapaksa brothers are believed to have placed more than 40 relatives in influential positions during their respective tenures as president.

The big three are gone, but to underline the difficulty protestors will have in forcing a meaningful change of government, just seven weeks after his dramatic exit Gotabaya returned to Colombo – this time with a beefed up security team. Billboards appeared in the city proclaiming “I’m back.” This is a man whose approval rate fell to 10 percent.

His power is diminished, clearly. But his reappearance shows the resilience of not just the Rajapaksas, but of the precarious political machinery that landed Sri Lanka in this crisis. After all, his is a family that has presided over Sri Lankan politics for over two decades. The problem is, theirs is a rule beset with nepotism, corruption, and total mismanagement.

The making of a crisis
When the civil war finally ended in 2009, then President Mahinda Rajapaksa took out massive foreign loans to pay for war expenses and, tellingly, fund flashy expensive infrastructure projects to attract tourism and reward his pals. Take for example, ‘the world’s emptiest international airport,’ as it was named by Forbes. Dubbed – unsurprisingly – the Mattala Rajapaksa International Airport (HRI) when the ribbon was cut in 2013, it cost a cool $209m. The majority ($190m) came in the form of high-interest loans courtesy of the Chinese government.

This is not a crisis created by a few recent external and internal factors, it has been decades in the making

It was a sign of things to come. By 2018 the airport was almost completely abandoned, with only a vanishingly small number of flights scheduled. The international press luxuriated in their descriptions of empty runways and eerily abandoned kiosks. The 12,000 square metre ‘ghost airport,’ said one newspaper. It was a disaster, and it was only one of many projects that failed to generate the revenue it so urgently needed to pay off Sri Lanka’s expensive loans.

Without the foreign reserves to fund these kinds of projects, and there were many, the government was forced to rely on foreign lenders like China to help service its debts, sparking a vicious and faintly familiar cycle (more on that later). Instead of focusing on economic reforms that might increase those reserves, the Rajapaksas introduced sweeping tax cuts to shore up political support and free up disposable incomes – with very limited success. The snazzy headline change was a reduction in VAT to eight percent from 15 percent. Seven other taxes were abolished altogether. In all, the cuts are thought to have cost the government more than $1.4bn and extended the budgetary deficit. Compounding the issue is the fact that income from exports has stayed low, while at the same time Sri Lanka’s import bill has ballooned. Today, the country imports $3bn more than it exports every year, while its foreign reserves have dwindled to essentially nothing. And at what cost?

According to Jayati Ghosh, professor of economics at University of Massachusetts Amherst, writing in The Guardian, “this is not a crisis created by a few recent external and internal factors, it has been decades in the making.” She continues, “ever since its ‘open economic policy’ was adopted in the late 1970s, Sri Lanka has been Asia’s poster boy for neoliberal reform, much like Chile in Latin America.”

In practice, this means that in Sri Lanka – as in other emerging markets – the strategy has been to make exports the basis for economic growth and lean on foreign capital inflows for support. So when inflows are curtailed by the likes of COVID-19 or the war in Ukraine, earnings fall and the price of essential imports like food and fuel skyrocket. In other words, ordinary people pay the price.

For its part, the WFP has launched a $60m emergency appeal for food and nutrition to assist three million of the most at-risk Sri Lankans. But without an immediate and massive package to account for the country’s shortfall, the situation looks dire.

There was some solace to be found in September when the IMF tentatively offered Sri Lanka a $2.9bn loan. Because, if nothing else, the loan will provide some breathing space. Though the country needs to strike deals with international banks and asset managers, who hold the bulk of its $19bn in sovereign bonds. Gotabaya Rajapaksa may have resigned, but his legacy, and more importantly, a long legacy of sovereign debt remains.

What’s the cost?
As of today, Sri Lanka owes about $51bn in overseas debt to international bondholders and international creditors including China, Japan and India. Its favourite airport partner holds about 10 percent of Sri Lanka’s debt, and China has been reluctant – if not totally unwilling – to forgive any of Sri Lanka’s debt so far. Many commentators have framed this as a kind of cautionary tale about the dangers of doing business with China. But the reality is far more complicated.

By far the largest share of Sri Lanka’s debt is held by commercial institutions. Over the last 20 years, its debt has shifted away from the kinds of low interest rate loans granted by the likes of the World Bank or Asian Development Bank and towards mostly commercial loans from private banks.

In 2019, 56 percent of Sri Lanka’s debt was held by commercial lenders, versus 2.5 percent in 2004. As you well know, these loans carry much higher interest rates. When, as with the Mattala Rajapaksa International Airport, infrastructure projects failed to yield the requisite returns, it wasn’t just the public finances but the public at large who began to feel the bite. Now we have a situation where a destabilised government must restructure billions in loans while ordinary Sri Lankans are in dire need of food and fuel. Again, at what cost?

According to the War on Want, “Many Sri Lankans fear that the IMF and World Bank will enforce the same ‘solutions’ that caused and fuelled the current crisis: further deregulation, cuts to public services, privatisation and poverty wages pushed even lower.”

Typically, a country’s debt repayments must be prioritised over social security schemes or investments in public services. In recent years over 40 percent of government spending was spent on paying off interest on foreign debts. Can Sri Lanka – or more accurately, Sri Lanka’s people – afford more of the same? “Sri Lanka’s collapse should be a wake-up call to other countries, highlighting the perils of sovereign debt in an era of geopolitical competition,” according to the US Institute of Peace.

On the same day Gotabaya fled Colombo, Pakistan reached the final stages of an IMF deal to put its finances on a firmer footing. The jury’s out on whether this will be so, or whether the debt upon debt approach will prevent the likes of Sri Lanka and Pakistan from pursuing the kinds of policies that benefit ordinary people. This is not just a Sri Lanka/Pakistan problem. Around 60 percent of low-income countries and 25 percent of emerging markets are in debt distress or at high risk of it. Couple this with rising interest rates and the strengthening of the dollar and it makes for quite the cocktail. A stronger dollar makes repayments even more expensive while at the same time borrowing costs for debt distressed countries have skyrocketed.

“The protests will again erupt – there’s no question about it,” says Jayadeva Uyangoda, professor emeritus of political science at the University of Colombo. “We can expect a situation with a lot of tension in the coming months.” Tension, because people on the streets are concerned about debt-driven concessions. But in a much more real sense, they’re concerned about a newfound determination to clamp down – and hard – on their protestations.

A familiar feeling
While protestors scored a minor victory in July with Rajapaksa’s resignation, his successor, Ranil Wickremesinghe, has shown a worryingly authoritarian streak. More authoritarian even than his predecessor. Most concerning is his new government’s use – or abuse – of emergency powers to contain protests. On September 23, it gave sweeping powers to authorities with the Official Secrets Act and the creation of ‘high security zones’ in central Colombo. Protestors now require written permission from police before they can legally organise any public gathering. Without it, police have wide-ranging authority to arrest anyone inside these zones. Only the High Court can grant bail.

Sri Lanka’s collapse should be a wake-up call to other countries, highlighting the perils of sovereign debt in an era of geopolitical competition

“In the wake of an unprecedented economic crisis in which families sometimes have to choose between food and medicine, these repressive measures further close avenues for dialogue and maintain a political climate prone to an escalation of tensions,” according to UN experts.

“Limitations to the right to freely assemble must be applied only in exceptional circumstances and strictly according to the law. National security cannot be used as a pretext to shut down expressions of dissent, and detention purely due to peaceful exercise of rights is arbitrary.”

Even outside of Colombo, authorities have responded to protests with excessive or unnecessary force, using teargas, water cannons and even live ammunition. The police and the military together have already arrested an array of what appear to be protest organisers. They’ve also raided the homes and the offices of protestors and – worryingly – opposition political parties. The latter suggests that they’re not only concerned about public opposition, but political opposition too. The step up in rhetoric and action has some organisations worried.

“The Sri Lankan authorities have repeatedly and unrelentingly stifled the voice of the people,” says Yamini Mishra, Amnesty International’s South Asia Regional Director.

“The new government in Sri Lanka has continued resorting to the unlawful use of force, intimidation and harassment to subdue protestors, sending a chilling message to the people of Sri Lanka that there is no room for dissent. The right to freedom of peaceful assembly is a keystone of any rights respecting society. It must be respected and protected,” Mishra said.

What next?
The protests have been muted, sure, but there are voices still on the streets calling for change. Their hope: that Sri Lanka will hold new elections within the year and establish a new constitution to empower its people and reduce the president’s executive powers. Chances of success are slim – and get slimmer by the day. People calling peacefully for reforms and greater accountability now face a very real risk of violence and arrest. But hope has not faded.

“We will continue our fight till we achieve our goal for a complete change of the system,” said one leading activist, Father Jeewantha Peiris. “This is a freedom struggle.”

As for the country’s spiralling debt crisis, history tells us that there is only real and systematic debt relief when there is the will to do something. Sri Lanka’s inclusion in global news outlets let a lot of people know that there is a crisis unfolding. Whether there is a willingness to step in…we shall see.

But as the headline-grabbing pictures of protestors storming the presidential building fade from memory, the international community may forget Sri Lanka’s plight. And by extension, that of other low and middle-income countries like it. Time, sadly, may be running out.

The most successful leaders in history

Posted on by itsupport

What makes a successful leader? For some it’s measured by the bottom line; for others by company culture, connection and purpose. For the best it’s a combination of all of these, and then some.

In their book, Primal Leadership, authors Daniel Goleman, Richard Boyatzis and Annie McKee outline six key leadership styles: visionary, coaching, affiliative, democratic, pace-setting and commanding.

But as David Noble, business coach and co-author of Real Time Leadership, points out, what’s most important is matching the right leadership style to the right environment. “We have seen successful leaders in every one of the key leadership styles, but we’ve also seen examples where each of these styles can fail spectacularly,” he says. “Leaders must be able to align their style to what is needed in the moment to unlock performance, and they need to be flexible enough to change their style as conditions change.”

“Inspiring leaders also need to be great human beings, with strong character strengths and values like perspective, generosity and inclusiveness,” Noble says. “What leaders emanate as people is as important as what they say and do.”

So what is it about CEOs such as Elon Musk, Bill Gates and Mary Barra that have made them so successful? “According to our research and experience, these CEOs have at least two big things in common,” says Ed O’Malley, president and CEO of the Kansas Health Foundation and co-author of When Everyone Leads: How the Toughest Challenges Get Seen and Solved. “First, they shoot for the moon (or Mars in Musk’s case). They have big, audacious, time-bound visions. They don’t convey the ‘how,’ but they make the direction clear. They know that one of the most important leadership tasks for anyone in authority is to set clear, provocative and bold direction.

“Second, they unleash a culture of leadership throughout their organisations. They know the toughest challenges can’t be solved by them alone, that their work is to create a culture where innovation, experimentation, and disruption thrive.”

So how have these qualities played out in history? From changing the world through affordable cars to sending humans to space, we’ve taken a deep dive into the success stories and personal characteristics of some of the most inspiring businesspeople of the past 100-plus years.

Henry Ford
Industrialist and founder of the Ford Motor Company

Few can claim to have transformed the world in quite the same way as Henry Ford. The first to bring the assembly line to car manufacturing – lowering production time from half a day to 93 minutes – he made cars for the masses, founding the Ford Motor Company in 1903.

The Model T was rolled out in 1908, and 10 years later, they accounted for half of all cars in the US. That was in large part thanks to their relative affordability; by 1924, they were selling for less than $300 (or around $5,200 in today’s money). By 1927, the company had produced more than 15 million of them.

These moves have been credited with major historic developments – including leading to the creation of the US’s interstate highway system. It wasn’t just Ford’s focus on technical innovation that propelled the company to success, though. While some have pointed to his autocratic, even ‘dictatorial’ leadership – making most of the business’s decisions himself – others have praised his collaborative, people-orientated approach.

He raised workers’ salaries – doubling them in 1914 to a then unusual $5 a day – and lowered daily hours from nine to eight hours, introducing the 40-hour working week with three daily shifts to keep production going round the clock. As well as motivating employees, these moves meant boosting productivity, lowering turnover and capturing and retaining the best talent. Ford also made various other moves – from bringing the entire car manufacturing process under one roof to transforming the way vehicles were sold, forming a network of dealers across the country. He was also notoriously service-driven, pursuing his conviction that “a business that makes nothing but money is a poor business.”

This approach clearly paid off; Ford Motor Company was the first manufacturer to begin production again after World War II and one of the first to go global, launching in 33 countries. The success hasn’t waned since; today the company is the second-biggest car manufacturer in the US and the fourth largest in the world, with more than 180,000 employees, an annual production of more than four million cars and revenues of $136bn in 2021.

Ford proved the power of throwing out the rulebook and pursuing a vision, however against the grain. “Whether you think you can, or think you can’t – you’re right,” he notoriously once said. He was a leader that certainly thought he could – and few would deny that he was right in his conviction.

Steve Jobs
Entrepreneur, designer and media proprietor

Creative, passionate, ruthless, innovative, inspiring and a relentless perfectionist – these are just a few of the words that have been used to describe the leadership of former Apple CEO Steve Jobs; and despite his oft-demanding, autocratic leadership, it would be a challenge to claim it didn’t work.

When Jobs took over as CEO of Apple in 1997 – having left 12 years earlier to found new firm NeXT – he joined a company that appeared to be on its last legs. Stock prices had plunged, board members had failed to find a buyer and losses that year had racked up to no less than $1bn. Michael Dell had reportedly stated that if it were up to him, he would “shut Apple down and give the money back to shareholders.”

Jobs didn’t waste time in taking action; he slimmed the 350 projects then in development to just 50, and then reduced them to a further 10 (with laptops and desktops for consumers and professionals at the core). “If we want to move forward and see Apple healthy and prospering again, we have to let go of a few things”, he said at the time, putting the emphasis on creating a new brand rather than competing with Microsoft.

He focused on design and simplicity – homing in on aesthetics in a way no other tech company had, exemplified in the Apple mouse – and invested in advertising, producing the ‘Think Different’ campaign to reflect Apple’s outside-of-the-box ethos. The iPod, iTunes and iPhone all followed, bringing a new consumer base to the brand that further propelled the company’s success. It clearly worked; Apple became the world’s first trillion-dollar company in 2018, and the first to hit the $3trn mark in early 2022, making it the most valuable firm on the planet by market capitalisation.

Working for Jobs wasn’t easy, according to some. He was known for his high expectations, perfectionism and desire for control, as well as an acute eye for detail (as an example, he reportedly noticed the second ‘o’ in the Google logo on the iPhone had a slightly different colour gradient and immediately assigned a team to it). “In the Macintosh Division, you had to prove yourself every day, or Jobs got rid of you,” wrote former Apple employee Guy Kawasaki in a CNBC article.
“He demanded excellence and kept you at the top of your game. It wasn’t easy to work for him; it was sometimes unpleasant and always scary, but it drove many of us to do the finest work of our careers.” Yet despite his demanding style, Jobs was passionate about what he did, and remained involved on every level throughout his career.

“Like many successful leaders, Jobs showed incredible grit, going through every wall and overcoming every setback despite the odds being against him,” says David Noble. “He had a big vision that set him apart from the pack – not just 10x dreams but 1,000x, and he set out a step-by-step pathway that would let teams and organisations know they were winning.”

His focus on innovation, artistry and challenging the status quo made him one of the most inspiring thinkers in history, preaching a philosophy summed up in his oft-quoted words: “Life can be so much broader, once you discover one simple fact, and that is that everything around you that you call ‘life’ was made up by people who were no smarter than you. And you can change it, you can influence it, you can build your own things that other people can use. Once you learn that, you’ll never be the same again.”

And the world wasn’t either.

Mary Barra
Chair and CEO of General Motors

When Mary Barra stepped up to the CEO throne at General Motors in 2014, she took on something of a challenge. It wasn’t just that she was the first woman to lead one of America’s top three car-makers (or one of the few females to head up any Fortune 500 company, for that matter). She had something of a turnaround job on her hands.

Just five years earlier, General Motors had filed for the biggest industrial bankruptcy in history – listing $82bn in assets and $173bn in liabilities – and got through five CEOs in the space of six years. Then a month into her tenure, GM was forced to recall 2.6 million vehicles due to a flaw in the switches (causing issues in airbag deployment). The crisis led to multiple accidents and more than 100 deaths, and a number of employees were dismissed.

Through honesty and transparency, Barra managed to navigate the crisis, publicly acknowledging the issue and launching a comprehensive investigation. She set about making various company changes, putting accountability top of the agenda and creating the ‘Speak Up for Safety’ programme to encourage employees to report issues. She also pulled the company from several markets including Western Europe, Russia, South Africa and India to home in on bigger money-making regions.

Since the crisis, Barra has continued to implement strategic changes – not least around the topic of sustainability. In 2016, GM introduced the Chevrolet Bolt EV with a battery that claims to outlast Tesla’s. The company has pledged to add 30 new electric vehicles to the fleet by 2025, with the vision of becoming fully electric by 2035. The firm is also investing in autonomous cars.

Barra is also a champion of equality, and there’s proof in the pudding; Equileap’s 2018 Global Report on Gender Equality found that GM was one of just two global businesses with no gender pay gap across the company. In 2020, she commissioned an Inclusion Advisory Board to encourage greater inclusivity, and she’s also a member of the OneTen coalition, whose goal is to cultivate economic opportunities for black talent in the US.

Many put Barra’s success down to her people-first approach and her ability to understand different perspectives, developed from first-hand experience working in a number of areas at GM – from engineering to human resources to product development. “My first job at General Motors was as a quality inspector on the assembly line,” she told Esquire. “I was checking fits between hoods and fenders. I had a little scale and clipboard. At one point, I was probably examining 60 jobs an hour during an eight-hour shift. A job like that teaches you to value all the people who do those type of roles.”

She’s also long been a preacher of hard work. “Hard work beats talent when talent doesn’t work hard,” she told Michigan Daily. “If you work hard, and you care about people and you have passion in what you do, you’ll do well.”

And she has a clear, powerful vision. “Under Barra’s leadership, GM envisions a world with zero crashes, to save lives; zero emissions, so future generations can inherit a healthier planet; and zero congestion, so customers get back a precious commodity – time,” reads her biography page on the GM website.

That formula has clearly paid off. Barra is number four on the current Forbes’ list of ‘The World’s 100 Most Powerful Women,’ and has been the highest-paid chief executive of the Big Three automakers for several consecutive years (earning $29.1m in 2021). GM brought in revenues of $127bn in 2021, holding the largest share of the auto market in the US at around 15 percent, according to Statista. That’s a far cry from the company’s position in 2009, when an article in The Economist stated that “no one believes that GM will ever return to its former glory.” Barra has proven the power of leadership in turning a company around, even when all hope seemed to be lost.

Sheryl Sandberg
Business executive, former COO of Facebook/Meta

When it comes to women in tech, Sheryl Sandberg is something of a pioneer. When she joined Facebook as COO in 2008 following a stint at Google, she helped revenues grow nearly 2,400 percent in the space of four years – from $153m in 2007 to $3.7bn in 2011 – bolstered largely by her focus on digital and mobile advertising. When Facebook went public in 2012, the company raised $16bn (with a valuation of $104bn), making it one of the largest IPOs in the history of the internet. By the time Sandberg announced in June 2022 she’d be leaving the company (now Meta), year-on-year revenue totalled more than $119bn.

But Sandberg’s work wasn’t only limited to the business side of things. When she joined Facebook’s board in 2012, she became the first woman to do so, and she’s been a proponent of gender equality ever since. She shot into the limelight in 2013 with her book Lean In: Women, Work and the Will to Lead – homing in on the systemic and societal barriers preventing women from taking up leadership roles – and later established the Lean In Foundation (now part of the Sheryl Sandberg & Dave Goldberg Family Foundation), overseeing grants and projects designed to help women across the world reach their goals; more than 50,000 women have since launched Lean In Circles across the globe.

Throughout her leadership, Sandberg emphasised the importance of confidence and self-worth, as well as supporting others. “The more women help one another, the more we help ourselves,” she wrote in Lean In. “Acting like a coalition truly does produce results. Any coalition of support must also include men, many of whom care about gender inequality as much as women do.” She’s also been vocal about her vision for a future where “there will be no female leaders. There will just be leaders.”

Sandberg has also garnered acclaim for supporting various philanthropic efforts – reportedly using around $100m of her Facebook stock to fund the Lean In Foundation and other charitable causes – and has been open about her ambition to use her power to better the world. “Leadership is not bullying and leadership is not aggression,” she told ABC News. “Leadership is the expectation that you can use your voice for good, that you can make the world a better place.”

Her career hasn’t been without criticism, however. As the face of a company linked to a number of data breaches, she’s come under fire from critics; in 2018, reports surfaced claiming that political consulting firm Cambridge Analytica had accessed data from more than 50 million Facebook users and used it to target voters, encouraging them to support Trump in the 2016 election. It led to widespread concerns over Facebook’s privacy, and a number of other accusations have cast a further shadow on the reputation of both Sandberg and the wider company. But Meta still counts more than three billion people among its user base, ranks the 12th most valuable company in the world and brings in annual revenues of over $100bn. Much of that is down to Sandberg and her willingness to “sit at the table,” create opportunities and ultimately challenge what it means to be a successful leader in today’s world – and many will long remember her legacy, in spite of the darker moments.

Elon Musk
Business magnate and CEO of SpaceX, Tesla and Twitter

If there’s one leader truly unafraid of pushing the boundaries, it’s Elon Musk. From his mission to get humans to Mars to his focus on electric cars, Musk doesn’t take impossible for an answer – and his controversial persona has only added to the intrigue.

From founding Paypal in the early 2000s (sold to eBay in 2002 for $1.5bn) to launching SpaceX and Tesla, he’s never been short of ideas – and the support to get him there. And against the odds, both have taken off somewhat spectacularly; in 2008, SpaceX won a $1.6bn NASA contract, two years later becoming the first private company to successfully launch, orbit and recover a spacecraft. Last September the company made history once again when it sent four passengers into space on the Inspiration4 rocket, marking the first ever orbit crewed solely by space tourists. Tesla has meanwhile become the biggest electric vehicle brand in the world, with sales of its Model 3 topping one million units globally in 2021 and revenue hitting $53bn.

As with Jobs, Musk’s leadership style hasn’t been without its critics; employees have pointed to his high expectations and tendency to make the decisions while micro-managing (Musk himself called himself a “nano-manager” in an interview with The Wall Street Journal). An anonymous former employee told Business Insider that “there was only one decision-maker at Tesla, and it’s Elon Musk.”

When he took over Twitter in October, he came under fire from far and wide for his drastic approach, including major cuts to the workforce and other controversial moves.

But others have praised his relentless drive, and an ability to motivate and inspire teams even in the face of failure. When Falcon One was lost during its mission in 2008, for example, Musk gave a speech that saw “the energy of the building go from despair and defeat to a massive buzz of determination,” in the words of former SpaceX head of talent acquisition Dolly Singh. “It was the most impressive display of leadership that I have ever witnessed,” she wrote in a post on Quora.

It’s perhaps that talent for boundary-pushing that has got Musk an almost cult-like following and given him a net-worth of $241bn; making him the richest person in the world. As with Jobs, it’s also his constant drive to question the status quo. “If something is important enough, even if the odds are against you, you should still do it,” he reportedly once said.

“The advice I would give is to not blindly follow trends,” he told CNBC. “Question and challenge the status quo.” Musk’s ambitions don’t end with his visions around electric vehicles, SpaceX and Twitter, of course.

He has spoken about launching a flying car at Tesla, and through another of his ventures, The Boring Company, is working on Hyperloop – an ultra-high-speed public transportation system that would transport passengers between cities in autonomous electric pods at 600mph. Another of his babies, Neuralink, meanwhile aims to integrate AI with the human brain in a way that would “enable someone with paralysis to use a smartphone with their mind faster than someone using thumbs,” in the words of Musk himself, in a recent Twitter post.

These visions might seem out there, but Neuralink already has the backing of Silicon Valley giants including Google parent Alphabet, and the company plans to launch clinical trials in humans in the near future. Realism likely isn’t a word that features in Elonism – and if there’s anyone who can achieve the seemingly impossible, it’s surely Musk.

Only time will tell what impact his Twitter takeover might have, or if we all end up living on Mars – but what is clear is that his bold, controversial visions appear to have skyrocketed him to success, even in the face of at times intense criticism and scrutiny.

Brazil is back

Posted on by itsupport

They tried to bury me alive, and here I am,” President-elect Lula told jubilant crowds in São Paulo as the vote count confirmed his victory in the Brazilian presidential runoff. The moment marked a historic comeback for the veteran politician, whose career and reputation were seemingly ruined when he was convicted of accepting bribes in Brazil’s watershed ‘Operation Car Wash’ corruption probe. Sentenced to 12 years behind bars, the former president was forced to watch the 2018 election from his jail cell. After serving 580 days in prison, his conviction was annulled, and Luiz Inácio Lula da Silva – known mononymously as Lula – re-entered Brazil’s political fray, finding his way back to the top job just three short years after his release from jail.

Despite the throngs of euphoric voters that filled the São Paulo streets as the election results poured in, Lula’s victory was by no means a landslide. After a divisive and bitterly fought election campaign, Lula defeated his far-right rival Jair Bolsonaro by the tightest of margins, winning 50.9 percent of the vote to the incumbent’s 49.1 percent. The knife-edge election was Brazil’s most closely fought contest since the end of its military dictatorship in 1985, reflecting a deeply divided and politically polarised society.

The Brazil that Lula now inherits is very different to the one he left

When he officially takes office in January 2023, Lula will be tasked with reuniting a fractured Brazil. The world’s fourth-largest democracy remains an extremely unequal country, with severe economic, social and geographic disparities that continue to hamper progress and slow growth. Many voters will hope that Lula can build on the successes of his first two terms, which saw 20 million Brazilians lifted out of poverty. But the Brazil that Lula now inherits is very different to the one he left when he last departed the presidential palace in 2011. COVID-19 dealt a hammer blow to the public purse, while stubborn inflation is eroding wages and pushing people back into poverty. In realising his vision for a better Brazil, Lula certainly faces an uphill struggle – but as his momentous comeback has shown, he doesn’t shy away from a hard fight.

Brazil’s own son
Politics can be a fickle game. Public support is hard-earned and easily lost, and longevity is by no means guaranteed. Few world leaders remain popular throughout their time in power, and fewer still are able to leave a lasting legacy once they have left office. Lula, however, has already succeeded on both counts.

Dubbed “the most popular politician on Earth” by former US president Barack Obama, Lula enjoyed tremendous support during his first two terms, leaving office in 2010 with an approval rating of nearly 90 percent. And it isn’t hard to see why Lula proved so popular among his peers and compatriots. Under his tenure, the country experienced rapid economic growth, while Lula’s commitment to anti-hunger programmes saw millions of people propelled out of poverty. In returning once again to Brazil’s highest office, Lula is putting his remarkable legacy on the line – in the hope that he can replicate his past successes.

A lifelong champion of the poor, Lula’s humble beginnings are central to his enduring appeal in Brazil. Born in the historically poverty-stricken north-eastern region of Brazil, Lula had to work from an early age to help to support his family, shining shoes and selling peanuts on the city streets as a young child. By his late teens, Lula had found employment as a metalworker in an industrial suburb of São Paulo – a physically demanding job that saw him lose a finger in a workplace accident when he was 19.

It was during this time as a factory worker that Lula developed an interest in advancing workers’ rights. At the encouragement of his union-activist brother, he joined the Metalworker’s Union and quickly rose through the ranks, becoming president in 1975.

In protest of the poor working conditions and routinely low salaries among Brazilian factory workers, Lula led a series of historic strikes between 1978 and 1980, spending a month in jail when the country’s military regime declared the strikes unlawful.

But a month in a prison cell couldn’t quash Lula’s newfound passion for social and economic justice. Shortly after his release, Lula founded the Workers’ Party, a progressive, left-wing political party that brought together a diverse array of union activists, academics and intellectuals.

From humble beginnings in the midst of Brazil’s military dictatorship, the Workers’ Party grew into an unstoppable political force in the decades that followed, with Lula eventually elected President of Brazil in 2002. For many Brazilians, Lula’s election marked the first time that they saw themselves represented in the country’s highest office. Unlike any other president in the nation’s history, Lula came from working class origins.

His lack of formal education and years spent toiling in high-risk, low-pay industries endeared him to millions of voters who had endured the same hardships over the course of their lifetime. But in order to keep the Brazilian people on his side, Lula had to make good on his bold election promises to eradicate hunger and bring an end to poverty. And in a nation rocked by economic crises and persistent inequality, this was certainly no small task.

A global powerhouse
When Lula first took office in 2003, the Brazilian economy was in something of a sorry state. The nation was weighed down by an immense debt burden, while the outgoing administration had failed in its promises to generate jobs and narrow the social divide. Many anticipated that Lula’s election would herald the end of neoliberalism in Brazil, ushering in an era of radical interventions and drastic revisions to economic policy. But this revolutionary approach did not materialise. Upon taking power, Lula surprised both his supporters and critics by adopting a much more conventional economic plan than had been anticipated.

Renewing all of the agreements that the previous administration had signed with the International Monetary Fund (IMF), Lula was prudent in his early policy-making, prioritising fiscal responsibility as he looked to calm jittery markets. This was ultimately a wise move. Brazil’s financial outlook rallied in the months following Lula’s victory, with his success in stabilising the economy allowing him to turn his attention to more radical social reform.

In a fortuitous turn of events, Lula’s election coincided with a surge in global demand for commodities. Driven largely by China and other emerging markets, the early 2000s commodities boom saw resource-rich Brazil enjoy a period of rapid economic growth. Boasting abundant supplies of foodstuffs and raw materials such as oil and iron ore, the South American nation was well-positioned to meet the demands of resource-hungry importers.

This country needs peace and unity. This population doesn’t want to fight anymore

Thanks to the skyrocketing demand for Brazilian products, Brazil saw its annual trade with China grow from $2bn at the turn of the century to $83bn in 2013. China became the country’s largest trade partner, with this lucrative relationship helping to drive down debt and boost growth. Lula successfully channelled the trade surplus of the commodities boom into help for the nation’s poor.

With the public purse now looking remarkably healthy, the state had the freedom to invest intensively in social programmes and poverty relief schemes. This included the expansion of the internationally lauded Bolsa Família cash transfer scheme, which was launched early in Lula’s first term. A radical programme targeted towards those living in extreme poverty, the Bolsa Família provided direct cash payments to poor families, on the condition that they would keep their children in school and take them to receive their required vaccinations.

According to the World Bank, 94 percent of Bolsa Família funds were directed towards the poorest 40 percent of the population, making it one of the most effectively targeted aid programmes in history. In directing windfall trade profits towards effective anti-hunger and anti-poverty programmes, Lula oversaw a historic rise in living standards among working class Brazilians, cementing his position on the global political stage and re-establishing the nation as an exciting ‘economy to watch.’

After years of underperformance and sluggish growth, Brazil was booming. By the end of Lula’s second term as president in 2010, the nation was something of a global powerhouse – both economically and culturally. Selected to host the 2014 World Cup and 2016 Olympics, the country had established itself as a significant player on the global scene, open for business, open for investment and open for visitors. Eternally cast as ‘the country of future,’ it seemed that, at long last, the future had arrived for Brazil.

From boom to bust
Brazil’s post-millennium boom was ultimately not to last. Over the past decade, the South American giant has been rocked by a series of economic, political and social crises that have destabilised the economy and left the country bitterly divided. In 2016, Lula’s successor Dilma Rousseff was impeached for supposedly manipulating government accounts. Around the same time, Lula’s own Workers’ Party became embroiled in the sprawling ‘Operation Car Wash’ corruption scandal, ultimately leading to the former president’s conviction and imprisonment.

As China’s appetite for imports cooled during its 2015 slowdown, the commodity boom that had fuelled Brazil’s growth also came to a shuddering halt. The nation entered a crippling and long-lasting recession in 2015, with the fall in commodity prices prompting the country’s deepest economic decline since records began. Once regarded as one of the fastest growing economies on earth, Brazil suddenly found that its fortunes had been reversed. For the first time in a decade, poverty began to rise and GDP began to fall. In 2018, discontented voters chose the far-right populist Jair Bolsonaro as the next president of Brazil, bringing an end to almost two decades of left-of-centre rule.

But a dramatic change in political leadership didn’t repair Brazil’s ailing economy. The 2015–16 recession had left deep scars, with a slow and fragile recovery leaving the country fiscally exposed. Then in early 2020, after six years of slow and oftentimes negative economic growth, COVID-19 arrived, and Brazil was plunged into yet another crisis. At the beginning of 2020, Brazil’s unemployment rate already stood at 12.6 percent, with the ongoing aftereffects of the recent recession continuing to affect both job opportunities and incomes (see Fig 1). The pandemic pushed joblessness to a record high, while an estimated 485,000 families were plunged into extreme poverty. As President Jair Bolsonaro publicly downplayed the severity of the virus, Brazil’s largely uncoordinated pandemic response saw it become one of the worst affected countries in the world. Recording in excess of 4,000 deaths on its darkest days of the pandemic, the nation suffered a simply catastrophic loss of life.

Despite the progress made during Lula’s first two terms, the pandemic further exacerbated the deepening inequality that has blighted Brazilian society over the past decade. A 2019 report by the United Nations found that the wealthiest one percent of Brazilians possess almost one third of the country’s entire income, with women, black Brazilians and the rural poor most severely affected by the inequality epidemic. Since the political-economic crisis of 2015, Brazil has pursued stringent fiscal austerity measures in an attempt to address the nation’s sizable deficit.

Significant cuts have been made to the social safety net that was created during the Lula administration, with the internationally admired Bolsa Família programme ultimately axed in November 2021. While perhaps the best-known in international circles, Bolsa Famiília is not the only Lula-era scheme to find itself on the chopping block – under Bolsonaro, a host of anti-poverty schemes and food security programmes have been cut at a time when they are needed most.

These austerity measures – coupled with the far-reaching impact of the pandemic – have had a devastating effect on the nation’s poor and vulnerable. Over half of the Brazilian population are now experiencing food insecurity, while a staggering 33 million are officially classed as hungry.

In little over a decade, Brazil has gone from a global powerhouse to a nation in severe social and economic decline. Once lauded as a future superpower, the country has instead become an international pariah, its reputation in tatters after years of pandemic mismanagement, environmental maladministration and fiscal chaos. Rebuilding Brazil will be a challenge of immense proportions – but it may just be the fight that Lula has spent his whole career preparing for.

Deep divisions
“Brazil is back!” President-elect Lula told euphoric crowds in São Paulo as he made his triumphant victory speech. “This country needs peace and unity. This population doesn’t want to fight anymore.” Many will share Lula’s desire for unity after what was a contentious and divisive election. Emotions ran high on both sides of the political spectrum in the lead-up to the presidential run-off, with misinformation and false accusations marring the election campaign. Left-wingers claimed that Bolsonaro was a cannibal, while right-wing bolsonaristas accused Lula of practising devil-worship. It was this fierce political polarisation that Lula sought to calm in his victory speech. Vowing to serve all Brazilians, and not just those who voted for him, Lula has made it clear that he intends to usher in a new era of social and political stability, bringing an end to the polarising politics of the outgoing administration.

Despite Bolsonaro’s insistence that “only God” could remove him from power, it now appears that Brazil is heading for a peaceful transition. Lula will assume office on January 1, 2023, and will inherit a daunting economic in-tray. With COVID-19 coming hot on the tails of Brazil’s worst post-war recession, the nation’s finances are in a very poor state. Inflation, while falling, is currently sitting at 6.5 percent, pushing the prices of everyday goods out of reach for many vulnerable Brazilians. Poverty is on the rise, particularly in the country’s rural northeast, and the growing national debt pile now stands at around 77 percent of GDP.

Against this challenging fiscal backdrop, Lula has promised to boost welfare spending and scrap the constitutional cap on government expenditure. What isn’t yet clear, however, is how Lula will achieve his ambitious campaign pledges in what remains a very limited fiscal space. There are echoes of his first two terms in his promises to eradicate hunger, build more affordable housing and improve living standards for the rural poor. He has also vowed to undertake a series of state-funded infrastructure projects, in addition to ushering in tax reforms and an increase in the minimum wage. Admirable goals, certainly, but Lula is likely to find that the public purse won’t stretch as far as it did during the 2000s commodities boom.

To make matters even more challenging, Lula also faces a congress largely dominated by Bolsonaro allies. The former president’s right-leaning Liberal party holds the largest number of seats in both the lower house and the Senate, potentially making life very difficult for leftist Lula. In order to find a way through, Lula will need to reach out to those in the centre ground – and compromise may become the order of the day.

Rising from the ashes
It is true that immense challenges lie ahead. Lula is set to inherit a deeply troubled country, against a decidedly gloomy global economic backdrop. But there may yet be some cause for cautious optimism. Lula’s post-millennium rise to power coincided with a worldwide commodities boom that saw resource-rich Brazil profit from an increase in demand for its exports.

Over the past 18 months, commodity prices have yet again been on the rise, with the COVID-19 recession and the ongoing Russian invasion of Ukraine causing severe supply chain bottlenecks and a globalised increase in demand for goods. Some market analysts have suggested that we may be at the beginning of a new commodities super cycle – with Brazil well-placed to capitalise on a sudden surge in prices.

Indeed, the nation’s agribusiness sector is booming thanks to the current sky-high prices of foodstuffs. A world leader in food supply, last year saw Brazil post a trade surplus of $61.2bn – the largest in its history. However, commodity prices are famously cyclical in nature, and prone to booms and busts. With experts predicting a short, sharp super cycle, Brazil may have a narrow window in which to capitalise on this uptick in prices – but it could provide the kickstart that the economy so desperately needs.

Lula oversaw a historic rise in living standards among working class Brazilians

On the international stage, meanwhile, Lula’s election has been warmly welcomed. ESG-conscious investors largely shunned Brazil during Bolsonaro’s presidency, in protest of the populist leader’s destructive environmental policies and controversial remarks. Lula’s promises to restore environmental protections and aim for zero deforestation are much more palatable to international investors – many of whom will also welcome the President-elect’s eagerness to pursue clean growth. If Lula is able to make good on his pledge to “reposition Brazil in the hearts of international investors,” the country could prove well-placed to attract significant foreign investment in the clean energy space. A shrewd negotiator and an experienced statesman, Lula may be able to soon restore Brazil’s reputation on the global stage – and an injection of foreign cash could well follow.

Significantly, financial markets are yet to be overly spooked by Lula’s early commitments to social spending. The nation’s GDP forecast for 2023 continues to rise, and despite some initial skittishness during the campaign trail, many in the financial world trust the returning president to take a pragmatic approach to government spending. Lula unexpectedly prioritised fiscal responsibility during his first term as president, and is expected to take a similarly realistic and practical approach to balancing the books when he assumes office in January.

When Lula was last in power, he achieved the seemingly impossible: maintaining fiscal discipline while boosting social spending and improving the lot of millions. Now returning for his third and supposedly final term, Lula’s priorities include fighting some familiar foes – hunger, extreme poverty and rampant inequality.

“If by the time I finish my term, every Brazilian is eating breakfast, lunch and dinner, I’ll have fulfilled my life’s mission once more,” the veteran politician said in a recent speech. If anyone can be counted on to achieve this noble goal, it may well be Lula.

Privacy versus Profits

Posted on by itsupport

A huge cyber-attack or data breach that cripples online activity is regularly listed as a major risk to global economic security, along with the physical risks of climate change and geopolitical conflict. Since British mathematician Clive Humby declared in 2006 that data is the oil of the 21st century, it has slowly dawned on governments, regulators, and companies that they have been sitting on goldmines for decades.

Along with this has come the realisation of the need to better protect this wealth of information. Enter the European Union’s General Data Protection Regulation (GDPR): a landmark 88-page piece of legislation that put data privacy and individuals’ rights on the map, introducing previously foreign concepts such as ‘the right to be forgotten’ to millions.

The overall thinking is not brand new – it is based on the 1995 Data Protection Directive, which is itself based on legal principles that have been in place since the 1970s. What’s different is the meaning of consent, and a clarification of the rights of individuals.

And if the measurement of success is awareness-raising among the general population, the GDPR has been remarkably successful: according to a 2019 (just a year after its implementation) study by Eurobarometer, nearly three in four people living in Europe were aware of at least some of their rights under the framework.

“GDPR has really popularised the sense of control, and its broad applicability is what makes it so impactful – it’s created a common language,” says Andrew Clearwater, chief trust officer at Atlanta-headquartered privacy management software service OneTrust. “Now you have millions of people with a broad expectation of what their rights are and how their data will be handled.”

One misnomer: while most of us learnt about it from the hundreds of ‘can we still contact you?’ emails from every company we’ve ever bought clothes or an appliance from, that was actually a separate law governing digital communications – the GDPR just tightened the meaning of consent for various pieces of legislation. The data protection rules themselves are more focused on how companies manage and store the personal data of individuals.

Not knowing how to answer a question on GDPR makes a company significantly less desirable to work with

“If I’d spoken to someone about what I do pre-2018 their eyes would glaze over – now they still might, but they will have at least heard of the GDPR,” says Jonathan Baines, chair of the National Association of Data Protection Officers in London (NADPO). “There is no business out there that does not process the personal data of individuals in some way – even a one-man building company has customers.”

And while it was the potential for huge, headline-grabbing fines that initially captured the attention of senior management teams, data privacy experts say it is this awareness-raising that has contributed the most to the law’s ongoing legacy. “While companies could respond by doing the bare minimum, for most, that new awareness has had a much bigger impact than a potential fine might,” adds Clearwater. “It means the bare minimum is just not enough compared to your competitors. Most have been forward thinking about helping their customers exercise their control.”

Measuring success
Determining the success of any legal framework is difficult and depends on its stated aims. For starters, it certainly seeks to address an existing problem. A common criticism of regulations is that they only solve past causes of crises and will not prevent future ones. But cybersecurity and companies’ handling of personal data is highly sensitive, and while the GDPR is about more than cybersecurity, a personal data breach that leaves customers open to hacking is likely to carry its most severe penalty.

“The concept of accountability is so important,” says Clearwater. Companies are required to maintain reams of internal evidence as proof of their compliance with the law. “That isn’t being broadcast endlessly, but it has to be there. And that creates this iceberg effect where users see a couple of small changes when they use a website, but below the surface, there are potentially hundreds of people engaging with records processing or vendor relationships in much better ways than in the past.”

From the earliest stages of product development to the way internal recruiters manage their databases, individuals at all levels and in all departments are expected to consider data privacy, says Edward Starkie, senior vice president of cybersecurity at risk consultancy Kroll. The intention was baking in “privacy by design” across every department of an organisation, he explains.

And while a whole new sector of privacy experts and firms purporting to be a one-stop-shop on GDPR compliance quickly sprung up around the regulation, for many companies, making use of one defeats the intended purpose of the framework. “There’s a perception within some businesses that these products are a silver bullet, but if you truly want to meet the intention behind the legislation, it has to be privacy by design,” says Starkie. “That can’t be achieved with the retrospective implementation of a tool.” Besides, Baines says that many of these were providing poor advice. Fundamental misunderstandings about what the law was intended to do – the confusion around digital marketing for example – led to some poor and incredibly costly mistakes, such as some companies dispensing with their entire marketing databases.

Data as an asset
If GDPR was about reining in the astronomical power wielded by Big Tech, it has been remarkably unsuccessful. A fair chunk of all fines have hit technology companies, with Amazon and Instagram paying the highest so far at $740m and $402m respectively, but they have barely made even a ripple in the ocean of enormous profits these companies report every year: in 2021 Amazon made approximately $33.4bn; Instagram parent company Meta took home around $39.3bn. While GDPR has undoubtedly improved the privacy rights of millions, these data farmers are still stockpiling vast reams of incredibly personal data and making billions of dollars every year out of selling it on – often at an enormous cost to society.

The difference between these companies and everyone else is that their whole business is personal data, so their privacy risk appetite is naturally much higher. “It makes a lot of sense for regulators to target the top tier – the Googles of the world which make money from not being compliant, compared to in other sectors,” he says. Mark Thompson, chief knowledge officer at the International Association of Privacy Professionals, seconds this. “Organisations are striving to work out what is the right level of personal data to minimise their liability but maximise their asset value,” he says.

Forever playing catch-up
Besides, law and regulation will always be playing catch-up to industry, particularly when it’s one as fast-moving as technology, says Jenna Franklin, co-chair of the data protection finance group at law firm Bird & Bird in London. And the EU’s fight on data privacy and governance continues: still in the pipeline are the Data Governance Act, the Data Act, the Digital Markets Act, Digital Services Act, the Artificial Intelligence Act, the Digital Operational Resilience Act, and the second Network and Information Security Directive.

“There’s always a tension, particularly with data protection rules, where regulators don’t want to stifle innovation – but they have to weigh that with the impact on the individual and how we protect their rights,” says Franklin. The COVID-19 pandemic and the remote working revolution it prompted certainly made things more difficult. While the GDPR requires data controllers to report breaches within 72 hours of becoming aware of them, a 2020 IBM study found that the global average time to identify and contain was an enormous 280 days. EU countries tended to perform better than others, but not by much.

Unfulfilled potential
Despite the eye-catching headlines around the GDPR’s potential for record-breaking fines, the penalties themselves have not come close to fulfilling their true potential. While information regulators technically have the power to hit companies with a fine of up to four percent of annual global turnover, the majority have not come close to that. Not all penalties are publicised by data protection authorities, but most have been under six figures, which for most companies is a mere drop in the ocean of the billions of dollars in profits each year.

We still have clients coming to us and saying ‘we’ve not done anything for GDPR – please help us’

“There was so much hype built up around the potential for fines that I don’t think it was ever going to match the reality – there was a lot of fear mongering around this four percent figure,” says Starkie. Clearwater says that beyond the big technology companies whose very business is personal data, it’s difficult to identify trends in enforcement, with fines hitting consumer goods, finance transportation, retail and hospitality all fairly evenly.

But Franklin says the conversation around fines served an important purpose at the start of implementation when it came to raising awareness among senior management. “When we were building our initial business case, the prospect of big fines was a helpful stick to encourage the board to take the rules seriously,” she says. “It made it clear that data protection is a financial risk, and generally across the board, resulted in really good compliance programmes.”

The pandemic had an impact here, with many regulators sympathetic to the major changes in business practices and the strain this put on internal systems and technology. But while working from home is here to stay for many, those days of understanding may well be over. After a slow start, regulators have recently stepped things up a gear. Fines increased by 92 percent, and the average total is rapidly climbing from five-figure totals in the earlier stages.

“The scariest part for businesses is still the risk of fines, in part because the financial damage of a large fine is inseparable from the reputational damage – a large fine will always get a large amount of coverage in the press,” says Baines. “It’s true that those future-defining fines just haven’t materialised yet though. I think that comes down to the way UK regulators do things.”

The UK is culturally different from the US in this respect, he explains, with regulators generally preferring to work with businesses. It’s also down to a GDPR stipulation that fines must be proportionate. “I think the conclusion is that only in very rare circumstances would it be proportionate for a data protection breach to effectively end a business,” he adds.

It’s who you know
Another fundamental shift has been in the management of vendor relationships. Clearwater says that who companies work with has become a much more important measure than it was in the past, here drawing a parallel between the GDPR and companies’ sustainability efforts when it comes to managing relationships with third parties. “The material way of moving forward with your sustainability commitments is going to be either choosing the vendors that are on the journey with you, or moving to those that are,” says Clearwater. “In the same sense, not knowing how to answer a question on GDPR makes a company significantly less desirable to work with, which can have a big impact on business.”

Starkie, who regularly advises on the data protection elements of joint ventures, mergers and acquisitions, seconds this. “In a number of cases we’ve come across where there has been a [data protection] breach, while it hasn’t necessarily killed the deal, it’s definitely delayed it,” he says. “There are a lot more considerations that now need to be taken into account: what individuals are impacted? Which privacy jurisdictions do they fall under? What is the potential for fines? In that sense, privacy has become just like all other risks businesses must consider.”

As a general rule, compliance has been harder for long-running businesses with legacy systems that were used to handle personal data pre-GDPR, says Bird & Bird’s Franklin. Within financial services, for example, it’s in many ways easier for a fintech company or challenger bank with new systems and customers that have only been on the books for five or so years to integrate the concept of privacy by design than it may be for a traditional bank with decades-worth of customer data to grapple with.

“Newer companies tend to have the technology advancement and without the headache of legacy systems,” she says. “In that sense I would imagine regulators might come down harder on a fintech for noncompliance – it’s easier to meet the requirements of GDPR as a start-up or scale-up than it is a traditional institution.”

A delicate balance
As with most regulation, the typical business isn’t looking for 100 percent compliance, says Kroll’s Starkie. Most are looking for “a degree of compliance that demonstrates the intention to do the right thing,” he explains. “No one wants to be vulnerable to being picked off from the back of the pack, but there are no major returns for being right at the front either – there’s a real herd mentality at play,” he explains. “We still have clients coming to us and saying ‘we’ve not done anything for GDPR – please help us.’ I would say there was definitely a perception that the whole pack would be much further ahead than it is by now.”

GDPR has really popularised the sense of control, and its broad applicability is what makes it so impactful – it’s created a common language

The conviction with which this view is held varies between types of businesses, of course. “There are some industries or organisations where their entire strategy is based upon having a strong reputation – industries where individuals can quickly change between products and services for instance,” adds Starkie. “The risk of a data breach is very real for them. But for others, I would be interested to see the data on how many individuals have exercised many of their rights under the GDPR. I think it would be quite small.”

Either way, study after study has shown that privacy is important to consumers. A 2016 survey by KPMG revealed that more than half of respondents had decided against buying a product or service online due to privacy concerns. Three-quarters said they were uneasy with the idea of their online shopping data being sold on to third parties, with social media, gaming and entertainment companies singled out as those being most intrusive with personal information.

The long arm of European regulation
Another potential barometer of success is just how many other governments have followed suit in the years since GDPR implementation. Similar laws now exist in dozens of countries including Bahrain, Indonesia, Israel, Japan, Kenya, New Zealand, Nigeria, Turkey and South Korea – along with others. Arguably the highest profile is the state of California’s Consumer Privacy Act (CCPA).

And while the CCPA was initially perceived to be much weaker than the GDPR, its first settlement landed in early September, with cosmetics company Sephora fined $1.2m for failing to inform customers that it was selling their data on.

Baines says that the European Commission’s two goals were protecting individuals’ rights and facilitating business. “That second piece is often overlooked though,” he says. “The homogenisation of data protection frameworks actually makes business easier and has had a significant effect on the way tech companies are run. They are a bit like tankers: they take a while to move. Nearly five years on from GDPR sounds extraordinary, but we’re only really now seeing its effect extending across the globe.”

One country where the GDPR’s future may be uncertain, however, is the UK. While the UK is not obliged to retain the rules on its statute books since leaving the EU, it has thus far. But that was cast into doubt in early October at the Conservative Party conference when newly appointed culture secretary Michelle Donelan said the rules were “limiting the potential of our businesses.” Privacy experts were quick to point out that the global nature of the internet means it is not as simple as abolishing the GDPR. Most have taken this with a pinch of salt, arguing that it is more a political statement than anything else.

Power to the people
Complacency may remain rife among certain businesses today, but that could be a future-defining business risk for some because as Baines argues, the true potential of GDPR simply has not been realised yet. “Businesses are conscious of the costs of compliance, and this will depend on the type of business. But those that have experienced aggrieved employees or customers making requests for their data are certainly mindful of how costly it can be,” he says. “Say you have a large customer base and a big chunk of them becomes aggrieved, maybe because there’s been publicity around a data breach or some sort of consumer rights-style campaign. The sheer cost of dealing with that would be a real business risk, before you’ve even got to a regulatory issue.”

A common criticism of regulation is that they only solve past causes of crises and will not prevent future ones

There was a hint of this over 10 years ago when Austrian law student Max Schrems picked a fight with Facebook over its handling of personal data. He pointed out that the social media giant was unlawfully transferring personal data between Europe and the US, and his work forced the European Commission to twice change its rules on transatlantic data transfers. Another Max Schrems could be highly effective.

There is also the potential for class action lawsuits, in which large groups of affected individuals can bring a collective case. One such case was brought against Google with a $5.5m settlement approved by a US district judge in February 2017, and momentum appeared to be building around that time, says Baines. The decision was ultimately struck down and the market went quiet, but it could change, he adds.

“If that had been successful we’d have seen a hell of a lot more litigation, but it went completely cold – these cases haven’t been as successful as some hoped or expected, but the litigation market is nothing if not ambitious,” says Baines. And these remain frontier times for the online world, with today’s generation mere guinea pigs. As big technology companies become ever more intrusive, most people are more focused than ever on their rights. The rules are in place – it is time individuals made the most of them.