Max Tomlin | World Finance

Why investing in STEM industries could drive growth in the US’ ailing southern states

Posted on July 14, 2017July 19, 2017 by Max Tomlin

“Sadly, the American Dream is dead”, were the despairing words of Donald Trump as he announced his presidential bid back in July 2015. For all the business mogul’s false claims during the ensuing campaign, this is one that might just ring true.

According to research conducted by the Equality of Opportunity Project, the American Dream is indeed fading, and children can no longer expect to enjoy a higher standard of living than their parents. In 1940, a phenomenal 90 percent of American 30-year-olds earned more money than their parents at the same age. Now, that figure has dropped to just 50 percent (see Fig 1).

The Great Recession and the Not-So-Great Recovery have had a profound impact on the lives of most Americans, creating new economic hurdles and aggravating the existing challenges of poverty, unemployment and income inequality. While this economic strain has certainly been felt all across the US, its impact is most stark in the American South.

For several decades now, the southern states have been trapped in a cycle of economic and social decline. Four of the five poorest US states are concentrated in the South, with poverty rates soaring across the region. Southern states also have the lowest rates of upward mobility in the country, meaning a child born in the South is less likely to rise out of poverty than if they had been born in a different region of the US.

Overall, around seven percent of American children born in the bottom fifth of income distribution will make it to the top fifth in their lifetime, whereas approximately 13 percent of low-income children will do the same over the border in Canada. In the South, however, decades of acute intergenerational poverty mean children are much less likely to climb up the income ladder, with just four percent of the population moving from the bottom bracket to the top.

According to Benny Goldman, a predoctoral fellow at the Stanford Institute for Economic Policy Research: “If you’re born into one of these disadvantaged families in the south-eastern states, then the chance that you’ll ever reach the top 20 percent when you’re older is very small.” Lagging behind the rest of the US in upward mobility, employment rates and wages, the South is in dire need of an economic miracle.

Manufacturing misfortune
In 1938, as the US struggled to recover from the Great Depression, Franklin D Roosevelt declared the South to be “America’s economic problem number one”. Once a rich and prosperous region, the southern economy was crippled by the Civil War and the lengthy Reconstruction Era, and by the time the Great Depression hit in 1929, the region had fallen behind the rest of the country in terms of household income, wages and job security. This trend continued throughout the 20th century, and today the South remains a profoundly troubled region.

Similarly to the rest of the US, the southern states have seen a steady decline in their manufacturing industries, with thousands of factory workers losing their jobs to automation and cheap Chinese labour. In the South, however, most of these job losses have occurred in the region’s formerly ubiquitous textile industry. In North Carolina, for example, 40 percent of jobs were concentrated in textile and apparel manufacturing in 1940, but by 2013, the industry accounted for just 1.1 percent of the state’s jobs.

Between 1997 and 2009, around 650 textile plants closed in the southern states, leaving thousands of workers without jobs and depressing entire communities (see Fig 2). The blue-collar economic heyday of the 1970s is now long over, but many states have failed to adjust to this new commercial landscape.

While the economic strain of the Great Recession has certainly been felt all across the US, its impact is most stark in the American South

There are stories of manufacturing losses occurring all over the US – particularly in the once-powerful Rust Belt – but the South has been hit by the double whammy of job losses and low median incomes. Southern states have long been hostile to organised labour and unionised work, and five states still have no state minimum wage.

For workers in Alabama, Louisiana, Mississippi, South Carolina and Tennessee, wages need only comply with the federal minimum of $7.25 an hour and $2.13 for tipped workers, driving a low-wage economy. This culture is particularly alarming for the region’s auto industry workers, who frequently engage in high-risk work for comparatively little financial reward.

While the South has experienced a rapid decline in its textile industry, car manufacturing is now enjoying something of a resurgence throughout Alabama, Georgia and Mississippi. Between 1980 and 2013, the number of auto industry jobs in the South increased by 52 percent, with 26,000 workers employed in the field in Alabama alone. And yet, far from being a welcome manufacturing renaissance, the phenomenon represents a race to the bottom by profit-motivated auto parts suppliers.

Factory workers are expected to work gruelling 12-hour shifts, often for six or seven days a week. Pay is universally low, and little thought is given to worker safety. According to the Bureau of Labour Statistics, southern workers at parts suppliers earn just 70 cents for every dollar earned by their Michigan-based counterparts. Safety violations are all too common, often resulting in serious injury. In 2015, the chances of losing a limb or finger in an Alabama parts factory was 50 percent higher than the national average risk for the industry.

These jobs may provide a way to escape the demoralising cycle of unemployment, but low-wage, high-risk industries aren’t the answer to the South’s economic woes.

Separate and unequal
Joblessness and depressed wages do indeed lead to low family incomes, but economic decline is not solely to blame for the South’s alarming poverty rates. Interestingly, when examining upward mobility in the US, the Equality of Opportunity Project observed a correlation between low mobility and areas of concentrated racial segregation.

“Segregation along many different fronts appears to be related to upward mobility rates – with the strongest correlation being racial segregation”, said Goldman. “In places where there is less racial segregation, this seems to help children to climb the income ladder.”

Newly released census data shows that black-white segregation is in modest decline across America, but still remains high in most large US cities. Some 50 years after the end of legally enforced segregation, black and white Americans still often inhabit vastly different neighbourhoods, with African Americans more likely to live in areas of concentrated poverty. While the nation’s decades-old discriminatory housing policies are certainly somewhat to blame for the current state of residential segregation, the phenomenon has been further aggravated by instances of ‘white flight’ from the inner cities to the suburbs, and the use of excusatory redlining practices.

According to a report by the Pew Research Centre, in 2014 the median household income for black Americans was just $43,300, compared with $71,300 for white Americans. As such, African Americans are often priced out of the more affluent, majority-white suburbs, and are therefore denied access to the same public services.

“In the United States, school funding is largely done via property taxes”, Goldman explained. “So if you have an area that’s very wealthy, with high property taxes, then that school is going to be well funded.” Of course, the inverse is true for low-income neighbourhoods: tying school funding to property taxes means children from the poorest families will most likely attend underperforming schools, further entangling them in a vicious cycle of poverty.

Southern states have long been hostile to organised labour and unionised work, and five states still have no state minimum wage

According to Ted Ownby, Director of the Centre for the Study of Southern Culture at the University of Mississippi: “Today, we’re seeing a very different type of racial segregation… It’s not based on laws and rules as it was in the past, but it certainly has to do with zoning, educational access and economic access, and it has strong connections to the issue of race.”

Racial segregation remains a crucial issue in cities throughout the nation, but is perhaps felt most keenly in the South. Between 1970 and 2010, segregation levels increased in just six metropolitan areas across the US, but five of these (Birmingham, Chattanooga, Gadsden, Mobile and Monroe) were located in the southern states. The social segregation of the Jim Crow era might be long over, but modern residential segregation has become a poverty trap for many southern African Americans.

Incarceration at a cost
When examining the causes of economic decline and spikes in poverty in the US, many social scientists have begun to point to one key factor: mass incarceration. With a 500 percent increase in the number of imprisoned people between 1985 and 2015, the US is by far the world leader in incarceration. Aside from the ethical implications this phenomenon presents, large scale imprisonment also has a profound impact on the economy.

The 2.2 million people currently behind bars in the US are unable to contribute to society through work, and stand a poor chance of finding gainful employment once released. Meanwhile, it costs taxpayers approximately $31,286 per year to house one inmate in a state prison, putting a significant drain on valuable state resources.

“The prisons system takes an extraordinarily large number of people – especially African American men – and pulls them out of the potential workforce”, said Ownby. “It has such a dreadful set of consequences for the whole society, with economic, personal and family-related implications. People’s lives are essentially taken away, and they are turned into non-citizens, non-voters and non-contributors to the economy.”

When it comes to mass incarceration, the US’ southern states are some of the most punitive. Louisiana has the highest rate of incarceration in the country, with a staggering 776 people imprisoned for every 100,000 citizens. Similarly, the states of Alabama, Mississippi and Georgia all have incarceration rates well above the national average, and also have some of the US’ harshest felony voting laws. All of the southern states employ the death penalty, yet despite the ‘tough on crime’ legislation of the past four decades, longer sentences and high incarceration rates have not played an effective role in reducing crime and recidivism. Indeed, despite having an incarceration rate 13 times higher than that of China, Louisiana still has one of the US’ highest rates of violent crimes.

Instead of tackling crime, mass incarceration has proved counterproductive and costly, taking a significant toll on already stretched southern state budgets. According to the US Department of Education, over the past three decades, state spending on prisons has increased at triple the rate of funding for education, leaving public schools underfunded and underperforming. Louisiana’s budget deficit is expected to reach $313m in 2017, prompting a fresh wave of cuts to higher education and healthcare, while the state attempts to maintain its spending on corrections.

“For far too long, systems in this country have continued to perpetuate inequality”, said then-US Secretary of Education John B King Jr in 2016. “We must choose to make more investments in our children’s future. We need to invest more in schools, not prisons.”

Hung out to dry: around 650 textile plants closed in the southern states between 1997 and 2009

Diseases of despair
The prisons system isn’t the only thing tearing families apart in the US South. Over the course of the past two decades, the misuse and abuse of opioid medications has become a public health crisis, now claiming more than 33,000 lives each year. The opioid epidemic has been called the worst health crisis in US history, with more deaths caused by opioid overdose today than from HIV/AIDS at the peak of the pandemic in the 1990s.

The opioid crisis is now a nationwide epidemic, though the southern states consistently issue the largest number of painkiller prescriptions: in Alabama and Tennessee, there are approximately 143 opioid prescriptions for every 100 people. Just like other so-called ‘diseases of despair’ (heavy drinking, drug addiction and obesity) opioid abuse is most common in areas of extreme poverty.

According to Goldman: “When you look at the southern states, where you have some strong pockets of abject intergenerational poverty, then it’s perhaps unsurprising that those are the areas where crises like these tend to pop up.” Indeed, the Equality of Opportunity Project has used big data to measure the impact of income on average life expectancy, and has discovered that the richest American men can expect to live 15 years longer than the poorest, while the richest American women tend to live 10 years longer than women on the opposite end of the income scale. While it may not entirely explain this discrepancy in life expectancy between the nation’s rich and poor, the spike in deaths from diseases of despair and opioid overdoses could be a contributing factor behind the lower life expectancies of impoverished Americans.

What’s more, while southern Americans are more likely to suffer from chronic illnesses and general ill health, they are also less likely to receive health insurance than if they lived elsewhere in the country. Millions of southerners are currently eligible for coverage under Medicaid, but many states are yet to adopt the healthcare programme. Without adequate insurance policies in place, ill health can have a severely destabilising effect on families already struggling to make ends meet.

The South rising
“I think most of us dwell too long on the causes of the South’s difficulties and too briefly on what is to be done about them”, said Franklin D Roosevelt advisor Harry Hopkins during a nationwide address in 1938. The region might have been President Roosevelt’s “economic problem number one”, but he wasn’t prepared to give up on the once-prosperous South. Now, nearly 80 years on, it is more crucial than ever that the US finds a solution to the South’s economic decline.

4 out of 5

of the poorest US states are located in the South

650 textile plants closed in the southern states between 1997 and 2009

52%

The increase in the number of auto industry jobs in the South between 1980 and 2013

776 people are imprisoned for every 100,000 citizens in Louisiana – the highest rate in the US

The southern states have a host of socioeconomic hurdles to overcome, but there are certainly some bright spots in the region’s future. For some time now, mayors and governors have been looking to attract tech companies and workers to the area, and their efforts are now beginning to pay off. The city of Huntsville, Alabama has become something of a southern tech hub in recent years, with science, technology, engineering and mathematics (STEM) workers accounting for a remarkable 16.6 percent of the workforce.

Atlanta boasts more than 166,690 hi-tech workers, while Chattanooga has invested in superfast internet in order to lure tech companies to Tennessee. With these STEM workers earning good salaries, the hope is that this money will quickly pour back into the local economies, providing much needed support to public schools, health services and businesses.

Aside from these flourishing tech communities, the South also stands to benefit from a renewed interest in the region’s historic and contemporary culture. “Cultural tourism presents something of an economic opportunity for the South”, said Ownby. “Different pockets of the American South have things to offer that the rest of the world is interested in, such as Appalachian life, for example, or country music or the stories of the civil rights movement.”

Moulded by a unique history and boasting a strong regional identity, the South has long exerted an influence over American popular culture. Now southern states are beginning to ask themselves how their local communities might be able to benefit from the lure of the South, and how to best promote cultural tourism as an attractive industry.

Goldman explained: “It’s not as if the American Dream is dead across the board – there’s some places that are doing very well and others that are doing very poorly.” Indeed, while the South might be struggling to boost upward mobility, the good news is that, across the US, there are some areas that are performing strongly. If social scientists can identify what makes cities such as Minneapolis and San Jose so good at propelling low-income children up the income ladder, then this can be applied to social planning strategies elsewhere.

From joblessness to diseases of despair, the South has a long list of economic woes to contend with. And yet the region has shown remarkable resilience and adaptability in the face of adversity. As local governments turn their attention to courting new industries and encouraging economic diversity, the southern states are beginning to dip their toes into much-needed new revenue streams. The American Dream might be fading, but the South is intent on keeping it alive.

Drawing in the reins

Posted on July 14, 2017June 27, 2017 by Max Tomlin

The rise of anti-globalisation political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. After all, lest we forget, the current arrangements – as pressured as they are – reflected our post-World War II forebears’ strong desire to minimise the risk of ‘beggar-thy-neighbour’ national policies, which had crippled growth, prosperity and global stability in the 1930s.

Similar considerations fuelled the launch, nearly 50 years ago, of the International Monetary Fund’s (IMF’s) Special Drawing Right (SDR) as the precursor to a global currency. And with renewed interest in the stability of the international monetary system, some are asking – including within the IMF – whether revamping the SDR could be part of an effective effort to re-energise multilateralism.

Safeguarding the monetary system
The original impetus for the SDR included concerns about a national currency’s ability to reconcile the need for global liquidity provision with confidence in its role as the world’s reserve currency – what economists call the ‘Triffin dilemma’. By creating an international currency that would be managed by the IMF, member countries sought to underpin and enhance the international monetary system with a non-national official reserve asset.

Legal and practical factors, as well as some countries’ political resistance to delegating economic governance to multilateral institutions, have prevented the SDR from meeting its creators’ modest expectations, let alone the grand role of a truly global reserve currency that anchors the cooperative functioning of a growth-orientated global economy. Information and other market failures have added to the challenges, as have weak institutional infrastructure and inadequate branding. The result is a substantial gap between the SDR’s potential and its performance.

That gap has meant missed opportunities for the global economy – particularly in terms of asset-liability management, responsive liquidity, adjustment between deficit and surplus countries – and thus a gap between actual and potential growth. With the SDR providing a stronger glue at the international monetary system’s core, prudential currency diversification could have been made easier, the need for costly and inefficient self-insurance could have been reduced, and the provision of liquidity could have been made less pro-cyclical.

The winds of change
So, do today’s anti-globalisation winds – caused in part by poor global policy coordination in the context of too many years of low and insufficiently inclusive growth – create scope for enhancing the SDR’s role and potential contributions?

Legal and practical factors have prevented the SDR from meeting its creators’ modest expectations, let alone the grand role of a truly global reserve currency

Addressing this question, were it to gain traction, would involve a focus on an ecosystem of SDR use, with the composite currency – which last year added the Chinese renminbi to the British pound, euro, Japanese yen and US dollar – potentially benefiting from a virtuous cycle. Specifically, the SDR’s three roles – an official reserve asset, a currency used more broadly in financial activity, and a numeraire – could ensure greater official liquidity, expand the range of new assets used around the world in public and private transactions, and boost its use as a unit of account.

Of course, given the advanced economies’ embrace of more inward-looking, populist and nationalist politics, a ‘big bang’ approach to reinvigorating the SDR is highly unlikely. Even an incremental approach, starting with practical low-hanging fruit that does not require amendments to the IMF’s Articles of Agreement, would face political challenges. But it would be worth considering.

Areas of focus would include using the SDR for some bond issuance and trade transactions, developing market infrastructure (including payments and settlement mechanisms), improving valuation methodologies, and gradually developing a yield curve for SDR-denominated loans and bonds. This would also help to leverage the interconnectedness of the SDR’s roles, in order to reach critical mass quickly and have a foundation for further incremental gains. For the effort to succeed, the IMF’s approach would need to evolve – just like it did on country-specific issues.

Delivering on promises
When I joined the IMF in the early 1980s, discussions with non-government counterparts, whether on country or policy work, were discouraged. The situation today is very different. Broader national engagement with NGOs, local media and a broad set of politicians is now viewed as an integral part of effective country advice and programme implementation, as well as being essential for the fund’s ‘surveillance’ function under its Articles of Agreements.

A similar pivot is needed if the IMF is to deliver better on the supranational issues that are now migrating up its policy agenda. Specifically, the fund would need to complement its traditional core constituency of governments and other multilateral institutions (particularly the World Bank) with systemically influential subnational and private counterparts. The resulting public-private partnerships would enhance issuance, the development of market infrastructure and liquidity provision for the SDR.

While it is not easy to combine developmental and commercial activities, the implications for global growth and stability of not doing so suggest that it is an effort that should be explored. Moreover, the IMF could start small, focusing on interactions with other official multilateral and regional institutions, sovereign wealth funds, and multinational financial companies – all anchored by an active coalition of the willing among the G20.

In an ideal world, the SDR would have evolved into more of a reserve currency during the era of accelerated trade and financial globalisation. In the world as it is today, the international monetary system faces two options: fragmentation, with all the risks and opportunity costs that this implies, or an incremental approach to bolstering the global economy’s resilience and potential growth, based on bottom-up partnerships that facilitate systemic progress.

© Project Syndicate 2017

Saudi-led sanctions set to remain despite Qatar-US anti-terror agreement

Posted on July 12, 2017July 17, 2017 by Max Tomlin

On July 11, the US and Qatar signed a memorandum of understanding to track the flow of terrorist financing, a move that hopes to ease the diplomatic crisis currently embroiling the Gulf states. The agreement was signed in Doha by US Secretary of State Rex Tillerson and the Qatari Foreign Minister Sheikh Mohammed bin Abdulrahman Al Thani, and will see the two nations collaborate more closely in the fight against terrorism.

Speaking after the signing of the agreement, Tillerson praised Qatar for its anti-terrorism stance, and expressed his optimism the Gulf dispute would soon be resolved: “I am hopeful we can make some progress to begin to bring this to a point of resolution.”

The deal represents progress in Tillerson’s efforts to resolve the ongoing diplomatic crisis between the Gulf states, which has seen Saudi Arabia, Egypt, Bahrain and the United Arab Emirates attempt to politically and economically isolate Qatar over its alleged links to Islamic extremism.

Tillerson has praised Qatar
for its anti-terrorism stance, and expressed his optimism the Gulf dispute would soon be resolved

On June 5, Saudi Arabia, Bahrain and the UAE issued statements announcing they would be cutting diplomatic and economic ties with their Gulf neighbour. From this date, the respective governments gave Qatari citizens 14 days to leave their countries, and banned their own citizens from visiting Qatar.

All air and sea travel between the Saudi-led group and Qatar has since been banned. Qatar’s only land border with Saudi Arabia has also been shut, depriving the nation of its main source of food. As a result, Qatar has been forced to airlift food supplies from outside of the Persian Gulf, as well as rerouting flights for its citizens.

Banks in Saudi Arabia, the UAE and Bahrain have also begun to cut their exposure to Qatar, with some lenders withdrawing deposits from Qatari banks and ceasing the trade of riyals and bonds. As fears mount over the potential imposition of financial sanctions on the nation, there is a deepening sense of uncertainty among businesses in Qatar. While Qatar is one of the world’s richest nations, it has been left reeling by the sustained decline in the price of oil, and a comprehensive economic embargo would prove extremely costly for the Gulf state.

Until now, Qatari efforts to end the sanctions and resolve the dispute have failed. The Saudi-led group has issued Qatar with a 13-point list of demands, which include severing links with the Muslim Brotherhood, curbing diplomatic ties with Iran and closing the Al Jazeera television network, but Qatar has been hoping to meet a compromise.

As part of his four-day tour of the Persian Gulf, Tillerson is also due to meet with Saudi officials in a further attempt to resolve the standoff between the disputing nations.

A taxing issue: how to navigate Latin America’s complex withholding tax regulations

Posted on July 12, 2017July 17, 2017 by Max Tomlin

Understanding tax regulation can be challenging at the best of times. In much of Latin America, rules around withholding taxes on B2B transactions vary so greatly it can dramatically hinder efficient business.

This fact is especially concerning when it comes to the consequences of non-compliance. For example, in Argentina, failure to pay withholding taxes can result in hefty fines of up to 10 times the amount not paid. Effectively managing B2B transactions, therefore, is of the essence.Doing so, however, requires an in-depth understanding of the individual, country-specific regulations that govern each jurisdiction.

World Finance spoke to Ana Paula Maciel, Tax Content Manager at leading tax solutions firm Vertex, and Ernesto Levy, Senior Leader of Global Indirect Tax at Intuit, to find out more about how Argentina, Brazil and Mexico differ in regulations, and what businesses can do to streamline their processes.

Untangling the complexities
In Maciel’s words: “Withholding tax is a government requirement for the buyer of goods or services to deduct a specific amount from the payment made to the supplier.” However, what sounds simple in theory is far more complex in reality, especially when various external factors – such as the various levels of government at play (federal, provincial and municipal) and frequently changing rules – are taken into consideration.

“Several common challenges crop up when tax functions address withholding tax requirements in Argentina, Brazil and Mexico, not least because each country has multiple forms of withholding taxes, rates and procedures”, said Maciel. “Rules, rates and calculations are subject to frequent adjustments and legislative changes, especially during periods of economic stress, in which governments are hungry for faster ways to collect revenue. Tax managers grappling to manage withholding taxes in these countries may feel that the rules, scattered throughout government layers, change at least every 100 days.”

When it comes to withholding, Brazil and Argentina are two of the most complex countries in the world. This is not helped by the fact that, in the latter country, a collection regime also applies, whereby the seller is mandated by the government to collect an advanced payment of taxes from the buyer at the time of invoicing.

The issue with Argentina
Both of these regimes are used heavily in Argentina; they can be found at the federal, provincial and municipal levels of government (see Fig 1) and are applied within almost all tax types, including income tax, VAT and turnover tax. According to Levy: “This approach complicates business and tax compliance in the country. Tax departments must collaborate closely with finance and accounting teams, investing significant time in tax management and compliance activities.”

Then there are the various regulations within each government level: on the federal side, almost all goods and services are subject to withholding income tax, and the majority of registered taxpayers are required to act as withholding tax agents. There are, however, some exemptions, including chargebacks, currency exchange transactions and payments made to government institutions.

“The calculation is highly complex, in part because it requires the buyer to track all payments made to each taxpayer within a specific category throughout the month”, said Levy. “The total payments made for each category must then be compared to each threshold.”

When it comes to VAT withholding, rates in Argentina vary depending on the type of goods or services being supplied – ranging from 50 percent on the sale of goods and certain construction services, up to 100 percent for ‘blacklisted’ taxpayers identified as high risk by the authority.

While this sounds confusing, things get even trickier at the provincial level. According to Maciel: “At this level, Argentina’s approach to withholding and collection taxes applied to turnover tax qualifies as complex.” There are 24 autonomous tax jurisdictions, and each one handles withholding and collection taxes based on a unique set of regulations. There are then various exemptions to consider; certain transactions may be excluded under different provincial tax regimes. In some cases, sales of capital goods are excluded from withholding and collection taxes, for example.

“As a result, there are numerous different withholding and collection tax rules, procedures and calculations that buyers and sellers of goods and services need to follow”, added Levy. “Usually, in order to be designated as either a withholding or collection agent, a taxpayer must have activities in the jurisdiction. Some provinces might also make the determination based on the company’s revenue; under this approach, larger companies tend to bear more of the brunt of withholding taxes.”

The Brazilian system
Over in Brazil, things are almost as complicated, with a system that can at times be unpredictable. “The Brazilian tax environment remains one of the most complex and fast-changing in the world”, Maciel said. “It’s important to recognise this condition in a country where indirect taxes and VAT withholding taxes apply only to services.”

The country is home to more than 80 different taxes. Those on VAT include: IPI, a federal tax on manufactured goods; PIS, a federal contribution applied to corporate gross revenues and used for the government’s social integration programme; COFINS, which funds social security and is applied to monthly invoicing; ICMS, which is a state value-added tax on the circulation of goods, interstate and intercity transportation and communication services; and ISS, a municipal service tax applied on services provided to a third party.

In much of Latin America, differences in rules around withholding taxes vary so greatly that it can dramatically hinder efficient business

Those on the corporate tax side include: IRPJ, a corporate income tax calculated on a company’s gross income; CSSL, a social contribution tax on net profit; and INSS, or National Institute of Social Security contributions, calculated on employees’ monthly salaries.

“It is important to keep in mind that some of these taxes apply differently, or do not apply at all, depending upon whether a transaction involves a good or a service”, said Maciel. “For example, at the federal level, IPI applies to goods but not to services. At the state level, ICMS applies to goods and some transportation and communications services, but no other services.”

The location of the transaction and its participants can also affect the status. The ISS tax in particular can vary depending on the city and service. In general, if the acquirer’s location requires the ISS tax, that city releases the ISS payment. However, there are rare situations where the two cities may understand that the ISS should be retained, and so the ISS is not paid.

A straightforward approach
Fortunately, Mexico has simplified things a little: it’s primarily income tax and VAT transactions that are subject to a withholding regime, making its regulations at least a little easier to navigate than the country’s South American counterparts. Here, income tax withholding generally applies to payments made from entities to individuals for professional services.

These local entities operate as the withholding tax agent and, as with Argentina and Brazil, withholding is triggered upon payment. The withholding tax rate is 10 percent, and it’s applied to the net amount of the transaction.

There are nevertheless still a few niggling details that companies need to navigate around. Transactions between local entities aren’t usually subject to VAT withholding, but for those that are, the rates vary – for example, from four percent for ground transportation of goods, to 16 percent for scrap to be used as raw material or sold. Independent personal and commission services, meanwhile, demand a payment of 10.67 percent. All of these rates are normally applied to the net amount, but in some circumstances come off the VAT amount.

There are further complications that apply to all three countries, however. If the value of individual goods and/or services isn’t itemised on an invoice, for example, withholding tax calculations becomes more difficult. “Chargebacks, payments in kind and instalment payments also tend to create additional layers of difficulty in the determination and management of withholding taxes”, added Levy. “Finally, some tax authorities provide software that taxpayers are required to use for reporting – and compliance – purposes.”

Fortunately, there are solutions to these issues – namely drawing on external knowledge and using technologies to streamline complex, tax-related data. “Withholding taxes in Argentina, Brazil and Mexico can be managed”, said Levy. “The leading approaches to doing so typically feature a blend of overall tax expertise, local knowledge, leading tax data management practices and supporting tax automation.”

Software platforms such as those offered by Vertex can help simplify systems and take the pressure off the companies themselves. Although the platforms can’t control the changes themselves, they can help organisations react to them. That’s well worth noting during a period of flux, when regulations are, according to Maciel, likely to undergo a series of rapid changes. This is expected to be the case over the coming years – but whether that’s for better or for worse remains to be seen.

From selfies to social responsibility: how Millennials are changing the way we invest

Posted on July 12, 2017July 17, 2017 by Max Tomlin

For a group of people so often characterised as the ‘me me me’ generation, it may seem puzzling that Millennials could be on the cusp of driving a profound shift in the way the financial sector approaches the morality of money. In fact, the distinct value set of the Millennial generation – conventionally defined as those born between the early 1980s and the early 2000s – could have the firepower to drive a widespread rejection of traditional banking and financial models.

Alongside their more commonly cited traits – narcissism, impatience, multitasking, technological know-how and a penchant for selfies – Millennials also hold social responsibility far closer to their hearts than previous generations. As a group, they are more socially tolerant, globally minded, value driven and more likely to believe in climate change than older generations, and tend to prioritise ‘making a difference’ above higher paycheques.

Numerous studies have found a trend linking specific generations to their level of concern over the social impact of their investments. For instance, according to a study by Accenture, social responsibility is a factor in choosing an investment for 49 percent of US millionaire Millennials, compared with 43 percent of those in Generation X, 34 percent of Baby Boomers and just 27 percent of seniors. These differences are even more pronounced when the respondents aren’t restricted to just those who are millionaires. A separate survey by Morgan Stanley found that Millennials were twice as likely as other generations to invest in a portfolio or individual companies that seek to have positive environmental or social impacts.

The Millennial generation could have the firepower to drive a widespread rejection of traditional banking and financial models

Of course, previous generations were also concerned by social issues: the Baby Boomer generation, for one, was famous for its civil rights, environmental, gay rights and anti-war movements. What sets Millennials apart is that they see their money as an important vehicle through which they can act on their values. As such, they tend to translate this concern into an impact-orientated approach to investment.

The makings of a generation
Clearly, people’s beliefs can change as they grow older. World Finance spoke to Morley Winograd, a leading generational expert and author of Millennial Momentum: How a New Generation is Remaking America, who said: “One of the things that those of us in generational research are always looking for is the ability to separate out age effects from generational effects.”

An equally good explanation for trends regarding Millennials’ approach to social investments might be that they have simply not yet matured to become fiscally conservative like their elders. However, according to Winograd: “That is not true of this particular differentiation… It is in fact a reflection of generational change and generational attitudes and beliefs.”

The existence of profound attitudinal differences between generations rests on the concept that people are deeply affected by the collective experiences of their upbringing, during which their attitudes crystallise to form a particular generational character. It is generally accepted by psychologists that people’s attitudes are more malleable in their younger years. This period is known by various terms, including the ‘impressionable’, ‘formative’ or ‘critical’ years, but these phrases all allude to the notion that there is a pivotal time during everybody’s youth when their fundamental value set is forged.

Generational expert Cam Marston explained one key influence: “Some of [Millennials’ concerns were] likely taught to them in their young ages by their parents… the Millennials are children of the Boomers, who are the first generation to care about social and environment responsibility.” It is a clear fact of life that parents play a key role in shaping their children’s attitudes. However, this alone cannot explain the sharp divergence in the ways Millennials and Baby Boomers approach the world of finance.

Critically, the attitudes of a generation are defined in part by the events that happen to occur during their youth. Of all experiences that might permanently colour the attitudes of a generation, the Great Recession is certainly a standout event. For the Millennial generation, the financial crash and its aftermath hit home when they were aged between 10 and 25 – precisely those years when people are most impressionable.

According to Winograd: “The financial services industry engaged in illegal and irresponsible behaviour, and they lost an entire generation. They’ve destroyed Millennials’ families, their home life, and their confidence in the world.” This characterisation of the financial sector as something intrinsically linked to culpability and guilt has consequently become imprinted as a generational memory, and is buried deeply into the psyches of Millennials to a greater extent than any other age group.

Indeed, according to Winograd, Millennials bear striking parallels to the generation that grew up during the Great Depression of the 1930s. While this older generation didn’t react by shifting to socially responsible investments, they stuck with their suspicion of the financial services industry throughout their whole lives.

Millennials have always had the tools and the digital know-how to tap into the relevant information needed to scrutinise their own decisions

As a generation, they remained less likely to trust banks with their money and more likely to hold it in cash. Similarly, for Millennials, a deeply held suspicion towards traditional banking models and a critical approach to any interactions with the industry can simply be understood as a natural response to their experience of the financial crash.

Digital natives
This distrust of the banking sector can be combined with another key formative element for the Millennial generation. Having grown up at a time of huge technological leaps – including the birth of widespread internet use, social media and smartphones – this is a generation that has always had the tools and the digital know-how to tap into the relevant information needed to scrutinise their own decisions. They are accustomed to having direct access to the details of social problems, such as human rights abuses and climate change. In fact, the nature of the way in which Millennials consume and share information is entirely different to that of previous generations.

It therefore comes as no surprise that Millennials typically spend much longer researching their investments than their older counterparts. A recent study published by Blackrock found that Millennials spend seven hours a month checking on their investments – around three times longer than older generations. According to Will Lana, Partner and Investment Manager at Trillium Asset Management: “In the past, investment firms tended to write off responsible investing as impossible. That’s no longer working. Clients are aware good options exist and they are more comfortable raising the topic.”

The result, according to Winograd, is that “[Millennials] are going to take their desire to change the world and leverage it in their investments, and they are not going to let standard investment practices stand in the way of that”. In turn, banks will have to keep up with this curve, or risk being sidelined by the new market.

Millennial motivation
Socially responsible investing itself is nothing new. It began as the filtering out of ‘sin stocks’ such as those related to the tobacco, gambling, sex or weapons industries, but has since taken on proactive forms, involving investments in everything from environmentally sound companies to businesses led by women or minorities. It is also taking on new guises, such as impact investment, peer-to-peer lending and crowdfunding.

Many of these are increasingly being shaped by technology and driven by younger generations: a host of new investment platforms, many app-based, are emerging, which allow people to individually select their social and environmental priorities. Grow Invest, for instance, is an app that allows people to filter their algorithmically defined investment packages to reflect their own personal and social concerns.

49%

of millionaire Millennials in the US consider social responsibility when choosing investments

43%

The same share of GenerationX

34%

The same share of Baby Boomers

27%

The same share of older generations

Over recent years, there has already been a huge jump in the number of banks offering socially responsible investment products. According to a review of the industry published by the Global Sustainable Investment Alliance, global sustainable, responsible and impact investment assets reached $22.89trn in 2016. This marks a 25 percent increase from 2014, which was in turn up 61 percent from 2012.

Other strands of ‘investment with a conscience’ are rapidly gaining momentum. For instance, according to JPMorgan, assets in impact investment currently stand at around $9bn in the US, but the bank predicts this will rocket to $1trn by 2020.

“There’s no guarantee an investment firm that had success with Baby Boomers can repeat with Millennials”, said Lana. “Having a solid impact offering helps because it speaks directly to what Millennials are asking for. The financial sector would be well served responding to investor demand rather than fighting it.”

Crucially, this is just the beginning. While in many countries Millennials are the largest generation by number, as it stands, the world’s wealth is largely concentrated within the Baby Boomer generation. Nonetheless, Millennials are poised to become the heirs to this vast sum of wealth, which will gradually change hands over the course of the next few decades. In the US alone, this wealth shift will amount to a generational transfer of $30trn over the course of the next 30 years. Considering that assets under management by the world’s 500 biggest managers totalled just $76.7trn at the end of 2015, this is a transfer of immense proportions.

Whether or not a dramatic rise in socially responsible investing will have the effect that many desire is another question entirely. But based on the assumption that Millennials will stick to their ideals, the financial industry could soon be forced to play ball with a very different kind of customer. A glance back at history tells us that generational change can be a powerful force, and those players in the sector that fail to change will find themselves looking increasingly old fashioned.

Trump nominates Randal Quarles as Fed watchdog amid regulatory shakeup

Posted on July 11, 2017July 17, 2017 by Max Tomlin

President Donald Trump has nominated Randal Quarles as the new banking watchdog at the Federal Reserve, placing the investment fund manager in charge of regulating the nation’s biggest banks. The former Republican Treasury official is thought to be a fairly moderate choice for the post, and has previously criticised aspects of the post-financial crisis regulatory system.

Quarles will be the Federal Reserve’s very first Vice Chair of Supervision, which is perhaps the most powerful regulatory post in the US. The role was created by Congress in 2010 under the Dodd-Frank reform law, but was never filled during Obama’s tenure. By filling this influential position, Trump’s administration is outlining its ambition to reimagine financial regulations in the post-Obama era.

If the Senate confirms the nomination, Quarles will become the fourth member of the Fed’s board of governors, which still has three vacancies. The White House is currently working to find two suitable nominees for these seats. The Trump administration has also begun looking for the next Chair of the Federal Reserve, as President Trump appears unwilling to consider extending current Chair Janet Yellen’s tenure.

By electing a Vice Chair of Supervision, Trump’s administration is outlining its ambition to reimagine financial regulations in
the post-Obama era

Upon his inauguration, President Trump promised to “do a big number” on the 2010 Dodd-Frank banking regulations, which he accuses of limiting economic growth. His advisors have since offered scant details on how the administration plans to dismantle the legislation, but Quarles’ nomination gives the White House an opportunity to reshape the post-crisis regulatory landscape.

If confirmed, Quarles will immediately begin overseeing the Fed’s regulatory staff, who are charged with supervising some of the nation’s biggest banks, including Bank of America and Citigroup. As Vice Chair of Supervision, Quarles will be able to profoundly influence the way in which the Fed oversees these firms.

According to a White House official, Quarles’ nomination “shows that we’re looking for a change to the heavy-handed approach to regulation from the prior administration”. Last month, the Treasury released a 147-page document detailing potential changes to the financial regulatory system. Trump has long been a vocal critic of the Obama-era regulatory framework, attacking the Dodd-Frank reforms in particular for inhibiting the creation of jobs and making it difficult for banks to offer loans.

In addition to his regulatory role as Vice Chair of Supervision, Quarles will also vote on monetary policy as one of the Fed’s board members. In the past, Quarles has criticised the Fed’s policy of keeping interest rates near zero in the years following the financial crisis, and supports using a monetary-policy rule to guide rate decisions. As such, the new Vice Chair of Supervision may well clash with his fellow board members, who largely do not share his views on monetary policy.

China’s Cosco to buy rival shipper Orient Overseas for $6.3bn

Posted on July 10, 2017July 13, 2017 by Max Tomlin

China’s biggest shipping company, Cosco Shipping, has agreed to buy Hong Kong rival Orient Overseas International Limited (OOIL) for $6.3bn, further consolidating the embattled shipping industry. The merger will see Cosco become the world’s third largest shipping company, with its 400 vessels only surpassed by Denmark’s Maersk Line and Switzerland’s Mediterranean Shipping Company.

The family of the first Hong Kong Chief Executive, Tung Chee-hwa, founded OOIL in 1950, and still holds a 69 percent stake in the company. As majority owners, the family has accepted the Cosco bid, but the sale still awaits approval from Cosco shareholders, as well as Chinese and US regulators.

The acquisition of Orient Overseas will see Cosco almost double its share of the US shipping market

The deal is the latest in a wave of mergers sweeping the shipping industry: eight M&A deals have taken place in the last four years alone, as the industry struggles to recover from 2008’s global financial crisis. The industry was further shaken in September, when South Korea’s Hanjin Shipping filed for bankruptcy, marking the demise of one of the world’s largest shippers.

Falling demand has led several smaller lines to suffer a similar fate, while larger rivals have snapped up other struggling firms. Cosco itself is the product of a merger between China’s two biggest state-owned shipping companies.

As a result, the world’s six largest shippers now control almost two thirds of the market. The acquisition of OOIL will see Cosco almost double its share of the US shipping market, emerging as a strong competitor to the industry’s top players.

What’s more, the deal also strengthens Beijing’s hold over global container shipping. Hong Kong currently boasts one of the world’s busiest ports, but could lose ground to rivals on the mainland once the deal is finalised.

Over the last four years, Chinese President Xi Jinping has been focusing on his so-called Belt and Road initiative, which aims to extend Chinese influence over supply chains from Asia to Europe. By increasing Cosco’s vessel capacity and market share, Beijing is taking a significant step forward in this ambitious initiative.

The history of the Rockefeller family

Posted on July 10, 2017July 12, 2017 by Max Tomlin

The Rockefeller name is one so deeply entrenched in different spheres across the United States that it is perhaps unlike any other legacy the world’s largest economy has ever known. From the oil industry and banking to Wall Street, higher education, medical research and the arts, the Rockefellers have had an unquestionable impact on the spheres in which they worked.

Today, there may still be residues of criticism surrounding the Rockefellers – certainly with regard to the methods that the first in the family, John Davinson Rockefeller (John), employed in order to become the world’s first billionaire – but it is impossible to deny the positive impression made by him, his son John Davinson Rockefeller Jr (John Jr), and his grandchildren Abby, John Davinson III (John III), Nelson, Laurance, Winthrop and David in the worlds of business, politics and philanthropy.

Following the passing of David Rockefeller – John’s youngest grandchild and the world’s oldest billionaire at the grand age of 101 – in March, World Finance takes a look at his family’s fascinating history and the legacy left by the Rockefellers.

The first Rockefeller
As with all great stories, this one starts with a great character. John was born into a poor family, and to this day there are any number of rumours surrounding the identity of his father: that he was a thief, a crook, a gambler, a peddler. In any case, struggling to make ends meet, the family moved from Richford, New York, to Cleveland, Ohio in search of better prospects when John was 14.

John Rockefeller said the rich man shouldn’t die rich, the rich man should die having done good things with the wealth he has created

Signs of ambition became evident from a young age as John, the second of six children, embarked on various business ventures during his teen years. At 16, he got his first job as an assistant bookkeeper for a merchant firm called Hewitt & Tuttle. John had a natural flair for the job and rose to the role of cashier and bookkeeper within a matter of months. After four years at Hewitt & Tuttle, John set out in pursuit of his own dreams; together with a partner, he founded a commission merchant company that dealt with meat, hay and grains. By the end of its first year, the business had grossed $450,000.

Sensing the oil boom that was soon to take the country by storm, John decided to instigate his next venture – one that would change history. With the rate of oil production in Pennsylvania accelerating, he opened a refinery near Pittsburgh in 1863. Within just two years, it had become the largest in the area.

In 1870, John and his business partners incorporated the Standard Oil Company. Owing much to the favourable economic conditions at the time and John’s talent at streamlining operations, profit margins at Standard Oil remained consistently high from its early days. Motivated by the company’s rapid growth, John began an aggressive takeover strategy that would propel the company into a league of its very own.

Within just two years, Standard Oil controlled almost all refineries in the Cleveland area. John’s next move involved forging partnerships with railroad companies in order to transport his oil as economically as possible, while also buying up pipelines and oil terminals. By owning nearly every aspect of the business, Standard Oil’s control of the industry tightened – the company even bought up land to prevent rivals from establishing their own transportation infrastructure.

“He was very, very effective in integrating the totality of oil – foremost its extraction, and then its transportation, and then its retail and whole selling”, said Professor Michael Cox, Emeritus Professor of International Relations at the London School of Economics. “So it made Standard Oil, which became this extraordinary corporation even by the end of the 19th century, almost a virtual monopoly in terms of oil in the US… Given the increasing importance of oil in the world and for the American economy, it gave the Rockefellers, and [John] in particular, an extraordinary position of power, and of course of great wealth accumulation.”

But as John’s wealth and power mushroomed, criticism grew in correlation, intensified further by the fact that the numerous divisions involved in his enterprise were all consolidated under Standard Oil, with John overseeing absolutely everything. Congress soon took note.

Cox told World Finance: “The critics thought that the methods John employed were deeply immoral, and also ran against something else – it was not just that they were pretty grim in terms of getting the outcomes you wanted, some critics in Congress suggested very strongly that by creating an effective monopoly, [John] actually undermined competition in the United States as well. So his monopolistic practices were viewed by many of his critics as not only rather strong arm, but they also ended up creating a monopoly, and a monopoly was basically bad for America, and bad for American capitalism.”

John Jr was embroiled in controversy, but continued
his philanthropic work, rebuilding his reputation one good deed at a time

In response, Congress introduced the Sherman Antitrust Act in 1890, making any attempt to monopolise commerce in the US illegal. By 1892, the Ohio Supreme Court had ruled Standard Oil was in violation of state law, causing John to dissolve the company and hand over the management of each subsidiary.

Nonetheless, the company’s hierarchy remained intact, with control of all divisions staying in the hands of a board run by John himself. What’s more, in an audacious move nine years later, he reassembled the various companies into one holding group. Congress re-intervened in 1911, forcing it to dissolve once more.

“For those who are defenders of masses of wealth, he just did what every other businessman did, but maybe slightly on the ruthless side”, said Cox. “Others would say he was very ruthless, as were the methods he used. But again, in the context of the late 19th century, everybody was doing it; he just did it rather more successfully than everybody else. It was the age of the robber baron.

“It was in an age of what you might call Wild West frontier methods in order to achieve the outcomes you wanted… It was an extraordinary period of economic growth and the transformation of America, which made it into a world economic power, even before the beginning of the First World War. So I’d see it as part of that larger dynamic of how America became the America it was to become.”

Charitable giving
As well known as John is for his part in helping to create the great American economy, he is perhaps just as famous for his philanthropic work. Among the most notable instances of such efforts was his contribution to the creation of the University of Chicago. Cox explained: “He was basically the funder – it was his money in the 1890s that laid the basis for the creation of the great University of Chicago.”

$11bn

The estimated net worth of the Rockefeller family today

$30bn

John D Rockefeller’s net worth today if adjusted for inflation

174 The number of heirs to the Rockefeller fortune

101 The age at which David died, making him the world’s oldest billionaire

$4.8bn

The value of Chase Bank when David Rockefeller joined in 1946

$76.2bn

The bank’s
value in assets by 1981

John then went on to found the Rockefeller Institute of Medical Research (now called Rockefeller University) to spur the study of disease and its prevention. Numerous techniques born from the institution have since transformed biochemistry and medicine, including the treatment of pneumonia and spinal meningitis.

Another momentous act came in 1902, when John established the General Education Board in a bid to support education in the US “regardless of race, sex or creed”, with a specific emphasis on promoting higher education. Then, of course, came the Rockefeller Foundation, an institution John established in 1913 to “promote the wellbeing of mankind throughout the world”. It has done exactly that, donating millions to promote education, public health, scientific advancement, the arts, social research and more. The list of organisations and causes helped by the foundation is nothing short of astounding.

Despite the criticisms that enshrouded John’s career – including various accusations of tax evasion – his habit of charitable giving was one that started long before he became rich. From his very first paycheque, John began making regular donations to his local Baptist church, a Sunday school and an African-American church. It is therefore hard to deny it was his religious beliefs (rather than, say, a quest to elude taxation) that
drove his altruism.

“Maybe we live in such a secular age that we don’t understand the kind of Christianity that he adhered to”, Cox explained. “Let’s put it rather crudely: you earn $10, you give away your first three, and that started very early in his life as a young man, as he was beginning to build up his fortune. I think he genuinely did believe that it was the duty of the wealthy man in the Christian sense to disperse his fortune – and in useful ways – to help others.

“He embodied what many people would call the prime virtues of Protestantism – you know, hard work, getting up early, only having one wife, a standard family, religious, and also with a strong sense of philanthropy. He talked about this quite a lot: that the rich man shouldn’t die rich, the rich man should die having done good things with the wealth that he has created.”

Down the line
Born on January 29, 1874, John Jr was to follow in his father’s footsteps and make his own sizeable mark upon the world. Raised in Cleveland alongside his three sisters, John Jr was little fazed by his father’s vast wealth. After graduating from Brown University, he worked at the Standard Oil headquarters during a time of considerable upheaval. Consequently, feeling disenchanted, John Jr took a leap and left the business world behind to focus solely on philanthropy.

Despite his dedication to altruism, the oft-changeable tide of public opinion began to turn in 1913 when around 9,000 coal miners working for the Rockefeller-owned Colorado Fuel and Iron Company decided to strike, demanding better wages, hours and accommodation. The affair soon turned violent, with workers’ families evicted from their homes and forced to live in makeshift tents during a harsh winter. By 1914, tragedy struck as more than 40 people, including 11 children, were shot and killed by private security forces.

Blame was placed on John Jr; slated by the newspapers, the heir soon found himself in front of Congress, and the Rockefeller name suffered perhaps its biggest blow. For years after, John Jr was embroiled in controversy, but continued his philanthropic work with gusto, focusing on rebuilding his reputation one good deed at a time. Some such deeds include creating the world famous Rockefeller Centre, donating the land that would later be transformed into the United Nations headquarters, and restoring Colonial Williamsburg. However, in addition to making incredibly generous contributions to various causes, perhaps John Jr’s most profound imprint on the world came through the work of his children.

The five Rockefeller brothers. Left to right: David, Winthrop, John D Rockefeller III, Nelson and Laurance

A family like no other
While Abby Rockefeller pursued charitable work out of the public limelight, her five brothers each carved a reputation in their own right, weaving through the interconnected spheres of business, politics and philanthropy in a manner unlike that of any family in US history.

The eldest of the brothers, John III, devoted his life to foreign affairs and philanthropy. Inspired by a trip around the world following his graduation, John III developed a deep interest in Asia that resulted in the creation of the Asia Society and the Council on Economic and Cultural Affairs. John III was also responsible for the Population Council, the first such organisation to bring issues of overpopulation to the fore, and the Lincoln Centre, now one of the world’s leading performing arts centres. John III also founded and supported numerous NGOs before his untimely death in a car crash in 1978.

Nelson was perhaps the most high profile of the siblings. Despite his father’s efforts to instil in him the values of restraint and modesty, Nelson always had grand plans and spoke about becoming president from childhood. After a stint at Chase Manhattan Bank, he went on to lead the development of the Rockefeller Centre through a tumultuous economic period, eventually serving as its president. Nelson then entered politics, transforming the New York skyline through the numerous construction projects he instigated while serving as Governor of New York for four terms between 1953 and 1973. He then served as Vice President of the US under President Gerald Ford between 1974 and 1977.

Laurance also had a big impact on New York, but via Wall Street, as a pioneer in venture capitalism. During his decades on the New York Stock Exchange, Laurance invested in hundreds of start-ups that focused on electronics, aviation, computers and biotechnology. Laurance had a talent for sensing the next big thing, as can be seen in his early investments in Apple and Intel. He was also a keen environmentalist and was instrumental in establishing and expanding numerous national parks throughout the US, from Wyoming to Hawaii.

Lessons in modesty worked for Winthrop, who was unwilling to merely waltz his way to the top based on his family name alone. Instead, he started his career as an apprentice working in his family’s oilfields. After the Second World War, Winthrop went into politics and became famous for the profound cultural and economic change he propelled in the state of Arkansas while serving as governor between 1967 and 1971. He introduced the state’s first minimum wage and the freedom of information law, and tightened insurance legislation, to name but a few examples.

The youngest brother, David, was a powerful force on Wall Street, as well as an incredibly influential individual who traversed the highest echelons of society. After graduating from the London School of Economics, David went on to gain a PhD from the University of Chicago in 1940. David’s first job, which involved writing letters for the Mayor of New York, came to a grinding halt – like so many others – as a result of the Second World War. Choosing to forgo the use of his family name, David enlisted as a private, rising to the rank of captain during his service in the US Army.

The Rockefellers changed the nature of doing business, establishing efficiency as the baseline and waste as anathema for any enterprise

After the war, David joined the company in which he would stay for the entirety of his professional career: Chase Manhattan Bank. Given that his uncle Winthrop Aldrich was chairman of the bank and his father and grandfather were its largest shareholders, David was unsurprisingly deemed to be nothing more than a spoiled rich kid upon arrival. However, he soon proved his worth, while his habit of getting the public subway to work every day helped to chip away at the spoiled status. His hard work saw him make his own way to the top, becoming co-CEO in 1960 and sole CEO in 1969.

During his time at the helm, David used his worldwide network to increase the bank’s foreign branches from 11 to 73, with Chase Bank becoming the first western bank to open branches in China and Russia, securing its position as a truly global institution. David was also responsible for re-energising the bank from within, creating HR, planning and marketing departments with the help of none other than the ‘father of management’, Peter Drucker. Though the 1970s proved difficult, David held the role of CEO until retiring in 1981.

When David joined Chase Bank in 1946, it was a $4.8bn institution. By 1981, it was worth $76.2bn in assets. “Well, he was the banker of all bankers”, Cox commented. As a result of two vast mergers, the bank is today the biggest in the US.

Changing the world
There are questions to be asked about how one man – or family – can possibly come to accumulate such incredible wealth as that of the Rockefellers. And yes, there are aspects of John’s strategy that were aggressive and uncompetitive. However, this approach to making mergers and acquisitions is one that has since become a standard business practice – he was just the first to do it with such success. Through his willingness to do things differently, John laid the groundwork for an industry that is integral to the global economy, and an area of commerce that has spurred the development and innovation of countless others.

At a time when oil was expensive and much of it was wasted, John made the production process far more efficient and cost effective, thereby making kerosene affordable for the masses – so much so that it soon overtook whale and coal oil (and even electricity for some time) as fuels, lighting up America street by street. John’s resourcefulness also prompted the development of some 300 oil by-products, ranging from paints and lubricating oils to anaesthetics. In this respect, he changed the nature of doing business, establishing efficiency as the baseline and waste as
anathema for any enterprise.

“He didn’t come from the establishment. He was in very many ways – I suppose this makes the story rather heroic – a self-made man”, said Cox. Indeed, John was the archetypal embodiment of the American Dream. And while he revolutionised business strategy and the oil industry, his grandsons, specifically Laurance and David, went on to shape the US financial market through their keen sense of forward thinking.

More remarkable still is the impact the Rockefellers had on education, medical research, equality, social science and the arts. Their support has trickled down to so many different organisations, helping millions upon millions along the way. John alone gave away $540m throughout his lifetime, but the true cost of the family’s ongoing philanthropy is simply unknown.

Key events in the Rockefeller family history:

1839: John D Rockefeller was born on a farm in Richford, New York on July 8

1859: With $2,000 in funds, John formed a partnership with Maurice B Clark

1863: The two partners entered the oil business, creating a company called Andrews, Clark & Co

1870: The Standard Oil Company was created with a capital of $1m

1874: John Rockefeller’s son, John Jr, was born in Cleveland, Ohio

1890: John’s donation of $600,000 helped fund the establishment of the University of Chicago

1901: The Rockefeller Institute for Medical Research (now Rockefeller University) was founded

1906: John III, John Jr’s son, was born in New York City on March 21

1911: The Supreme Court ordered the dissolution of the Standard Oil Company

1915: David Rockefeller, the youngest child of John Jr, was born in New York City

1946: David joined Chase Bank as an assistant manager in the foreign banking department

1969: David was named Chairman of the Board of Directors and CEO of Chase Manhattan Bank

1994: The David Rockefeller Centre for Latin American Studies opened at Harvard University

2000: The Rockefeller family’s ownership of Rockefeller Centre ended after being sold for $1.85bn

2017: David died at the age of 101 in Upstate New York with a net worth of $3.3bn

The digital divide: why the skills gap must be addressed to tackle inequality

Posted on July 7, 2017July 14, 2017 by Max Tomlin

In 1821, the eminent political economist David Ricardo remarked: “The substitution of machinery for human labour is often very injurious to the interests of the class of labourers… [it] may render the population redundant and deteriorate the condition of the labourer.” Little over a century later, John Maynard Keynes identified a similar predicament: “Technological unemployment… [is an issue born of] our discovery of means of economising the use of labour outrunning the pace at which we can find new uses of labour.”

Fast-forward another century and you will find yourself in the present day, where once again anxieties regarding automation have captured the world’s attention. ‘Digital refugees’ were a hot topic among leaders at this year’s World Economic Forum, as discussions centred on the role of technological advancements in rising inequality, the deterioration of social cohesion, and the encroaching wave of populism. Meanwhile, many predict the coming ‘fourth industrial revolution’ will have serious implications for job market stability, with one study from the University of Oxford estimating 47 percent of US employment faces a “high risk” of automation in the next 20 years.

The flipside of these fears are the dramatically high returns available to the small elite capable of capturing the rewards of such disruptive technology. The winner-takes-all effect has been aptly characterised by economist Sherwin Rosen, who dubbed it the “economics of superstars”.

Troublesome tech
Recent research published by the IMF in April’s World Economic Outlook report attempted to get to grips with the role technological advancement is playing in reordering our societies. The authors of the research, Mai Dao, Mitali Das, Zsoka Koczan and Weicheng Lian, noted the labour share of national income in advanced economies had been whittled away since the 1980s. In fact, the labour share of income is now four percent lower than in 1970.

Modern skills are in high demand, and those with
them are able to demand a huge premium, while workers incapable of keeping up with technological advancements are left behind

Such a shift indicates the gains from increased productivity are flowing predominantly to the owners of capital – those already positioned towards the upper echelons of the income spectrum. This, however, is not the only troubling trend. As workers continue to lose out overall, labour markets are becoming increasingly polarised, with wages clustered around extremes. Together, these developments provide the backstory for the dramatic increase in inequality across the majority of advanced economies in the same period.

The report labelled technology the predominant driver of these trends, with the rise of global integration also an important factor – albeit half as important as technology. While the two forces are intertwined, this verdict certainly points to the ugly side of technological advancement.

Speaking to World Finance, Dao and Das said: “We were not surprised to find that technology explains about half of the downward trend in labour shares in the US, as the literature has already established this. But we were surprised at how broad-based this result was for other advanced economies, where this question has not been analysed systematically.

“This common pattern further suggests that technology is a global force affecting labour markets similarly across the industrialised world.”

Digital refugees
Rather than being a consistent trend across all sectors, the report found the blow to labour incomes was linked to the combination of two key factors: technological advancement and routinisation. The report identified technological advancement as anything reducing the cost of the employer’s investment and incentivising firms to replace workers with machines, robots or computers. Routinisation, meanwhile, measured the extent to which tasks in a specific sector or country were repetitive and prone to automation. Countries or sectors with the highest share of occupations easily susceptible to both of these factors were deemed the most vulnerable.

Dao and Das noted: “Generally speaking, countries such as Germany, which had a relatively large manufacturing sector, were more susceptible to routine-based technology displacing workers in manufacturing industries than a typical emerging market or developing country, where agriculture and services are still dominant sectors of production.”

According to the report, these same technological forces are driving the polarisation of labour markets, an effect characterised as the ‘hollowing out’ of the middle class. This phenomenon is explained by technological changes eliminating the need for middle-skilled, repetitive tasks, forcing those in the middle-skill bracket to either accept lower wages or find a way to reskill. As a result, labour markets have been profoundly shaken up; developing a greater demand at both the higher and lower ends of the market.

47%

Share of US employment at “high risk” of automation in the next 20 years

4%

Decrease in the labour share of income since 1970

In support of this hypothesis, the report found that middle-skill workers have borne the brunt of the decrease in income shares, while low and highly skilled workers have experienced relatively nominal effects. Furthermore, those sectors most exposed to routine-based technological progress witnessed a more pronounced decline in middle-skilled labour.

Speaking to World Finance, James Bessen, author of Learning by Doing: The Real Connection between Innovation, Wages, and Wealth, underscored that, rather than destroying jobs, technology is redefining them. In fact, Bessen asserted jobs affected by computer technology have often witnessed growing levels of employment.

An illustrative example of this is the graphic design industry, which once consisted largely of the repetitive task of typography. As new software and computers replaced many of the more routine jobs, the number of graphic designers grew, with lower costs driving demand. Bessen explained: “[As] the routine work is being taken over by machines, the more creative and cognitive work is moving to humans.”

The hollowing out effect, therefore, transpires when people struggle to learn the skills accompanying these new roles. Such a struggle has caused a skills gap to emerge, one which means employers are finding it increasingly difficult to hire people with the relevant skills to work with new technologies. As a result, modern skills are in high demand, and those with them are able to demand a huge premium, while workers incapable of keeping up with technological advancements are left behind.

Bessen said: “We are seeing a new digital divide between those who are working with new technologies and those who are not.”

Lifelong learning
As is clear from historical comments by economists such as Keynes and Ricardo, the threat of automation is nothing new; technology has profoundly disrupted labour markets since the onset of the Industrial Revolution. “For some countries where historical data exists, such as England, we do observe similarly pervasive declines in the past, particularly in the aftermath of the Industrial Revolution in the 19th century”, said Dao and Das.

Indeed, when Ricardo wrote of the deteriorating “condition of the labourer”, the UK was in the midst of the first Industrial Revolution, a period that triggered profound disruptions to labour markets and held striking parallels to the plight seen today. “The average wage was stagnant for decades [after the Industrial Revolution]”, Bessen revealed. “Skilled workers fared well, but the average worker didn’t. It took a long time before the benefits of the technology were shared by the average worker.” In fact, it was only after training institutions, business models and labour markets fostered the necessary skills that the average wages of ordinary workers began to rise.

Dramatic advancements in technology are far from over, with artificial-intelligence-based technologies holding the potential to displace innumerable workers and drive the skills gap wider still

In today’s setting, while the technology itself may have changed beyond all recognition, the problem remains familiar. Bessen said: “I think essentially we are seeing a similar thing today. Different reasons – at a different pace or scale, maybe – but a similar problem.”

Worryingly, dramatic advancements in technology are far from over, with artificial-intelligence-based technologies holding the potential to displace innumerable workers and drive the skills gap wider still.

Crucially, to prevent technological advancements from driving inequalities, the skills gap must be addressed. As with the industrial revolutions of the 19th century, this can only be resolved by finding new ways of fostering skills. Learning to adapt to technology and supporting those who become so-called digital refugees will become a constant necessity. “I think that we are going to see a prolonged period where clearly the nature of education is changing… It has already become much more of a story of lifelong learning”, Bessen said.

As such, it seems we will be unable to escape the modern world’s continual call for new and more bespoke skills. Instead, for society to continue to function, we must perpetually adapt, learning to reinvent our skill set as and when the market demands.

Inside India’s data fortress

Posted on July 5, 2017July 14, 2017 by Max Tomlin

Located in a sleepy suburb of India’s southern city of Bangalore is a fortress-like data centre, tightly guarded by a triple layer of security. Contained inside are the biometric data profiles of more than one billion Indians – or 15 percent of the global population – who have each provided their fingerprints and iris scans for the world’s largest biometric identification system.

Underneath an armour of encryption, every biometric profile is linked to a 12-digit code known as an ‘Aadhaar’ number, which functions as an officially recognised identity for each given individual.

The number of people registered on this system has rocketed from zero to a billion in just seven years, now covering 99.5 percent of Indians over 18 years old. These registration numbers are a major breakthrough in India, a country where up until 2009 almost half of the population did not have any official identity papers. Now, a $100 biometric scanner – available to businesses and government organisations alike – can verify in a matter of seconds whether someone’s true identity matches who they claim to be.

A key to everything
The implications are enormous. The overarching aim is to rewire the entire economy and governance system, plugging in each member of the population via their biometrics to a new digital framework – something that has never been attempted before by any country. The system is now having an impact on how just about everything is done, from banking and hospital check-ins to mobile phone contracts and tax returns.

Number of Indian citizens registered to the Aadhaar system (billions):

0 2010

0.1 2011

0.2 2012

0.4 2013

0.7 2014

1 2015

1.1 2016

Last year, with the biometric database more or less fully in place, the government launched a new layer to the framework, known as India Stack. The tech, hailed as the “bedrock of digital India”, is a series of connected systems through which people are able to store and share personal data, such as tax filings, bank statements and health, school and employment records. The unique key needed to access the data is a biometric scan of the individual in question.

With India Stack, people can open a bank account, take out a loan, share medical records or start a mobile phone contract using just a fingerprint or iris scan. On top of this, each person’s individual realm of India Stack can be reached through Aadhaar-compatible smartphones, which use iris-sensitive cameras or fingerprint identification.

Following Indian Prime Minister Narendra Modi’s recent push for demonetisation, the government took the system one step further by establishing Aadhaar-enabled financial transactions through smartphones. This payments system makes it possible to transfer money using only a fingerprint and a mobile phone. Already, 337 million Aadhaar numbers have been linked to bank accounts, with 15 million transactions occurring through the system each day.

The power of identity
But while it is not lacking in ambition, the rapid rollout of the system has already suffered some sizable blunders. Failure to identify the fingerprints of manual labourers, as well as some fairly serious data breaches, have been among the numerous controversies that have marred the project so far. Biometrics are slowly becoming a standard feature of day-to-day life in India, and while the project has only just begun, a run-of-the-mill day in the not-so-distant future could involve tens of biometric checks for each person as they go about their routines.

“In many ways, a legally acceptable personal identity is the fundamental pillar on which all other rights and capabilities are based”, read a paper co-authored by Mukesh Sud, an associate professor at the Indian Institute of Management Ahmedabad. This notion that an officially recognised identity is powerful in itself is central to the appeal of the biometric system. Crucially, the ability to prove one’s identity is an important precursor to engagement with the formal economy, and is therefore part of the basic infrastructure of modern life. For this reason, the biometric system is not just a way of saving time and money, it also has the potential to be an effective tool for inclusive growth.

Speaking to World Finance, Sud said: “Imagine a casual labourer travels for work to a different state. In the absence of a definitive proof of identity, they are unable to claim any benefits from the government. They can’t even open a bank account, and find it difficult to keep their savings, which end up under a mattress.” Many of India’s poor are repeatedly held back by a lack of official documentation, becoming locked out of the formal economy. This manifests itself in a number of ways: access to basic financial services is often out of reach, with the simple act of opening a bank account requiring proof of identity. As a result, people who are already living in poverty are often forced to go to extortionate moneylenders as their only option for borrowing cash.

Another key issue for poor residents is the inability to secure official property rights without a recognised identity to attach them to. Without such property rights, assets are reduced to dead capital, which cannot necessarily be loaned, transferred or sold at will. As a result, people are often prevented from making full use of their assets, and are unable to reach their full economic potential. Worse still, exclusion from banking and property rights becomes mutually reinforcing.

The biometric system is not just a way of saving time
and money, it also has the potential to be a tool for inclusive growth

According to Sud: “You can’t borrow from a bank or get a cell phone connection as you have difficulty in establishing proof of who are you. You may not even have property documents, which also require an identity. So it ends up being a circular argument; one thing leads to another.”

This effect is compounded by the fact that an inability to prove one’s identity makes it difficult for people to access the very government privileges that are designed to help them. Taken together, the combined impact of the mass rollout of official identities for property rights, financial inclusion and access to government programmes can bring about a fundamentally more inclusive economy.

As such, the most marginalised members of society will be armed with a newfound means of identification, providing them with access to the privileges that make it possible to capture a slice of the productive economy.

Biometric benefits
From the perspective of the government, the ability to verify every citizen’s identity is a miracle of efficiency. In all middle and low-income countries, administering government benefits and keeping track of tax returns is fraught with logistical challenges. Indeed, in India, government schemes are often dogged by several layers of corruption and bureaucracy that can prevent welfare payments from reaching the intended beneficiaries. These leakages have traditionally created an exorbitant drain on resources, but as systems are switched to the biometric framework, they are slowly being plugged.

Without Aadhaar, the process of administering government benefits would be filtered through several layers of bureaucracy, with each representing a potential leak – be it the bank official, the person signing the cheque or the local government. According to Sud: “Everybody was just siphoning what they could, and some beneficiaries got maybe half of what they deserved. A few, in connivance with the government official in their area, could claim the same benefit multiple times and no one would be any the wiser. For instance, we have food subsidies for people below the poverty line, yet there were three or four times the number of claimants than the actual number of poor.”

One case that illustrates the potential for efficiency gains is that of a government office in New Delhi, where a biometric attendance system was recently installed using Aadhaar. Upon implementation of the system, 23,000 fictitious workers were discovered, whose wages were being siphoned off through the payroll. Collectively, these fabricated labourers were costing the government more than $3m a month.

Various impressive numbers have been publicised regarding the total savings and efficiencies amassed by the government as a result of the technology, with the World Bank estimating savings to be in the region of $1bn per year. This, however, is a relatively conservative estimate, and more extravagant numbers have been touted by the Indian Government: according to Finance Secretary Ashok Lavasa, by shifting 78 government schemes to Aadhaar-enabled ‘direct benefit transfers’, the public purse has already garnered an impressive $5.3bn in savings. Overall, the government claims the cumulative savings made through the project now stand at $7.6bn.

However, Development Economist Jean Drèze, talking to World Finance, cautioned against taking such estimates at face value: “It is very hard to trace the basis of most of these figures. They seem to be acquiring an aura of plausibility by sheer repetition.”

Certainly, the system has at times done more harm than good: often, when it is enforced for government schemes in rural areas, patchy internet connectivity can prevent the machines from functioning properly, which can lead to lengthy queues or a failure to distribute entitlements at all. Furthermore, while growing, India’s low rate of internet usage (see Fig 1) can also act as a barrier to inclusion. Such issues have led many to perceive the system as a frustrating and irrelevant layer of tech imposed by the government.

That said, as it is rolled out evermore extensively, there is no denying Aadhaar has the potential to profoundly improve the efficiency of the systems in place. By cutting out duplicates and linking Aadhaar to tax returns, the project could also go a long way towards stamping out tax evasion. There are plenty more schemes and government functions to which the system could be applied, which will contribute to increasingly streamlined administration in the future.

A man provides an iris scan for the Aadhaar database

Shaking up the markets
The newfound ability to verify identity is also shaking up entire segments of the economy by creating commercial ventures that were not previously viable. For one, branchless banking targeted at those in rural areas has previously been held back by prohibitively high transaction costs stemming from the need to establish customer identity. Yet by synching accounts to people’s biometrics, it could become feasible to reach entire new markets with microsavings and microcredit accounts. A variety of new financial instruments could also pop up, such as microinsurance and micropensions.

Take the telecoms industry, which is also being fundamentally shaken by the technology. Due to the necessity of establishing a customer’s identity to provide a contract, the industry was in the past held back by lengthy bureaucratic procedures and ‘know your customer’ regulations, which have now been dramatically simplified using the Aadhaar framework.

One telecoms player in particular, Reliance Jio, has upturned the entire market by setting data costs far below the prevailing rate. The company, which is a new player in the industry, has managed to enrol 100 million customers in just six months. Sud noted: “Reliance achieved [its] numbers so quickly because [it was] able to eliminate the paperwork involved. Without Aadhaar, it would have taken much longer and an army of people to check each of the applicants and verify their identities. The company has acknowledged it.”

The biometric system has therefore already dramatically affected the proportion of people with access to mobile data, making it an important force in bringing more people into the digital economy.

Guarding the fortress
From a security perspective, rewiring the entire economy and governance system onto a single, highly sensitive central database is a delicate process. Bangalore’s data centre may be fortress-like, but the question remains whether there can ever be a fortress strong enough to adequately protect the data that is being stored inside.

The question remains whether there can ever be a fortress strong enough to adequately protect the data that is
being stored inside

There is also something fundamentally permanent about biometric information. Unlike a PIN, it cannot simply be changed if it falls into the wrong hands – and worryingly, the track record of security protection is not perfect. In February, the Unique Identification Authority of India filed a police complaint against a bank after it was discovered to have illegally stored fingerprint details to attempt impersonations. The incident has since been dismissed as an isolated case, but has nonetheless dented the government’s claim that the system is totally impenetrable.

Furthermore, a huge leap in the amount of private data being stored against biometrics has heightened privacy concerns. Through innovations like India Stack, central servers are linking people’s Aadhaar numbers to a lifetime of private data, including medical histories, financial data, school records and residential addresses. While personal data being held on central servers is nothing new, the sheer quantity of sensitive data that is in need of protection creates an enormous and unprecedented challenge.

Protecting privacy
An even greater fear than that of the data centre being breached, perhaps, is the simple question of who might be handed the key. A fundamental criticism of the project is that a government-administered biometric database like Aadhaar essentially reformats the very relationship between citizen and state. World Finance spoke to Shyam Divan, a lawyer who is currently going through the process of representing challengers to the Aadhaar scheme in the Supreme Court. He said: “With multiple check-ins a day, everyone is essentially leaving a trail through which they can be tracked… We are talking about a brave new world where you have virtually no individuality or space for yourself.”

1.3bn

Population
of India

1.1bn

Indians are currently registered to the Aadhaar biometric database

15%

The above as a share of global population

99.5%

of Indians aged over 18 are enrolled

337m

Aaddhaar numbers are linked to bank accounts

15m

transactions take place each day

$1bn

The amount the World Bank estimates the system has saved the Indian Government
per year

Critically, the very prospect of the state maintaining a watchful eye can have tangible effects on the way people act and even think. “People know that even if they are not watching, they are capable of watching – that has a tremendous chilling impact in terms of behaviour”, said Divan. The concern is that, as well as undermining privacy, this can act to stifle political dissent.

“The government is constantly trying to reward its loyal supporters and marginalise its opponents. So a situation is rapidly developing where, firstly, everyone is being monitored all the time, and secondly, people know that it is in their best interest to be in the good books of the government. Obviously, this is bound to stifle political dissent, or any sort of dissent for that matter”, Drèze told World Finance. This leads to the question that hangs over the entire project: has the government gone too far?

The Supreme Court initially judged that enrolment in the scheme must be purely voluntary, yet being registered has now become a requirement for everything, from filing tax returns to buying a mobile phone. Now the database has been created, the purpose for which it is used seems to be ever-changing. Drèze explained: “Anything is possible. For all we know, the Supreme Court may direct the government to destroy the Aadhaar database next week. It is equally possible that some fanatic will become India’s next prime minister, use Aadhaar to consolidate his power, and create a virtual state of emergency. The point is, we should not take chances in these matters.”

The entire project now hinges on the prospect of designing a system that can create a strong enough shield to protect people’s privacy and civil liberties, without destroying its potential. As Sud said: “We must not throw the baby out with the bathwater. We have to get the best people to institute checks and balances in the system.”

Of course, this is not the first time technological innovations have come up against the important issues surrounding data protection and privacy, but the mass uptake of biometric data will make these debates all the more pertinent. Biometrics are rapidly seeping into people’s everyday lives on an international scale, as they are increasingly put to use in areas such as banking, telecommunications and voting. Furthermore, several countries – Germany, Bangladesh, Brazil and France, to name a few – are moving towards building centralised biometric systems of their own, which again will bring up important questions regarding the relationship between citizen and state.

Biometric systems could well become the new normal. When they do, we can expect something close to a futuristic ideal – but the meaning of privacy may never be quite the same again.

Politicians playing a dangerous game

Posted on July 5, 2017June 23, 2017 by Max Tomlin

It has been almost a decade since the 2008 financial crisis, and the confrontational politics that emerged in its aftermath remain ubiquitous in the West. But despite similarities between the United States and the European Union, differences in how they address social, economic and fiscal issues have recently been thrown into sharp relief.

Since President Donald Trump’s surprise election victory, the US has seemed to be competing with the EU over which side’s politics are more contentious and dysfunctional. In each case, many potential players can subvert the political process. Trump is learning this in his confrontations with Congress, the courts and state governments. In Europe, domestic political forces routinely clash with constitutional courts and supranational bodies. And every time a national – or even regional – election is held in one of the EU’s 28 (soon 27) member states, Europeans become paralysed by fear of a disruptive outcome.

To address this state of affairs, European Commission President Jean-Claude Juncker recently issued a white paper outlining five possible paths forward: from doing nothing to pursuing systematic reforms to complete European integration once and for all. The US, too, is facing a challenge of political disunity, if not disintegration.

Cliff’s edge
The central problem for both is not just fake news or ‘alternative facts’, though misinformation does flood into most debates on both sides of the Atlantic. Rather, politics itself has become operationally dysfunctional. When citizens and politicians come to regard politics as a zero-sum game and resort to brinkmanship and other bad-faith tactics, malaise sets in.

Both European and American debates have been replete with posturing and tests of will, turning politics into a game of ‘chicken’. In chicken, two drivers race towards a cliff (or towards each other); the loser is the first driver to swerve away in the face of imminent catastrophe. But if neither driver concedes, both are destroyed.

In Europe, countries have threatened to crash out of the eurozone unless the European Central Bank or other European governments underwrite their unsustainable debt, and European policymakers have threatened to cut off support to certain countries unless they implement reforms. In this game, each side believes that its threatened action would be so damaging that the other side must swerve.

Debating the finer points
The Trump administration behaved similarly in the lead-up to the debacle over its attempt to repeal and replace the Affordable Care Act (‘Obamacare’). The administration pressed Congress by using tactics that were almost identical to those employed by the warring parties in Europe’s debt crisis.

Europe may yet learn that a member state’s exit from the EU need not be a destructive gambit in a game of chicken

At first, the administration claimed that an impending conflict would not necessarily be bad, because differing opinions are inevitable – or, in the words of White House Press Secretary Sean Spicer: “Diversity makes our nation strong.” At the start of the eurozone crisis in 2010, the EU also worried about its diversity, and how to reconcile differences between north and south, or centre and periphery.

As the effort to repeal Obamacare proceeded, however, Trump refused to entertain any alternatives: the healthcare ‘debate’ was framed as a binary choice between passing a protean bill that satisfied no one and maintaining the status quo. In offering no plan B, Trump’s approach resembled that of German Chancellor Angela Merkel in the eurozone crisis, when she took a hard line that allowed for no alternatives to the German position.

Finally, there was Trump’s apparently unshakeable confidence that he would win, and that the bill to replace Obamacare would be enacted. Spicer’s claim that “we’re going to get this done” echoes Merkel’s famous mantra in defence of her policy to welcome Syrian refugees: “Wir schaffen das” (“We can do it”). But beyond these rhetorical similarities, the European policymaking approach is very different from that of the Trump administration. And it is telling that, during Europe’s long struggle since the financial crisis, it has avoided any spectacular collapses – with the exception of the United Kingdom’s Brexit referendum.

Working together
Europe’s conflicts have always been resolved with some sort of compromise. And even though critics often caricature the EU’s internal negotiating process as overly lengthy and tedious, it has undoubtedly produced positive results.

Reforms that have improved energy policy coordination or helped to create a banking union have proven to be far more robust than they may have seemed at first. European-style multilateralism depends on constantly tweaking existing arrangements, which makes it the opposite of Trump-style unilateralism.

Constitutional government, too, is based on a process of bargaining and adjusting. At the heart of the US Constitution – which was shaped by the American Founders’ experience with British imperial overreach – is a belief that many people, working through consensus, are wiser than one person. Trump will have to learn sooner or later that consensus building is inherently frustrating, and that the solutions produced by political bargaining are usually neither clear nor simple.

Europe, for its part, reached this realisation in the 1950s, when it discovered that integration would require a series of bargains to preserve large areas of national policymaking autonomy. Europe does not have an uncontested leader to impose policy preferences on everyone else. But, unlike Trump, European leaders today can realistically issue assurances such as “we can do it”, precisely because they understand that trade-offs are necessary and inevitable.

In 2017, Europe may learn two more important lessons: first, a member state’s exit from the EU need not be a destructive gambit in a game of chicken, if the country’s departure removes tension points and preserves the foundation for future bargaining. And second, Trump’s dysfunctional administration is a model of how not to govern, and voters could punish those – like French National Front leader Marine Le Pen – who continue to emulate it.

Clariant shares rise as activist investors seek to sink $20bn Huntsman merger

Posted on July 4, 2017July 10, 2017 by Max Tomlin

The leading shareholders of two US activist investment firms – Corvex Capital Management and 40 North Management – have sought to derail the $20bn merger of chemical specialists Clariant and Huntsman, citing concerns over strategic rationale.

A Swiss regulatory filing shows David Winter and David Milestone of 40 North, along with Keith Meister of Corvex, have amassed a combined 5.13 percent of Clariant’s voting rights.

In a joint emailed statement published by Bloomberg, the investors said: “We believe that the proposed merger significantly undervalues Clariant’s shares and that far more value could be created for shareholders through any number of alternative transactions.” Markets responded positively to the development, with Clariant shares jumping 2.8 percent in early trading on July 4.

Markets responded positively to the investors’ attempts to block the deal, with Clariant shares jumping 2.8 percent
in early trading

The Clariant-Huntsman deal was announced in May, and represents an all-share merger with an enterprise value of $20bn. The agreement has been described as a merger of equals, with Clariant shareholders set to own 52 percent of the combined company, while Huntsman shareholders would hold the remaining 48 percent.

Upon reaching the agreement, Clariant CEO Hariolf Kottmann had described the planned merger as the “perfect deal at the right time”, claiming the combined company would gain a broader global reach, more sustained innovation power and fresh growth opportunities as a result. The companies had targeted to complete the merger by the end of 2017, but this schedule remains subject to shareholder approval.

In a press release early this year, the companies claimed the deal would result in cost synergies in excess of $400m, resulting in value creation of over $3.5bn. But the activist investors in question have argued the deal represents a poor piece of business: “The proposed merger has no strategic rationale and is in fact a complete reversal of the company’s longstanding strategy of becoming a pure-play specialty chemicals company.”

In place of merging with Huntsman, the investors are pushing for Clariant to explore its strategic options: “Clariant will be exchanging almost half its shares for what is primarily a commodity and intermediates business, which will further dilute its multiple and create a larger conglomerate discount.”

In response to the investors’ actions, a Clariant statement read: “We have noticed the increased investment of Corvex [and] 40 North in Clariant and their demands… we are taking all of our shareholders’ interests seriously and maintain our long-practiced open and engaging attitude with them. In that spirit we are in contact with Corvex [and] 40 North.”

China launches Bond Connect trade link in its latest bid to attract foreign investment

Posted on July 3, 2017July 10, 2017 by Max Tomlin

On July 3, China finally opened the long-awaited Bond Connect trade link, officially inviting foreign investors to tap into its $9trn bond market. The new link, which was announced in a joint statement by the Chinese central bank and the Hong Kong Monetary Authority, marks the latest in a series of moves to liberalise China’s capital markets.

The move aims to attract fresh funding to the Chinese bond market and strengthen Hong Kong’s position as a global financial centre. The much-anticipated launch coincides with the 20th anniversary of Hong Kong’s return to Chinese rule.

The project represents China’s latest attempt to expand overseas access to its markets, having already established a new trading link between Hong Kong and Shanghai in 2014, and a further link between Hong Kong and Shenzhen in late 2016.

But, despite such moves, restrictions continue to hold back foreign investors: while the Chinese bond market is currently the third largest in the world, Bloomberg estimates overseas investors own just 1.5 percent of Chinese bonds.

The Bond Connect trade link marks the latest in a series of moves to liberalise China’s capital markets

This heavy domestic-bias is expected to change in the coming years, however, as the Chinese bond market becomes an increasingly important asset class. In a recent research paper, Goldman Sachs outlined its expectations that more than $1trn of additional global fixed-income investments would shift towards the market over the next decade.

As reported by the South China Morning Post, Yunho Song, Senior Advisor to the president of Ping An Securities, said: “In comparison with previous rules on foreign investors’ investment in the Chinese bond market, Bond Connect has significantly abridged the procedures for foreign investors who can not only ‘click’ and enter the Chinese bond market but also purchase directly in foreign currencies. These arrangements can greatly save trading cost[s] and improve investment efficiency.”

The new trading link will connect global investors to Chinese bonds by establishing mutual bond market access between Hong Kong and mainland China. However, access to Chinese bonds via the programme will be restricted to overseas institutional investors such as banks, insurers and investment funds.

Under rules issued by the Chinese central bank, offshore investors will be able to trade bonds using foreign currencies. Further, the Chinese central bank will have the right to access offshore investor data.

According to the South China Morning Post, 86 financial firms had already traded Chinese bonds worth a total CNY 3.33bn ($490.4m) by 9.20am on July 3.

United Nations must embrace foreign aid effort as humanitarian crisis deepens

Posted on July 3, 2017July 6, 2017 by Max Tomlin

“We stand at a critical point in history”, the UN humanitarian chief Stephen O’Brien told the Security Council at a meeting in March. “We are facing the largest humanitarian crisis since the creation of the United Nations.” More than 20 million people are at risk of starvation or death from disease in Yemen, Somalia and Kenya, while areas of South Sudan are already officially suffering famine. In Yemen alone, child malnutrition has jumped 200 percent in two years, and three million citizens have been displaced from their homes.

At the March meeting, O’Brien said more than $4.4bn in aid was needed by the end of July if there was to be any hope of averting this catastrophe. As of the end of May, these countries in crisis had received just 10 percent of the necessary funds.

The recent swing towards protectionism has stoked fears among aid workers that established foreign aid commitments might
now be under threat

Without urgent action from the international community, millions will simply starve. And yet, as the world teeters on the brink of the worst humanitarian crisis in living memory, developed nations are turning their backs on this suffering. From Brexit to Trump, there has been a swing towards protectionism in parts of Europe and the US, stoking fears among aid workers that established foreign aid commitments might now be under threat.

These fears are certainly well founded, as in March the Trump administration outlined plans to cut its foreign aid spending by up to one third, delivering a devastating blow to the world’s poorest nations. With the situation rapidly worsening in East Africa and Trump threatening to further slash funding, the foreign aid debate has once again been thrust into the spotlight.

While NGOs call for immediate, comprehensive action, aid sceptics question whether such measures are effective in achieving long-term stability and growth. But, as 20 million lives now hang in the balance, the foreign aid question has never been so urgent.

Does foreign aid work?
Defying opposition from media critics and members of her own Conservative Party, British Prime Minister Theresa May gave aid workers something to celebrate in April when she confirmed the UK’s foreign aid budget will remain intact at 0.7 percent of GNI. While this announcement was warmly welcomed by the development sector, it quickly prompted criticism from aid sceptics, who believe the nation’s £14bn ($18bn) overseas development budget is largely going to waste.

However, Saira O’Mallie, UK Director of the ONE Campaign, an advocacy organisation focused on fighting extreme poverty, told World Finance: “£14bn sounds like a huge amount of money if you don’t know the context of it and you don’t know what that figure is as a portion of the budget – it’s seven pence in every 10 taxable pounds.”

A culture of pessimism has surrounded foreign aid spending for some time now, with critics declaring that development assistance is not only ineffective, but that a large portion of this money is lost to fraud and corruption each year. Bestselling works such as William Easterly’s The White Man’s Burden and Dambisa Moyo’s Dead Aid have delivered blistering criticisms of existing aid strategies, suggesting that foreign aid ultimately does more harm than good by encouraging economic dependency. While these accusations are certainly provocative, there may also be an element of truth in the authors’ diatribes.

Over the past 50 years, developed nations have sent more than $1trn in aid to Africa in an effort to end extreme poverty and stimulate economic growth. Today, however, the continent still dominates the ranking of the world’s poorest countries, with African nations making up 27 of the World Bank’s 31 low-income economies. Life expectancy in sub-Saharan Africa remains below the global average, while over 414 million are still living in extreme poverty.

The challenges remain great, but that’s not to say foreign aid has been ineffective in the global fight against poverty. In fact, over the past half century, aid finance has played a crucial role in improving quality of life in the world’s poorest countries.

“The UK’s Department for International Development (DFID) has seen 5.3 million girls get an education through its Girls’ Education Challenge”, said O’Mallie. “Elsewhere, the progress foreign aid has made in the fight against HIV, AIDs and malaria is also significant, and the UK has supported this through investment in programmes such as Gavi, the Vaccine Alliance.”

Global vaccine funding now immunises a child every two minutes, helping to prevent millions of early deaths from treatable conditions such as pneumonia, diarrhoea and tuberculosis. Thanks to the medical support provided by foreign aid, the number of children dying before their fifth birthday has been halved since 1900. When it comes to education, significant progress has also been made, with 90 percent of the world’s children now attending primary schools, compared with less than fifty percent in 1950. What’s more, literacy rates in sub-Saharan Africa have more than doubled in the past 40 years.

“Global poverty has been almost halved since the 1950s”, said Peter Smith, Head of UK Media at the ONE Campaign. “The fight against extreme poverty has been incredibly successful, but that war is not over yet.”

Making the money count
From providing education to food security, evidence shows foreign aid has indeed helped to improve lives in developing nations across the globe. And yet, one of the most pressing concerns for aid advocates today is that assistance is simply not reaching those people most in need.

Every year, huge amounts of aid funding are lost through government tax evasion, money laundering and bribery, although it is difficult to calculate just how much money goes missing this way. With corruption rife in many aid recipient countries throughout Africa and the Middle East, fraud not only consistently undermines aid efforts, but also impacts taxpayer support of development spending. As such, media scrutiny of aid wastage is now on the rise, prompting a profound reassessment of current aid delivery strategies.

“In places where there is corruption and there is money lost, then DFID will take action – that’s already happened in Rwanda and Liberia”, O’Mallie explained: “In these cases, DFID either stopped channelling money through the government and instead went straight to civil society organisations, or it just withheld funding altogether until progress was made.”

Critics suggest that foreign aid ultimately does more harm than good by encouraging economic dependency

Aside from the issue of corruption, we also have to consider whether aid is being spent in the most effective way. In 2016, aid experts observed a slight rise in global foreign aid spending, with six developed nations reaching the UN’s spending target of 0.7 percent of GNI (see Fig 1). However, despite this increase in aid funding, developed nations tend to be spending more on refugees already within their own borders, rather than sending the money overseas to help fight extreme poverty.

“The question of what you spend your aid budget on is very important”, said Amy Dodd, Director of the UK Aid Network. “Germany just joined the 0.7 group this year, but the vast majority of its budget is spent in Germany on refugees, and that’s not the most effective aid. Supporting refugees is a great thing to do, but it’s not development aid in action.”

Indeed, refugees arriving in Europe certainly require support, but the needs of displaced citizens in the developed world are undeniably greater. More than three million people have already been displaced by Yemen’s bloody civil war, and local refugee camps are bracing themselves for a worsening famine. Meanwhile, as Kenya teeters on the brink of an unprecedented starvation crisis, the population of Dadaab – the world’s largest refugee camp – has swollen to 250,000, with resources running worryingly low.

What’s more, if governments need to reconsider what they are spending their aid budgets on, they must also reassess the channels through which they provide aid. In the UK, the majority of the aid budget is spent through DFID, but aid workers are concerned an increasing portion of funds is being spent through other government departments, such as the Ministry of Defence. Not only do these departments lack the same level of transparency as DFID, but they also have a largely different focus. “The core purpose of DFID is to end extreme poverty”, explained O’Mallie. “The same can’t be said for the Ministry of Defence.”

Displaced Iraqis receive food from an aid worker

Philanthropic impact
In an age of immense philanthropic giving, some aid sceptics are beginning to question whether official development assistance is still necessary. Founded in 2000, the Bill and Melinda Gates Foundation has had a profound impact on the aid landscape, funnelling billions of dollars into health initiatives, sanitation projects and emergency relief. With investments pouring in from high profile philanthropists such as Warren Buffett, the foundation now boasts a budget of more than $40bn – far outstripping the total US foreign aid budget of $31bn.

As the world’s largest and most charitable foundation, it is hard to overstate the impact the Bill and Melinda Gates Foundation has had on global development. However, its founders recently warned governments cannot rely on philanthropic donations to meet the needs of the world’s poorest people.

Shortly after taking office in January, newly inaugurated President Trump announced he would be reinstating the so-called ‘global gag rule’, a piece of legislation designed to block US funds to any overseas organisation that offers abortion counselling or referrals. While NGOs and governments from around the world have quickly stepped in to fill this urgent funding gap, Bill Gates advised any further aid cuts would “create a void that even a foundation like ours can’t fill”.

$4.4bn

Amount of aid the UN said was required by July to prevent the famine crisis in the Middle East and Africa

10%

of this amount had been received as of May

$1trn

in aid has been sent to African nations in the past 50 years

$40bn

The foreign aid budget of the Bill and Melinda Gates Foundation

$31bn

The foreign aid budget of the US Government

“The US is the number one donor in the work that we do”, Gates told The Guardian. “Government aid can’t be replaced by philanthropy. When government leaves an area like that, it can’t be offset, there isn’t a real alternative.”

Ignoring these warnings of a potentially catastrophic funding gap, Trump appears intent on continuing to slash the nation’s aid budget. In his budget proposal for 2018, the president has suggested a 28 percent cut in overseas development spending which, if implemented, would squeeze the US aid budget to a level not seen in more than two decades.

Reflecting Trump’s oft-scrutinised isolationist vision for the nation, the proposed cuts would see a reduction in US funding for the UN, as well as an extreme reduction in spending on climate change and cultural exchange programmes. “It marks a step back from internationalism, cooperation and multilateralism, which is really concerning”, said Dodd. “Stepping back from working with the UN is a particularly worrying idea.”

“Every country is better off if there is greater global equality, even if you just look at it in terms of potential trade partnerships”, said O’Mallie. “Helping countries to invest in their own infrastructure just makes everyone safer and makes the world a more stable place.”

Over the past 12 months, the world has seen a turn towards isolationism and protectionism, and the impact of such a trend will be felt most bitterly by the world’s poorest nations. In the 40 years since the UN established its 0.7 percent aid funding target, just six countries have met this pledge. With the US turning its back on its foreign aid commitments, it is high time the world’s richest economies fulfil the promise they made almost half a century ago.

As politicians debate the effectiveness and ethics of foreign aid, the world stands on the brink of the greatest humanitarian crisis since 1945. A child now dies every 10 minutes in Yemen from a preventable disease, while more than one million South Sudanese children are suffering from severe acute malnutrition. With 20 million lives now at stake, the developed world can no longer ignore this suffering. Foreign aid may well have its flaws, but the consequences of our inaction will forever haunt us.

Japanese firms struggle to fill vacancies as job-to-applicant ratio hits 43-year high

Posted on June 30, 2017July 5, 2017 by Max Tomlin

According to the latest data released by Japan’s Ministry of Internal Affairs and Communications, the job-to-applicant ratio exceeded expectations in May, reaching its highest point in 43 years. For each applicant in Japan there were an average of 1.49 job vacancies, up from 1.48 in the previous month. The numbers reflect a shortage of labour even more extreme than witnessed during the heated economic climate that preceded the 1990 financial crisis.

Japan’s growing unemployment rate can be explained by an increase in the number of people choosing to seek work, rather than a decrease in those employed

In a seemingly illogical twist, Japan’s unemployment rate actually increased during the same month. According to seasonally adjusted figures, the unemployment rate rose from 2.8 percent to 3.1 percent month-on-month. This quirk, however, can be explained by an increase in the number of people choosing to seek work, rather than a decrease in those employed. Indeed, the labour force participation rate has now reached its highest point since 2008.

More generally, however, unemployment is sitting at a historically low level. The key issue regarding Japan’s workforce has centred on a lack of wage increases coupled with stagnant inflation. Despite labour shortages, wage levels in Japan have seen only minor increases, and inflation is likely to fall short of the Bank of Japan’s target of two percent. The official inflation forecast for 2017 currently sits at 1.4 percent.

While the target inflation rate remains some way off, it seems likely there will be some upward pressure in the future. In an interview with Bloomberg, Takeshi Minami, Chief Economist at Norinchukin Research Institute, said: “Labour participation may be peaking due to supply shortage, which should push up wages and prices… it hasn’t occurred at all yet, but I do think we are getting there soon.”

4 out of 5

of the poorest US states are located in the South

650

textile plants closed in the southern states between 1997 and 2009

52%

The increase in the number of auto industry jobs in the South between 1980 and 2013

776

people are imprisoned for every 100,000 citizens in Louisiana – the highest rate in the US

49%

of millionaire Millennials in the US consider social responsibility when choosing investments

43%

The same share of GenerationX

34%

The same share of Baby Boomers

27%

The same share of older generations

$11bn

The estimated net worth of the Rockefeller family today

$30bn

John D Rockefeller’s net worth today if adjusted for inflation

174

The number of heirs to the Rockefeller fortune

101

The age at which David died, making him the world’s oldest billionaire

$4.8bn

The value of Chase Bank when David Rockefeller joined in 1946

$76.2bn

The bank’s value in assets by 1981

47%

Share of US employment at “high risk” of automation in the next 20 years

4%

Decrease in the labour share of income since 1970

Number of Indian citizens registered to the Aadhaar system (billions):

0

2010

0.1

2011

0.2

2012

0.4

2013

0.7

2014

1

2015

1.1

2016

1.3bn

Population of India

1.1bn

Indians are currently registered to the Aadhaar biometric database

15%

The above as a share of global population

99.5%

of Indians aged over 18 are enrolled

337m

Aaddhaar numbers are linked to bank accounts

15m

transactions take place each day

$1bn

The amount the World Bank estimates the system has saved the Indian Government per year

$4.4bn

Amount of aid the UN said was required by July to prevent the famine crisis in the Middle East and Africa

10%

of this amount had been received as of May

$1trn

in aid has been sent to African nations in the past 50 years

$40bn

The foreign aid budget of the Bill and Melinda Gates Foundation

$31bn

The foreign aid budget of the US Government

The bank’s
value in assets by 1981

Population
of India

The amount the World Bank estimates the system has saved the Indian Government
per year