UNCDF: A Roadmap for Financial Inclusion

[caption id="attachment_8681" align="alignright" width="180"] South Africa[/caption]

Nephathli is a man from Lesotho, formerly a mineworker in South Africa. His family’s main source of income is the profit made on the sale of chickens and eggs. Nephathli’s income varies from month to month depending on how many eggs or chickens are sold. His children are trying to make a living. However, they are struggling to find a stable income leaving Nephathli responsible for the entire family. Three of his nine children have passed away, leaving behind orphaned grandchildren.

Nephathli and his wife keep their cash in a safe place at home rather than in a bank. He also tries to save a little every month, mostly to pay for his grandchildren’s school fees. “I was not able to even open a bank account because of the little money that I get.” While Nephathli acknowledges that a bank would be a good place to borrow money from in order to buy a dairy cow or a tractor, he feels he does not qualify not having a bank account or the money for one.

Lesotho is characterised by a poor, but not indigent, population maintained largely through social support structures and remittances. While the adult population enjoys some access to banking services, these are by no means universally provided.

“It is increasingly recognised that it takes a broader ecosystem of providers to deliver the diverse set of financial services that the poor require as opposed to a singular focus on micro-finance institutions only.”

However, the kind of financial services that people use (including high-cost bank accounts, low-value community or home-based savings, high-cost informal loans, funeral cover, and informal remittances) are not helping to lift them out of poverty, but are merely offering ways to “get by.” Thus, financial access measured in terms of uptake is not the issue in Lesotho but rather how to extend the reach of these services. The bigger question is: How can financial services be leveraged or re-engineered to more effectively alleviate poverty and support economic growth?

Making Access Possible

The recent MAP (Making Access Possible) diagnostic and planning framework in Lesotho was able to identify the financial inclusion priorities by unpacking and understanding the current customer needs and their usage of existing services. When filtering the financial inclusion priorities through the lens of actions most likely to contribute to poverty alleviation and economic growth, three key roadmap priorities were identified: Directly improve household welfare through efficiency gains and risk mitigation; take small steps towards enhanced growth via highly targeted productive credit and inward investment promotion; and increase financial sector intermediation to support investment and growth.

MAP is a UNCDF (United Nations Capital Development Fund) multi-country diagnostic and planning framework to support financial inclusion through a process of evidence-based country diagnostic and stakeholder dialogue, leading to the development of national financial inclusion roadmaps that identify key drivers of financial inclusion and recommended action.

MAP is a powerful tool towards the achievement of financial inclusion goals and aspirations across the globe. Through its inclusive approach and stakeholder engagement, and a comprehensive diagnostic, and practical, action-oriented strategies/roadmaps, MAP can enable governments and stakeholders to translate their high-level aspirations to reality. MAP generates key data that can be used in efforts to enhance decision-making and monitor progress as called for by the GPFI (Global Partnership for Financial inclusion).

[caption id="attachment_8686" align="aligncenter" width="589"] Why MAP? MAP value proposition.[/caption]

MAP is set apart from other financial inclusion initiatives in a number of ways. It combines three key components: A country diagnostic, a country-level stakeholder process and roadmap, and a global learning, dissemination, and advocacy drive to impact the financial inclusion agenda in a unique way. MAP is evidence based, customer centric and data driven, enabling factual and insightful discussions across a range of financial inclusion issues.

The MAP analytical framework and methodology amalgamates three tested approaches including UNCDF’s collaborative country-level programming framework (deployed in forty countries) that does not preconceive the role of different stakeholders but seeks to work within the practical realities to optimise and coordinate the efforts.

Broadening the Ecosystem

It is increasingly recognised that it takes a broader ecosystem of providers to deliver the diverse set of financial services that the poor require as opposed to a singular focus on micro-finance institutions only. Strategies that remain focused on only one of these providers such as microfinance institutions, private sector, cooperatives, or a single activity such as institution-building are missing the bigger picture and also unlikely to enable systemic change that will drive universal financial inclusion. This is based on the view that competitive markets are the means through which innovation and competition will result in falling transaction costs together with the scale and sustainability required to overcome the significant levels of exclusion that remain (Porteous, 2004, Honohan and Beck, 2007).

Financial transactions play an integral role in the daily lives of most people, especially those living in poverty. Yet, they are compelled to use informal, often sub-optimal services. Research has shown that poor households use a range of informal methods to manage their daily needs, including storing savings at home, with others, and with banking institutions; joining savings clubs, savings-and-loan clubs, and insurance clubs; and borrowing from neighbours, relatives, employers, moneylenders, or financial institutions. These mechanisms are not ideal, particularly in protecting the poor from short-term and long-term household risks and shocks.

Greater financial inclusion can contribute to multiple developmental priorities as laid out in the Post-2015 Development Agenda and the Sustainable Development Goals (SDGs) currently being negotiated at the United Nations. By reducing vulnerability to economic shocks and boosting job creation, financial inclusion can be a key driver of both poverty reduction and inclusive economic growth while at the same time promoting greater equality.

Increased financial inclusion for women has been shown to lead to their enhanced economic and social empowerment. Without inclusive financial systems, poor people must depend on incomplete or inferior informal mechanisms to deal with shocks. While building assets and small enterprises, they must rely on their limited earnings.

Greater Constraints

For firms, particularly small and start-up firms that are subject to greater constraints, access to finance can be associated with innovation, job creation, and growth. For these reasons, access to financial services can play a key role in the transformative Post-2015 Development Agenda across the three dimensions of sustainable development, economic, environmental and social. This explains why financial inclusion appears as targets under a number of likely SDGs being considered by the UN General Assembly.

Financial inclusion has also become a priority for policy-makers and regulators in financial sector development globally. Since 2009, the G20 has noted the importance of financial inclusion, particularly in its contribution to financial sector deepening, and has noted its contribution to economic growth. The G20 has gone further by setting out Nine Principles of Financial Inclusion and has underscored the importance of data with the adoption of the Basic Set of Financial Inclusion Indicators.

The MAP diagnostic and planning framework enables governments and other stakeholders to better understand the financial inclusion context in their country, by providing data and insights on demand for and supply of financial services as well as the policy, legal, and regulatory framework.
Reflecting the high priority placed by governments on financial inclusion, some 38 countries have made a commitment to expand financial inclusion as part of the Maya Declaration launched by the Alliance for Financial Inclusion (AFI). Many of these commitments include the adoption of national strategies for financial inclusion – and MAP can help in the development of these.

It is hoped that through the efforts of global programmes like AFI and the Maya Declaration, together with the powerful analysis and diagnostics provided by MAP, people like Nephathli can benefit from access to appropriate financial services. By understanding the needs and demands of households like Nephathli’s, policies as well as product and service solutions can be developed that better serve their needs and reduce inequalities of access. With greater access to a range of financial services, poor and low-income households and businesses can, increase consumption, manage risks, and expand income, and build assets.

About UNCDF

UNCDF is the UN’s capital investment agency for the world’s 48 least developed countries. It creates new opportunities for poor people and their small businesses by increasing access to microfinance and investment capital. UNCDF focuses on Africa and the poorest countries of Asia, with a special commitment to countries emerging from conflict or crisis. It provides seed capital – grants and loans – and technical support to help microfinance institutions reach more poor households and small businesses, and local governments finance the capital investments – water systems, feeder roads, schools, irrigation schemes – that will improve poor peoples’ lives. UNCDF programmes help to empower women, and are designed to catalyze larger capital flows from the private sector, national governments and development partners, for maximum impact toward the Millennium Development Goals. For more information, please visit www.uncdf.org and subscribe for news, follow @UNCDF on Twitter and UN Capital Development Fund on Facebook.


Masoud Barzani: Walking a Tightrope

 The world’s largest nation without a country, the Kurds are slowly carving out a few slices of real estate to call their own. Decades of war and civil strife have weakened and toppled governments that stood between the Kurds and their aspiration to statehood.

In Syria, around the town of Sere Kaniyeh, local Kurdish leaders have managed to establish a de-facto independent enclave largely untouched by either government forces or rebel fighters. Run by the Democratic Union Party – aligned with the Kurdistan Workers’ Party (PKK) – the region is a haven of peace and the “third point” in the revolution that is levelling Syria.

In neighbouring Iraq, the Kurds are firmly in charge of their own autonomous region. Covering an area of almost 80,000km2 and home to well over eight million people, the Iraqi Kurdistan Region is a nation-building exercise on the grandest of scales. It also comes with more than an average set of challenges.

Leading the way is Masoud Barzani, scion of family of successful entrepreneurs and elected president of the autonomous region in 2009 with close to 70% of the vote. In 2013, the Iraqi Kurdistan Parliament extended President Barzani’s mandate by two years in order to gain additional time for the drafting of a new constitution.

“I will hand over executive power to the person chosen by the people. It is therefore of paramount importance that a process be put in place to allow for the democratic transfer of power.”

President Barzani has repeatedly stated that he is not interested in running for re-election once his term expires in 2015: “I will hand over executive power to the person chosen by the people. It is therefore of paramount importance that a process be put in place to allow for the democratic transfer of power.”

While the 111-strong parliament in Erbil shapes and frames the region’s political future, President Barzani has suspended all efforts at obtaining full independence. Though he has not renounced the idea of Kurdish statehood, the fight against the Islamic State (IS) now requires his government’s full attention.

President Barzani is walking the proverbial tightrope as he tries to stave off the ongoing offensive by Islamist militants who are not just encroaching on the autonomous region but also on other Kurdish enclaves in Iraq and Syria. So far, President Barzani has deftly managed to keep relations with Turkey on a civilised footing, although that country’s government remains wary of facilitating the delivery of both humanitarian aid and military supplies to embattled Kurdish enclaves besieged by IS.

A skilful negotiator and behind-the-scenes operator, President Barzani did manage to get both Turkey and Iran to discreetly supply his government with arms to fight IS in Kobane, a Kurdish town on the Turkish-Syrian border. The president revealed in mid-October that Turkey is also offering medical assistance to hundreds of Kurdish fighters wounded in the Battle of Kobane, including some forty members of the PKK – still outlawed by Ankara.

President Barzani has gathered an impressive level of foreign support for his efforts to forge a secular democratic state out of the turmoil. Though not without critics, he has established the trappings of an emerging democracy. Long-standing feuds between President Barzani’s own Kurdistan Democratic Party (KDP) and the Patriotic Union of Kurdistan (PUK) have been plastered over and replaced with a unified approach to the establishment of a Kurdish state-in-being and the fight against IS.

Perhaps not without flaws – he was criticised for insufficient financial transparency – President Barzani has been a bulwark against both the political and religious extremism that, at times, seems endemic to the wider region. He also offers a Kurdish voice distinct from the PKK and is, as such, much more acceptable to regional powerbroker Turkey without whose blessing any initiative to form a Kurdish state would seem doomed to failure.


World Economic Forum: Chile and Colombia Best in Entrepreneurial Vitality

[caption id="attachment_8697" align="alignright" width="171"] Davos[/caption]

Most advanced economies are lagging in entrepreneurial vitality. According to a report published last week by the World Economic Forum, the most ambitious and innovative businesspeople are to be found in emerging countries.

The Leveraging Entrepreneurial Ambition and Innovation Report found that Chile and Colombia score best for entrepreneurial spirit and drive. In both countries, start-up businesses are significantly contributing towards economic growth, job creation, and innovation. “It is not just about the number of entrepreneurs. The amount of innovation and ambition matter as much,” says Head of Investors Industries at the WEF Michael Drexler.

“We found that most advanced economies typically have less early-stage entrepreneurial activity, and many of them lack in either ambitious or innovative entrepreneurship, too. That means they miss out on much of the positive impact entrepreneurs can have on their economy.”

Mr Drexel explained that in dynamic economies such as those of the United States, Israel, and Ireland businesspeople may indeed be ambitious and optimistic, but often score only average or lower on early-stage entrepreneurial activity – meaning that new initiatives often fail to take off, let alone bear fruit. Mr Drexel hopes that the report may provide policymakers with valuable insights and a better understanding of the specific conditions needed to nurture entrepreneurship.

“We found that most advanced economies typically have less early-stage entrepreneurial activity, and many of them lack in either ambitious or innovative entrepreneurship, too. That means they miss out on much of the positive impact entrepreneurs can have on their economy.”

- Michael Drexler, Head of Investors Industries at the WEF

The study combines two data streams to examine the relationship between levels of entrepreneurship and competitiveness. Using crossed-referenced data going back five years, the report surveys 44 economies for entrepreneurial preconditions such as awareness of opportunity, inherent business skills, cultural tolerance of risk-taking, and entrepreneurial connections.

Scoring low on the Global Competitiveness Index (GCI), does not mean that a given country lacks in entrepreneurial spirit. Uganda is a case in point: of the 44 countries examined, it ranks last on the GCI scale but claims the top position when early-stage entrepreneurial activity is considered with close to 35% of population engaging in some form of business. However, very few of Uganda’s start-ups are confident in the future. Their level of ambition is minimal as is innovation. Clearly conditions are far from optimal in Uganda. That said, a change in policy could possibly unlock vast economic rewards for the country.

Contrast this to both Chile and Colombia: here, most start-ups tend to be highly innovative and very ambitious. Moreover, there are plenty of them: more than a quarter of the population is engaged in running a business.

The report splits the examined countries into two groups: those with high levels of activity – such as Uganda, Brazil, and Mexico – and those with high levels of innovation – such as France and Denmark. Other countries may have high levels of ambition (US and China). However, only Chile and Colombia score well across the board and as such have become places of entrepreneurial excellence.


France – New Elan Takes Hold of Economy

[caption id="attachment_8703" align="alignright" width="180"] Paris[/caption]

The triple terrorist attacks that rocked France last week will have a negligible impact on the country’s economy. According to Economics Professor Todd Sandler of the University of Texas Dallas business confidence is seldom affected when terrorists strike in advanced countries: “Their economies are usually pretty resilient and have ways of equilibrating and adjusting to risk. People know the security forces will do their job, and a central bank can take action if needed.”

However, sluggish economic growth will keep the French economy teetering on the brink of recession throughout 2015. Even the more optimistic of forecasts have France’s GDP expanding by no more than 0.8% in 2015 – a slight improvement over the 0.2% growth registered in 2014. The latest numbers released by the Organisation for Economic Development and Cooperation (OECD), show that a slight gain in momentum may be expected in 2016 with growth perhaps reaching as high as 1.5%.

Earlier this month, President François Hollande pledged not to seek re-election in 2017 should unemployment remain above 10%. In order for joblessness to decline, France needs economic growth to exceed one percent. In an interview with France Inter radio, President Hollande revealed that he will meet German Chancellor Angela Merkel shortly to discuss ways that could help revive Europe’s economic fortunes in general and France’s in particular.

"However, sluggish economic growth will keep the French economy teetering on the brink of recession throughout 2015. Even the more optimistic of forecasts have France’s GDP expanding by no more than 0.8% in 2015 – a slight improvement over the 0.2% growth registered in 2014."

The French president solemnly promised to use the proceeds of any excess growth – anything over 1% – towards the reduction of the budget deficit which currently stands at 4.1%, well above the 3% maximum allowed for by the European Commission. Late last year, the European Commission granted France a three-month extension on the time it has to prove that policy measures put in pace will in fact reduce the structural budget deficit to within the 3% of GDP allowed for under the Stability and Growth Pact.

Lower oil prices and a weaker euro may yet save the day. Policymakers in Brussels admit that the knock-on effects of these new conditions could very well help tip the balance in Paris’ favour. While the commissions economists are likely to strip France’s deficit forecasts of any cyclical windfalls and concentrate instead on structural improvements, the country is now likely to meet its targets without imposing additional budgetary restraints and thus escape the EU’s ire.

Meanwhile, the “exceptional contribution to solidarity” of 75% on annual earnings in excess of one million euros – the much maligned “super tax” on the rich – is set to expire on February 1. A fiasco by any measure, with the possible exception of Gerard Depardieu’s hilariously pompous departure to fiscally less-taxing Russia, President Hollande’s flagship measure brought less than €500m into the national treasury.

The tax did signal the administration’s animosity towards business and, as such, helped drive investors away. Foreign direct investment (FDI) dropped from an annual average of $84bn in 2005-2007, to less than $5bn in 2013 thus vindicating Emmanuel Macron who in 2012 warned that President Hollande’s tax plan would turn France into a “Cuba without sunshine.”

In August 2014, Mr Macron was appointed minister of economy, industrial renewal, and information technology in the cabinet of Prime-Minister Manuel Valls. The former presidential advisor may now try and undo the damage wrought by the misguided policies implemented during the first half President Hollande’s term in office.

Minister Macron brings a measure of flair and vigour to the otherwise uninspiring Valls cabinet. He was present at the glitzy Consumer Electronics Show (CES) in Las Vegas to promote France as a welcoming place for high-tech start-ups. After posing for the unavoidable selfie, Minister Macron went out of his way to emphasise that France is back in business. “I don’t want a country completely resistant to innovation, to modernization, to acceleration – that’s exactly the opposite of what I want.”

Some 120 French companies showcased their gadgets and services at the CES – the biggest national delegation from Europe. With a stellar reputation for getting things done, Minister Macron enjoys the highest popularity ratings of any cabinet member. The moment for France to shed its image as a country hostile to business and innovation is now.


Henri de Castries: Pragmatism with a Human Touch

Business managers often point out that people are the greatest asset of any company. In interviews, CEOs unfailingly express a debt of gratitude to their dedicated workforce. However, this debt does not prevent them from sending a few workers home every now and then to prop up share prices and assure investors that their business remains lean and mean.

Henri de Castries, CEO of French insurance company AXA, is much the exception to the rule: He actually does as he preaches. Mr De Castries runs a people-centred company and takes a genuine interest in the well-being of those who work for it. He is happy to take time for a chat and will personally address any grievances detected. Mr De Castries is a charmer as well. He is famous for gracefully chastising financial analysts who insist on maximising short-term profits to the detriment of long-term corporate health. More importantly, he gets away with it and has remained the darling of the investor community.

More than just the CEO of a company that last year netted €4.5bn in income, Mr De Castries is also chairman of the Steering Committee of the Bilderberg Group – a somewhat secretive conclave of leaders from business and politics instigated in 1954 by Prince Bernhard of The Netherlands who was to fall from grace for his dubious role in the Lockheed Affair of 1976.

The affability Henri de Castries is known for stands him in good stead at the Bilderberg Group. Here, it is all about building solid private relationships that allow for behind-the-scenes consultations should issues arise. At the Bilderberg Group friends help friends. And for that to work, these friends need plenty of privacy.

The topics discussed at the group’s annual meetings, billed as informal affairs, are not divulged. In 2008, a highly unusual press statement was released by the American Friends of Bilderberg which explained that the group does not propose resolutions, take votes, or issue policy statements.

Though the Bilderberg Group maintains an, again, informal secretariat in the Dutch university town of Leiden, it does not have any permanent members aside from those sitting on the steering committee. The guest list for the annual conference changes each year and names get dropped, and others added, for no apparent reason. Usually, no more than 150 people receive an invitation to attend a Bilderberg meeting. The one thing attendees have in common is that they are either European or North American. Bilderberg is a strictly Atlantic affair.

The group was started in the 1950s to stem the tide of growing anti-Americanism in Europe. Its Belgian, Dutch, and Polish founders wanted to create a forum to foster transatlantic cooperation and understanding with a view to strengthening the political, economic, and military ties between Europe and the United States.

On the American side, it was initially the CIA that answered the Bilderberg call. The stage was set for conspiracy theorists the world over to see the Bilderberg Group as set on world domination. However, nothing could be further from the truth. While the group Mr De Castries discreetly helps steer does include people wielding significant chunks of power, the collective now also embodies the demise of the West’s influence in a multipolar world.

Behind-the-scenes manoeuvring and the trading of favours between friends remain of paramount importance to smoothing differences, facing common challenges, and clearing misconceptions. If Russian President Vladimir Putin had a close personal friend of some societal standing in the West, he might have been told to stop acting like a spoilt brat.

That is how the Bilderberg Group is supposed to work; as a conduit for common sense to prevail. As such, Mr De Castries is the right man for the job: He is known to severely dislike power-tripping and prefers to infuse cold pragmatism with a warm human touch. Meanwhile, the Bilderberg Group is at the cusp of outliving its usefulness. As a geopolitical concept, Atlanticism has now joined the dodo in the realm of the extinct.


World Economic Forum: Who’s Packing for Davos

[caption id="attachment_8716" align="alignright" width="145"] Klaus Schwab[/caption]

The ultimate networking event is set to kick off in a week with a record-setting 2,633 participants. The World Economic Forum (WEF) today released its list of invitees the organisation hopes to welcome in Davos, the posh Swiss ski resort where the event unfolds annually since 1971.

Close to 300 heads of state, heads of government, and cabinet ministers will attend the forum. The world’s largest corporations are expected to dispatch over 1,500 representatives to Switzerland. Smaller cohorts of reps from non-governmental organisations, academic institutions, and multilateral bodies are also in attendance. Thirteen Nobel laureates will be at hand as well.

Invitations to the event are extended at a minimum price of $71,000 – a steal according to most businesspeople for nothing quite compares to Davos when it comes to making connections. The WEF is billed as a platform for those committed to improving the state of the world. However, conducting a little business on the side while improving humanity’s lot has become acceptable, if not the norm. The organisation frowns upon this practice but condones it nonetheless.

“2015 is a year when we are at a crossroads. A world of disintegration, of hate, of fundamentalism, and on the other hand a world of solidarity, of cooperation. We have seen both of those worlds last week in Paris.”

- Klaus Schwab, WEF Chairperson

Large corporations, which sponsor the WEF to the tune of $200 million annually, send top-heavy delegations to Davos with a view to deal-making. Countries now employ the forum, and the countless “off-piste” happenings, to showcase their strengths as they vie for the attention – and the wherewithal – of investors and corporate behemoths.

Heavyweights

China is sending its highest level delegation to Davos since 2009. Premier Li Keqiang, and economist by training and one of the architects of Chinese economic policy, is expected to deliver a keynote address and hold talks with representatives of the International Business Council, an advisory body that provides intellectual guidance to the forum. While in Davos, Premier Keqiang is also scheduled to meet WEF Founder and Chairperson Klaus Schwab.

Secretary of State John Kerry, a Davos habitué, is the highest US administration official to attend the 45th edition of the forum. German Chancellor Angela Merkel, another fixture of Davos, has also confirmed her presence.

Though earlier this month, Russian President Vladimir Putin, Mrs Merkel’s nemesis, received an invitation from the WEF, he cordially declined. However, Prime-Minister Dmitry Medvedev may well travel to Davos though that is yet to be confirmed by the Kremlin. First Deputy Prime-Minister Igor Shuvalov in certain to attend the proceedings as will Deputy Prime Minister for Industry and Energy Arkady Dvorkovich.

Russian corporations, widely appreciated for the outrageous parties they traditionally throw, are also not shying away. Two banks suffering from international sanctions – VTB Bank and OAO Sberbank – have been strategic partners of the forum for a number of years and confirmed their presence. The state-owned Vnesheconombank, particularly hard-hit by the third round of sanctions implemented in July 2014, has announced it will send its Chairperson Vladimir Dmitriev and his deputy to Davos.

Other noteworthy participants include Chinese self-made billionaire businessman and philanthropist Jack Ma who in 2007 suffered an epiphany after reading about worldwide opposition to the wholesale killing of sharks for their fins. Mr Ma not only swore off shark fin soup, he also decided that environmentalism would henceforth shape his ethos. True to his word, in May 2013 Mr Ma resigned as CEO of the Alibaba Group he founded in 1999 to take up a full-time position as chairman of the board of The Nature Conservancy China Programme.

Earlier this week, WEF Chairperson Klaus Schwab said that the forum takes place at a most opportune moment: “2015 is a year when we are at a crossroads. A world of disintegration, of hate, of fundamentalism, and on the other hand a world of solidarity, of cooperation. We have seen both of those worlds last week in Paris.”

Participants address the most pressing of global concerns in a series of workshops, conferences, and panels. Issues most likely to dominate include the crash of the oil price, Russia’s assertiveness vis-à-vis the Ukraine, the continuing and escalating threat of sectarian terrorism, and the likelihood of the European Central Bank flooding the market with untold billions in an attempt to jump-start the Eurozone’s economy.

Shaping Davos

More than 140 countries will be present in Davos. Most hope to drum up business in the form of public-private partnerships. Already this week, the Shaping Davos event takes place, connecting forty cities – hubs in WEF parlance – to the Swiss village for a multiway conversation that aims to encourage local solutions to global issues. Touted as a game-changing concept, Shaping Davos is a new initiative of Global Shapers – a network of young people between the ages of 20 and 30 who wish to actively take part in setting the development and societal agendas.

The Global Shapers network comprises over 400 self-organising local hubs that undertake a wide variety of activities aimed at generating a positive impact within their home community. Global Shapers also operates as a think tank and produces a number of reports on competitiveness, risk, and development scenarios.


UK Economic Growth: Beyond the Glitter

[caption id="attachment_8720" align="alignright" width="215"] Bank of England[/caption]

The UK economy may be growing at an impressive clip; the spurt is powered by borrowed money and, as such, akin to a bubble. The same holds true for the seemingly impressive economic performance of the United States.

With a current account deficit equal to a whopping 4.8% of GDP, Britain’s most successful export commodity is its own wealth, which now leaves the country at a rate of $163bn (£107bn / €139bn) annually.

The valiant efforts of Chancellor of the Exchequer George Osborne to minimise fallout have so far tricked financial markets into believing that Britain is doing just fine. It remains somewhat of a mystery why investors keep faith in Mr Osborne. The twin pillars that support the British economy – North Sea oil and the London City – are wobbling, if not crumbling.

Earlier this week, energy experts warned that production may be halted at some North Sea oilfields if prices drop any further. “Even at $50 a barrel, a number of fields are failing to break even. At $40 a barrel, which is where we’re heading to, a significant part of the North Sea oil supply becomes cash negative,” says Robert Plummer of the oil industry consultancy Wood Mackenzie.

Bank of England Governor Mark Carney said on Wednesday that the Scottish economy is expected to suffer “a negative shock.” Mr Carney, not usually one to eschew candour, told MPs of the Treasury Select Committee that the impact on Scotland of the downturn will be substantially mitigated by “the nature of the economic union that exists.”

Falling oil prices have so far wiped £6bn off Scotland’s GDP. Keeping with her government’s character, Scottish First Minister Nicola Sturgeon immediately blamed London for all her woes, bluntly stating that Scotland’s present predicament is the result of mismanaged oil and gas fiscal policies.

“Even at $50 a barrel, a number of fields are failing to break even. At $40 a barrel, which is where we’re heading to, a significant part of the North Sea oil supply becomes cash negative.”

- Robert Plummer, Wood Mackenzie

Meanwhile, the City is slowly coming to grips with the times and foreswearing its erstwhile less-delicate ways of raking in cash. Though still the domain of glitzy and racy financiers, the more nefarious effects of the 1986 Big Bang – the far-reaching and abrupt deregulation of financial markets – are slowly being undone, mostly courtesy of the EU’s financial regulatory entities and undoubtedly to the chagrin of Mr Farage.

With the Eurozone progressing steadily towards a fiscal and banking union – an inevitability if the euro is to survive (which it will) – the City may well suffer rules, instead of imposing them. Britain runs the risk of being outgunned and outsmarted at its own financial game by the continentals. There is no discernible rationale for the Eurozone to use an off-shore financial centre while perfectly viable “on-shore” alternatives are readily available in Frankfurt, Paris, and Amsterdam.

The numbers reveal a staggering divide not always present in public perception. While the much-maligned Eurozone boasts a trade balance of +$242bn in 2014 and racked up a $334bn current account surplus, the UK lost close to $200bn on its foreign trade, contributing towards a current account deficit of $163bn. It is not so much that Britain is unwilling to sign onto the common currency as it is that the country would prove a serious drain on the Eurozone, almost wiping out the block’s trade surplus and severely undermining its accounts. As such, the UK would be a most unwelcome addition to the Eurozone. One France is quite enough to keep things interesting.

While on the subject: the sneers directed at France emanating periodically from London, seem particularly misguided. For all the cost-cutting, the UK budget deficit of -5.1% of GDP makes the French look positively stingy (-4.4%). The markets seem to be catching on. While France can easily place its 10-year bond (OAT) at an interest rate of 0.7%, UK 10-year gilts need offer a 1.7% rate to pique investor interest.

What the numbers also show is that any and all attempts at undermining the euro are doomed to fail. Eurozone economic growth may be anaemic, its books are in order and the European Central Bank’s war chest would put both Ali Baba and Scrooge McDuck to shame.

The choice seems to be one between accelerated growth, spurred on by copious deficit spending, and more modest growth rates with balanced accounts. The latter option is the one preferred by the ever-prudent Germans and Dutch, while the former is espoused by both the British and Americans.

The Anglo-American option delivers economic growth, albeit at a price most continentals would consider too steep. Contrast this to the German-Dutch approach that keeps economies shackled to the higher ideal of fiscal responsibility. Hence, the choice is a simple one: either grow out of the hole or stop digging.


US Welcomed at Davos as the New Emerging Market

The annual meeting of top businessmen, leading public officials, and a host of other VIPs in Davos usually sees emerging markets claim centre stage and draw attention to the marvels of their booming economies. Save for China, at this year’s Davos happening the world’s erstwhile movers and shakers are expected to tone down some.

Three of the five BRICS countries – Brazil, Russia, and odd-man-out South Africa – aren’t doing all too well. Brazil’s economic growth is petering out and forecasted to not exceed 1.2% in 2015. South Africa is doing a bit better, expecting its GDP to expand by 2.5% provided oil prices stay low, while Russia – beset by crippling sanctions – may, with some luck, only just avoid an economic contraction.

India is doing significantly better. According to estimates by the World Bank, the country will see its GDP grow by 6% or more this year, even as Prime-Minister Narendra Modi seeks to introduce sweeping reforms aimed at ushering in a golden age. Meanwhile, China is battling its own demons – a shaky real estate market and iffy banks – all the while maintaining an impressive, albeit slightly lower than usual, growth rate of at the very least 7.4% in 2015.

The one emerging market to command the undivided attention of the 2,633 invitees to the 45th edition of the World Economic Forum is … the United States. “It is the safest and best harbour,” assures Manuel Falco, head of corporate and investment banking for Europe, Africa, and the Middle East at Citigroup.

“If you want to participate in innovation, you have to be in the US.”

- Karl-Ludwig Kley, CEO, Merck

The US is close to booming with its economy in Q3 2014 growing at an annualised rate of 5%. “The pendulum has shifted once again,” says Jacob Frenkel, chairperson of JPMorgan Chase & Co.’s international operations: “The US is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

Martin Reitz, head of the German branch of the Rothschild investment bank, agrees and predicts that behind the scenes, much of the talk in Davos will concern the extraordinary resilience of the US economy and the ways in which companies may hitch a ride on the American bandwagon: “Companies not present or sub-scale in the US are busy thinking about how to address this.”

German pharmaceutical giant Merck jumped ahead of the pack and in September announced its takeover of St Louis-based life science and biotech company Sigma-Aldrich for $17bn. Shareholders approved the bid and just before Christmas, the US Federal Trade Commission gave its blessing to the proposed deal as well. “If you want to participate in innovation, you have to be in the US,” said Merck CEO Karl-Ludwig Kley: “No other country on earth is investing as much in innovation.”

Japanese distiller Suntory plopped down a cool $16bn for an irresistible piece of Americana as it acquired iconic bourbon producer Jim Bean, while the Canadian oil and natural gas producer and transporter Encana moved decisively into the Texas oil patch with its $5.9bn purchase of Athlon Energy.

The US acquisition scene is about to heat up and Davos is the place to take its temperature. Forecasters are dead-sure that last year’s $259bn in foreign takeovers of US businesses – already double the 2013 numbers and a level not seen since 2007 – may very well be outdone in 2015. Large cash reserves, halting growth in emerging markets, and the limited potential of organic growth have fuelled interest in mergers and acquisitions to such a point that suitable targets have become scarce.

“Finding assets that will generate returns to satisfy investors has proven difficult for corporations and private equity firms alike,” says Dan Tiemann, head of Transactions and Restructuring at KPMG in the US: “The economic fundamentals that drive M&A are back at pre-crisis levels, with corporations holding large cash reserves, interest rates remaining historically low, consumer confidence improving and the US dollar becoming stronger.”


World Bank MENA Chief Economist: Towards a New Social Contract in the Middle East and North Africa

By Shanta Devarajan

[caption id="attachment_8728" align="alignright" width="250"] Dubai[/caption]

A snapshot of the Middle East and North Africa (MENA) Region today reveals a diverse and discouraging picture (Figure 1). Syria, Iraq, and Libya are suffering from violent conflict that has devastated people’s lives, infrastructure, and national economies, with spill overs to neighbouring countries.

The “Arab-Spring” countries of Tunisia, Egypt, and Yemen are in the midst of turbulent political transitions. They, as well as countries undergoing more gradual transitions, such as Jordan and Morocco, are experiencing slow economic growth and worsened macroeconomic imbalances. Until the recent fall in oil prices, the resource-rich GCC (Gulf Cooperation Council) member states had been growing rapidly, but they now too face problems of unemployment and undiversified economies.

But a longer-term perspective – a movie rather than a snapshot – indicates a more homogeneous region and a more hopeful future. Despite differences in their current circumstances, MENA countries have been following more or less the same development model since independence.

In this model, there was a social contract between the state and citizens, whereby the government would subsidize food, fuel, and water, and provide health and education for free. The public sector was the main employer. In turn, the private sector was based on privilege rather than competition, with evidence from Tunisia and Egypt that the privileges were often enjoyed by politically connected families. Most governments were considered autocratic, albeit to different degrees.

Furthermore, through the first decade of the 21st century, this common social contract delivered similar and relatively successful results. Annual economic growth averaged 4-5 percent. Extreme poverty (people living on less than $1.25 a day) was effectively eliminated. Almost everyone completed primary school, and enrolment rates in secondary and tertiary education – for both men and women – were high and rising.

[caption id="attachment_8730" align="aligncenter" width="610"] Figure 1: Economic growth in MENA. Source: World Bank, MENA Economic Monitor, October 2014.[/caption]

MENA registered the fastest decline in child mortality rates in the world (Figure 2). Contrary to perceptions, inequality – as measured by conventional indicators such as the Gini coefficient – was lower than in comparable countries elsewhere and either constant or declining.

Yet, in 2010-11 this same region saw widespread protests that led to the overthrow of the government in power in Tunisia, Egypt, Libya, and Yemen, and greater political opening in Morocco and Jordan. Why? Alongside numerous political, social, and cultural explanations, there is an economic one: The old development model had reached its limits.

Governments could no longer afford to subsidize food and fuel, provide free health and education, and keep such a large share of the labour force employed. Faced with unsustainable fiscal deficits, governments cut back (or slowed the growth of) public employment. But the private sector, having been protected from competition, could not grow fast enough to absorb the large number of educated young people entering the labour force.

In particular, there was little room for the young small and medium enterprises – typical engines of job creation around the world – to grow. The causes were the host of business regulations that restricted entry and exit, especially in sectors such as banking, transport, and telecommunications in Tunisia where the Ben Ali family had a significant interest.

[caption id="attachment_8733" align="aligncenter" width="437"] Figure 2: Rapid decline in child mortality in MENA. [Mortality rate, under-5 (per 1,000 live births): population-weighted averages]
Source: Iqbal and Kiendrebeogo (2014), “The Reduction of Child Mortality in MENA: A Success Story.”[/caption]

The resulting high cost of these services made it difficult for Tunisia’s labour-intensive export sector to take off. Similarly, energy subsidies, by favouring energy-intensive and therefore capital-intensive firms, discriminated against younger, smaller, labour-intensive firms. There is also some evidence from Egypt that these subsidies went disproportionately to politically-connected firms.

The result was the highest unemployment rate in the developing world, with youth unemployment exceeding 25 percent. Men who could not afford to be unemployed, took highly insecure jobs in the informal sector. Women, including educated women, dropped out of the labour force. At 25 percent, MENA has the lowest female labour force participation rate in the world.

Meanwhile, although it delivered basic health and education, the public system was falling short on quality. Secondary-school students, even those from high-income countries like Qatar and UAE, were scoring poorly in international standardised tests. In Egypt, about seventy percent of the students used private tutoring. Students in secondary schools and universities were not being taught the skills that the market demanded, creating job vacancies alongside high unemployment.

With doctor absentee rates of 20-30 percent in public clinics in Egypt, Morocco, and Yemen, patients, desperate for care, resorted to private clinics. As one woman put it, “You can go to the private clinic and lose your money, or to the pubic clinic and lose your life.” In addition, subsidised energy and water contributed to chronic power cuts and water shortages, hurting industry and agriculture.

The combination of lack of jobs and poor services meant that the middle class was stagnating, breeding resentment and alienation among the population. In Egypt, when extreme poverty was falling rapidly, the share of the population earning $4 or $5 a day had hardly changed since the 1990s (Figure 3). In Tunisia, when incomes were rising at four annually, the percentage of people who said in a Gallup Poll that they were “thriving” declined every year.

[caption id="attachment_8734" align="aligncenter" width="436"] Figure 3: Egypt - population living on $4 and $5 a day (% of population living below poverty line).
Source: World Bank, World Development Indicators.[/caption]

The few jobs that were available, were allocated based on connections rather than merit. In a Gallup Poll survey, the percentage that agreed with the statement, “Connections (wasta) are critical to getting a job,” was 80 percent (Figure 4).

In short, the people protesting in the streets were calling for a new social contract, one where the government, instead of being the employer of first and last resort, would enable the private sector to grow and create jobs. And one where citizens could hold the state accountable for quality services, rather than the other way around.

Unfortunately, the aftermath of the Arab Spring has been so turbulent – and in some instances so violent – that economic performance in almost every country declined. Economic growth fell from an average of almost five percent a year to two percent. Fiscal deficits increased to the point where some countries’ debt reached dangerous levels. Unemployment increased, especially for women and young people. The unemployment rate for young Egyptian women currently stands at over sixty percent.

To quell the political unrest, some governments increased subsidies and public sector employment. In Syria and Libya, bloody civil wars have made it difficult, if not impossible, to address the underlying economic distortions that triggered the uprising in the first place. And in those countries that have not had an uprising, but are facing the limitations of the old development model, reform progress has been slow, not least for fear of triggering an uprising.

In this situation, what can be done? While each country’s situation is different, the fact that they all followed the same development model, and are facing the same limitations to that model today, suggests two common elements of a new social contract.

Fostering competition in domestic markets. Policies and regulations that promote competition, including competition from foreign companies, will reduce the risk of political capture and allow SMEs to grow and create jobs.
Strengthening accountability in the delivery of public services. Institutional arrangements that enable students and patients to hold teachers and doctors accountable – vouchers, empowered school management committees, etc. – will contribute to improving the quality of service delivery.

Although not sufficient, two concrete steps can further both these elements significantly. One is the replacement of energy subsidies (which account for five to ten percent of GDP in the region) with targeted cash transfers. Not only will this reform enable the poor – who now receive only a small fraction of the subsidy – to benefit more, but it will reduce the advantage enjoyed by large, capital-intensive enterprises, thereby promoting SMEs’ growth. Such a reform will also reduce some of the other distortions caused by energy subsidies, such as air pollution, congestion, and the depletion of water resources. Finally, it will reduce the fiscal deficit.

The second, albeit controversial, step would be to provide poor people with cash so that they can “buy” education and health services in the private sector. At present, there is a thriving private market in these services, but only those with means can use them. Instead of pouring more money into the free, public system (which does not seem to be delivering quality services), it is worth exploring whether protecting poor people with cash transfers, and regulating the private system, would lead to better outcomes. It will certainly strengthen citizens’ ability to hold providers accountable.

[caption id="attachment_8735" align="aligncenter" width="588"] Figure 4: “Connections (wasta) are critical to getting a job.” Source: Gallup World Poll, 2013. [legend: dark red - ‘agree’ / light red - ‘not agree’][/caption]

Needless to say, the application of these principles will be different across countries. For countries in conflict, the short-term demands of humanitarian assistance and peace-building will have to take precedence. However, these principles could be part of a post-conflict recovery program. The demand for a new social contract was explicit in the transition countries, but it is equally relevant to other countries that are suffering from high unemployment, sluggish private sector growth, and weak accountability in public services. The principles could also be relevant for the GCC where the effectiveness of the development model of oil rents’ being distributed through public employment and subsidies is being questioned.

In applying the approach, it is important to recognise that the proximate effects of a policy reform or investment may not be the relevant indicator. For instance, a public-sector investment that creates jobs, but maintains or reinforces the oligopolistic structure of the private sector, would not be contributing to the new social contract. Conversely, a reform that leads to a more open economy, allowing domestic entrepreneurs freedom to participate, may at first blush appear to be destroying jobs (those in the protected firms), but is in fact promoting the competitive private sector that is needed for the new approach to function.

Moving to the new development model will be neither easy nor quick. But the facts that (i) MENA countries made outstanding progress on poverty reduction and human development; (ii) in 2011, people rose up to demand what is their due, namely jobs and quality services; and (iii) we now understand the limits of the old development model and the contours of the new one; signal that the people of the MENA region will emerge from their present-day difficulties and realise their goals of a dynamic private sector, quality public services, and accountable government.

The views expressed in this article are not necessarily those of the World Bank.

About the Author

[caption id="attachment_8736" align="alignleft" width="132"] Shanta Devarajan[/caption]

Mr Shantayanan Devarajan is the Chief Economist of the World Bank’s Middle East and North Africa Region. Since joining the World Bank in 1991, he has been a Principal Economist and Research Manager for Public Economics in the Development Research Group, and the Chief Economist of the Human Development Network, of the South Asia Region, and of the Africa Region. He was the director of the World Development Report 2004, Making Services Work for Poor People. Before 1991, he was on the faculty of Harvard University’s John F. Kennedy School of Government. The author or co-author of over 100 publications, Mr. Devarajan’s research covers public economics, trade policy, natural resources and the environment, and general equilibrium modeling of developing countries. Born in Sri Lanka, Mr. Devarajan received his B.A. in mathematics from Princeton University and his Ph.D. in economics from the University of California, Berkeley.

About The Office of the Chief Economist

The Office of the Chief Economist of the World Bank’s MENA Region (MNACE) seeks to bring the best possible knowledge to bear on the development problems of the region. In addition, MNACE leads the formulation of the Bank’s regional strategy, while overseeing the country strategies. The chief economist is responsible for the quality of economic analysis in the Bank’s products in the region. Finally, the office helps to build a community of economists working on the MENA region.


Davos: Getting It Right Some of the Time

Davos - Pundits and assorted others in-the-know flock to the Swiss mountain village Davos in their hundreds on an annual pilgrimage that aims to explain the state of the world – invariably described as worrisome – and offers ways to improve matters – without fail rather impractical.

The thin Alpine air seems to obfuscate, or otherwise cause to malfunction, the crystal balls hauled up the mountain by the world’s preeminent thought leaders. Their predictions are often – though thankfully not always – off-the-mark, plain wrong, or conspicuously absent.

Last year, none of the gathered luminaries were able to foresee Russian President Vladimir Putin going on a rampage in the Crimea and the Ukraine. Likewise, the sudden rise of the Islamic State and its particularly barbarous brand of religious fanaticism did not appear on anyone’s radar. Cheap oil? Nobody even considered the possibility.

Haruhiko Kuroda, governor of the Bank of Japan, at last year’s Davos meet triumphantly announced that his country had finally overcome its economic lethargy and rediscovered the path to growth. Japan has now slid back into recession and is resorting to more exotic ways of quantitative easing (QE), disbursing money directly to consumers.

Then there is Dr Doom. Nouriel Roubini, a regular contributor to CFI.co, gained much admiration and a huge following as one of only a few economists to correctly predict the US sub-prime mortgage crisis. However, Mr Roubini lost his magic touch in Davos. In 2012, he assured that Greece would leave the Eurozone “within the year.” That of course didn’t happen, though a Grexit – however unlikely – is still on the table at this year’s summit meet.

"Cheap oil? Nobody even considered the possibility."

Others to miss the mark while in Davos include Microsoft’s Bill Gates who in 2008 famously quipped that he would rid the world of spam and other forms of junk mail in two years’ time. But the prize for the wildest prediction gone awry must go to Bader Al Sa’ad, at the time head of the Kuwait Investment Authority. At the 2008 Davos summit, Mr Al Sa’ad excitedly explained why investors should shove their cash wholesale into the US financial system – hailed as “a pure investment opportunity.” Barely eight months later, Lehman Brothers had crashed, causing the entire US – and indeed global – financial system to crumble.

That is not to say the annual Davos powwow is an exercise in futility. The World Economic Forum (WEF) must be credited with spotting a few global trends early on. The rise of the emerging markets – and the accompanying change in the balance of power – was first properly charted at Davos. Topics such a cybercrime, water shortages, intensified regional conflict, and a return of geopolitics were all driven onto the global agenda at Davos.

Also, the far-reaching global implications of the shale gas revolution in the United States was first discussed in Davos long before the wider world became aware of the changed reality. A now energy independent nation, the US has assumed a new role on the world stage, significantly lessening its willingness to intervene in order to secure energy supplies from turbulent or unstable regions.

As a barometer of the zeitgeist, Davos’ record may not be unblemished; the event, however, remains indispensable as a forum for thought leaders to express their opinions on the issues of the moment and the challenges up ahead. With the benefit of hindsight, it is not always easy to give the forum its proper due. Due to its exclusive and exclusivist nature as a venue for the rich, famous, and powerful, the WEF is a rewarding target for critics of all stripes to take aim at.

Still, there is no other place or event in the world that matches the World Economic Forum for the breadth and scope of its brief. People come to Davos in their thousands precisely because there is nowhere better to gauge the state of the world. As such, Davos is the place where those who wield great power get informed.


Klaus Schwab - Portrait of a Man on a Mission

[caption id="attachment_8754" align="alignright" width="202"] Klaus Schwab. Bloomberg/Getty Images[/caption]

Long before Google came up with the motto, Don’t Be Evil was the sort of maxim Professor Klaus Schwab regularly employed to remind students and businesspeople of their responsibilities beyond turning a profit. Prof Schwab (76) advocates for the stakeholder concept which argues that the most efficient way to pursue one’s own interests is to incorporate those of all others affected by the endeavour.

Simple though it seems, the idea that cooperation beats confrontation has become the premise of a business philosophy now gaining traction globally. The stakeholder concept rests at the heart of sustainability which, in turn, encompasses three considerations: environmental, social, and governance (ESG). The excitement sustainability currently elicits amongst corporate leaders and politicians alike is – if nothing else – proof that the German professor was right all along. Others were perhaps just a bit slow on the uptake.

Now that the wider world seems to have caught up with him, Prof Schwab again surges ahead concluding, perhaps rather boldly, that, “capitalism, in its current form, has no place in the world around us.” Though readily admitting that capitalism is not yet broke, Prof Schwab does think it needs plenty fixing. For one, capital is gradually losing its pre-eminence as a factor of production. It is being replaced by the forces of innovation. As talent gains in importance, money becomes less relevant. Prof Schwab expects this shift to impact economics worldwide and ultimately result in an ideology that emphasises personal freedom and social responsibility as drivers of development.

Ivory Towers Exit

Professor Klaus Schwab is a man on a mission. He wants to make the world a better place by appealing to common sense rather than political dogma. Though a science not yet fully understood, economics – the art of making a living – holds the key to humanity’s advancement. Not partial to small-scale thinking or a life of pondering spent within the confines of academia’s ivory towers, Prof Schwab set out in 1971 to improve the world around him.

“Prof Schwab’s outsized success in creating a neutral platform for thought and action, brought a new, and perhaps unexpected, set of challenges to the fore.”

The epic journey that followed started innocently enough with a meeting of 444 business leaders at the Davos Congress Centre to discuss inclusive management styles. Thus, the European Management Forum came into being – the forerunner of the World Economic Forum (WEF). The venue was well chosen as a stage for transformation: in 1928 Albert Einstein visited the resort town – then a sanatorium for tuberculosis patients – and delivered a landmark lecture on his Theory of Relativity.

Klaus Schwab – from 1969 to 2002 first lecturer and then professor in Business Policy at the University of Geneva – soon broadened the scope of the annual get-togethers in Davos to include economic and social issues, and later still, politics. The World Economic Forum in its present form got its start in 1987 and, under Prof Schwab’s stewardship, has grown into a global organisation employing some 500 staff and mobilising many thousands in networks, councils, and platforms – all aimed at facilitating cooperation through the exchange of ideas and experiences.

Common Ground

The Davos formula of success is based on impartiality. The annual meeting is not a stage for waving flags or broadcasting convictions – it is a common ground. Prof Schwab’s outsized success in creating a neutral platform for thought and action, brought a new, and perhaps unexpected, set of challenges to the fore.

Size, it would seem, is a mixed blessing. With an annual budget of about $200 million, offices in New York and Beijing besides its headquarters in Cologny near Geneva, and organising numerous large events around the world, the WEF has a reach stretching far beyond Davos. The foundation is sponsored by a hundreds of member companies that each contribute to the budget annually, either as “strategic partners” (SFr 500,000) or “industry partners” (SFr 250,000). In return for their investment, the corporate sponsors receive exposure, media support, and a seat on discussion panels. They also get to be part of the ultimate forum for movers and shakers.

In a rare unguarded moment, Prof Schwab in January 2014 sighed that he must “constantly fight” to keep corporate interests from setting the agenda of the Davos meeting and dominating the proceedings. “We fight the commercialisation of the meeting. The forum is a great place precisely because business leaders are reminded that they have to take global public interest into account.” Prof Schwab realises that quite a few captains of industry see Davos merely as a place to meet with, and fête, potential clients and conduct business. Still, he hopes that the message get through. It often does, although not always in the way it was intended to.

Beyond Globalisation

Just as most politicians only understand the countercyclical spending part of Keynesianism, most corporate participants of the Davos meetings seem to have ears only for the globalisation bit of the message. This gave rise to the Davos Man, a name coined by the conservative US political scientist Samuel P Huntington in 1977 to describe global elites who have no use for either borders or governments and thrive in a climate where states wither as their demise facilitates the emergence of a transnational elite.

This was not quite the force Prof Schwab had intended to unleash with the World Economic Forum. In fact, Prof Schwab seems quite uncomfortable with the Davos Man whose, at times deplorable, antics have given globalisation a bad rap it did not deserve. Indeed, one of the main topics a`t the upcoming meet in Davos concerns the threats to global economic integration from a rise in sectarianism, political isolationism, and nationalism.

The 2015 Davos summit is, however, one that may signal change and see the debut of the Modern Davos Man who is much more aware of social responsibilities than his predecessor ever was. Prof Schwab is actively looking to redefine the Davos Man into someone more in tune with his own stakeholder concept.

As it happens, the time seems right for such a makeover: corporate social responsibility and sustainability are becoming more than just the obligatory footnotes in annual reports. Corporations worldwide are finding that embracing such esoteric values, and elevating them to guiding principles, actually helps solidify bottom-lines. Cooperation is an improvement over confrontation and translates into bigger profits down the line. And those profits will now benefit all stakeholders, rather than just the select few holding the purse strings.

As the 45th Annual Meeting of the World Economic Forum gets underway, the circle is almost complete and Prof Schwab may yet see his original stakeholder concept vindicated. The Modern Davos Man – paradoxically a throwback to earlier times as much as the harbinger of an improved world – may yet rise to the occasion.


Davos: Income and Wealth Inequality to Top Agenda

[caption id="attachment_8760" align="alignright" width="129"] Rick Samans[/caption]

Davos – On the eve of its annual flagship meeting in the Swiss Alpine village Davos, the World Economic Forum (WEF) has released a 14-point discussion paper on inclusive growth and the need to shrink the widening income gap. The forum calls on the world’s policymakers to refrain from “vaguely aspirational” talk and tackle growing inequality in more “concrete” ways. The document notes that the international consensus on the need to adopt improved growth and development models has so far largely failed to produce effective policy initiatives.

Over the past few years, the forum has consistently identified income and wealth inequality as a major threat to the global economy. WEF board member and head of the Centre for the Global Agenda Rick Samans yesterday explained the urgent need for an analytical framework to be erected that offers clear policy guidance and evidence-based solutions to decision makers concerned about a more equitable distribution of the fruits of economic progress.

Mr Samans, a former economic advisor to US President Bill Clinton, went on to reveal that the WEF has assembled a set of 14 benchmarks that governments may use to gauge their own performance on promoting inclusive growth. The forum looked at the development models of 96 high, middle, and low income countries to distil a set of benchmarks across six areas: employment and income policies, asset building and investment, basic services, infrastructure, fiscal regimes, and corruption and rents. Taken together the benchmarks form a tool for, as Mr Samans detailed, “the exploitation of available policy space across the full spectrum of levers.”

Deflect Criticism

Notwithstanding this techno-babble, the WEF discussion paper on inequality is a most welcome addition to the forum’s agenda. It is also meant to deflect some of the criticism levelled at the Davos get-together by, amongst others, Oxfam, a confederation of seventeen organisations working in 94 countries to alleviate poverty. Earlier this week, Oxfam published its own report on inequality, concluding that by this time next year the richest 1% of the world population will own more wealth than all of the other 99%. Right now, the one-percenters own approximately 48% of global wealth, up from 44% in 2009.

"As an informal gathering of billionaires, powerbrokers, government leaders, and other assorted authorities, the Davos meeting is the ultimate venue for promoting change."

As an informal gathering of billionaires, powerbrokers, government leaders, and other assorted authorities, the Davos meeting is the ultimate venue for promoting change. Oxfam International Executive Director Winnie Byanyima is one of six co-chairs of this year’s proceedings and is adamant that the concentration of wealth be reversed: “Rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”

Last year, Oxfam caused considerable furore with a study showing that the 85 richest people of the planet command assets and resources equal to those possessed by the poorest 50% of the world’s inhabitants. This year, the concentration of wealth has increased further with just the 80 wealthiest people owning the same as the poorest 3.5 billion.

According to Oxfam, those 80 exceedingly rich folks doubled their wealth between 2009 and 2014. “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issue shooting up the global agenda, the gap between the richest and the rest is widening fast,” said Mrs Byanyima.

In Davos, Oxfam will urge government leaders to adopt a plan comprised of seven points that, taken together, may promote inclusive development and reduce income and wealth disparities. The organisation suggests clamping down on tax evasion by corporations and ultra-high-net-worth individuals, investing in free and universal education, shifting taxation from labour and consumption to capital and wealth, introducing minimum living wages, bridging the gender pay and opportunity gap, ensuring adequate social safety nets with income guarantees, and agreeing on a global initiative to tackle inequality.

Contradicting French economist Thomas Piketty – who in his bestselling book on wealth disparities argues that inequality is the natural outcome of economic processes – Mrs Byanyima suggests that specific policies lay at the root of this evil: “Extreme inequality is not just an accident or a natural rule of economics. It is the result of policies and with different policies it can be reduced.”

Trickling-Up

Prominently on display in Davos is the abject failure of trickle-down economics to deliver sustained growth. The idea, first introduced as a cure to all societal ills in the 1980s by President Reagan in the US and Prime-Minister Thatcher in the UK, was to cut the taxes levied on the rich in order to unleash their awesome spending power. The largess of the lightly-taxed über-wealthy would boost the overall economy and thus provide increased incomes to all.

It took some time for the libertarians to catch on, but their trickle-down economics contained a fallacy of outsized proportions: instead of spending their untold millions and billions on consumer goods and services, the excessively rich mostly invested their capital in sheltered assets. Others just sluiced their monies to exotic tax havens. After all, how many Mouawad diamond purses ($3.8 million each), Patek Philippe Caliber 89 watches ($5.1 million per timepiece), and Lamborghini Veneno roadsters (a veritable steal at $4.5 million) can anyone enjoy?

Trickle-down windfalls awarded to rich folks and large corporations contributed towards greater fiscal deficits. These, in turn, resulted in states assuming larger debt loads which now need to be paid off, dampening growth prospects and depressing the purchasing power of wages. Some studies show that the misguided assumptions of trickle-down economics have lowered economic growth over the past three decades by as much as 20% in the UK.

In a report published to coincide with the opening of the 45th World Economic Forum meeting in Davos, the Center for American Progress, a US public policy research and advocacy organisation, shows that tax cuts for the rich are merely the upward distribution of income. The report, written by former US Treasury Secretary Larry Summers and the UK Labour Party’s shadow Chancellor of the Exchequer Ed Balls, states that: “Left to their own devices, unfettered markets and trickle-down economics will lead to increasing levels of inequality, stagnating wages, and a hollowing out of decent, middle-income jobs.”

In their study, Messrs Summers and Balls find open doors aplenty. Tax cuts for the wealthy inexorably result in higher savings rates rather than increased spending thus slowing down economies instead of boosting growth. The authors propose higher tax rates on the rich and on large multinational corporations, closing the myriad loopholes that enable them currently to evade taxes without running afoul of legislation. The additional monies thus flowing into national treasuries should, according to Summers and Balls, be employed to improve both public services and infrastructure.

French Experience

While recent experience in France has shown that the reintroduction of ultrahigh marginal tax rates does little to bolster tax receipts, a top rate of 50% should not cause capital flight. “A bit of inequality is good as it creates incentives for hard work and rewards entrepreneurship. Lots of inequality is bad, disenfranchises segments of society, and erodes the social fabric,” says Mohamed El-Erian, the former CEO of PIMCO – the world’s largest bond investment fund.

In yet another report released to impact the Davos WEF meet, the International Labour Organisation (ILO) shows that inequality is also dampening the growth prospects of emerging markets. According to the ILO, periods of accelerated growth are becoming less frequent in these countries which brakes the rise of income levels and thus perpetuates the gap between fully-developed and emerging markets.

Excessive and growing inequality in both income levels and wealth is now firmly established as the headline topic of the meeting in Davos. It is a way for the World Economic Forum to show that it means business when it comes to “improving the state of the world” – the organisation’s slogan of old. Although one wouldn’t think so from observing the gathering of the rich and powerful in a posh Swiss ski resort, the WEF was actually not conceived as a meeting ground for the privileged. It is also not the organiser’s intention to have the one-percenters decide on the fate of the hoi polloi.

The forum is but a meeting place to freely discuss the state of the world and exchange thoughts on how to improve it. By placing inequality at the top of its bill, the forum may yet redeem itself in the eyes of its critics and provide the impetus for lasting change.


Davos: Azerbaijan Making a Splash at World Economic Forum

[caption id="attachment_8775" align="alignright" width="306"] Davos: WEF 2015. Photo: Copyright © CFI.co[/caption]

Davos – One of the world’s fastest growing economies for ten years in a row, Azerbaijan is set to showcase its accomplishments and promising future outlook at the annual meeting of World Economic Forum set to kick off tomorrow in Davos, Switzerland. The Azerbaijani delegation, headed by President Ilham Aliyev and First Lady Mehriban, has established its headquarters at the landmark Belvédère Grand Hotel, ready to detail the country’s exceptionally strong economic performance in the face of dwindling oil prices.

The Azerbaijan economy managed to expand its GDP by 3% in 2014. Growth was boosted by a 7% increase in non-oil activities. Inflation remained low at 1.4% while disposable income grew by 4.8%. Investments attained $27bn of which $16bn was generated domestically.

Presiding over a cabinet meeting to review the economic achievements of the past year, President Aliyev earlier this month drew attention to the steady improvement of his country’s ranking on the Global Competitiveness Report, compiled annually by the World Economic Forum (WEF). Currently ranked the world’s 38th most competitive economy – up one notch from the previous year and well ahead of economic powerhouses such as South Africa, Brazil, Turkey, and Poland – President Aliyev congratulated his cabinet on the “historic achievement.”

"As financial, economic, and political uncertainties elsewhere in the world lead to severe budgetary constraints, reduced investments, and an overall decline in social wellbeing, Azerbaijan is deftly bucking this global trend, upping the ante with a slew of new infrastructure projects slated for execution and meant to underpin the country’s sustained development."

Tying into income and wealth inequality – this year’s overriding issue at the World Economic Forum’s flagship meeting in Davos – President Aliyev emphasised that Azerbaijan is making significant headway with average salaries rising to well over $7,000 annually and the state providing sustained social assistance to over 90,000 families at risk of being left behind as the country barrels towards higher levels of prosperity. The president also noted that poverty rates are decreasing rapidly as the unemployment level dropped to under 5%.

Last year, the Azerbaijan economy created over 123,000 new jobs. At the same time, 230 new industrial enterprises were founded. As financial, economic, and political uncertainties elsewhere in the world lead to severe budgetary constraints, reduced investments, and an overall decline in social wellbeing, Azerbaijan is deftly bucking this global trend, upping the ante with a slew of new infrastructure projects slated for execution and meant to underpin the country’s sustained development.

Considered a one-party dominant state, Azerbaijani politics struggle with the need for further political reform. Though opposition parties such as the Azerbaijan Popular Front are allowed to operate, their political sway is minimal. The 2010 parliamentary elections were won by the ruling Yeni Azerbaijan Party of President Aliyev. The party claimed 73 of the parliament’s 125 seats with most of the remainder going to “soft opposition” parties. While the United States concluded that the election failed to meet international standards, the Organisation for Security and Cooperation in Europe (OSCE) did find some encouraging signs of improvement.

The Azerbaijani ruler does seem to be motivated by a genuine, albeit rather absolutist, concern for the wellbeing of his fellow countrymen. Boosted by oil revenue, the Aliyev Administration has consistently delivered high economic growth rates, leveraging the country’s vast hydrocarbon reserves to attract more than $60bn in foreign investment.

Azerbaijan has been more successful than most former Soviet republics in making the transition from a command to a market economy. A number of far-reaching reforms successfully injected a degree of entrepreneurial dynamism into the economy. During the cabinet meeting of January 10, President Aliyev said that his country has already undergone a number of political reforms that now assure freedom of speech, assembly, conscience, and religion.

“The Internet is also uncensored,” said the president who tweeted three days later to his 110,000+ followers on Twitter that Azerbaijan offers its “own model of unique economic development and political reform.” As the middle class swells it ranks, calls for additional political reform may intensify, requiring President Aliyev to display an acumen similar to the one he exhibited while successfully reforming the country’s economy.

While in Davos, President Aliyev and First Lady Mehriban – featured in a recent CFI.co hero profile – are also expected to present an update on the preparations for the upcoming European Games. The inaugural edition of this sports event will see over 6,000 athletes – representing the National Olympic Committees of all European countries – competing for seventeen days in brand-new purpose-built facilities in the Azerbaijani capital Baku. The grand opening ceremony scheduled for June 12.

The organising committee for the first European Games is chaired by First Lady Mehriban Aliyev who is also an executive member of Azerbaijan’s National Olympic Committee. With less than 150 days remaining before the event gets underway, preparations are nearing completion. In Davos, Mrs Aliyev and her husband will host a dinner gala event at the InterContinental for hundreds of guests to report on the latest developments surrounding Baku 2015. European Olympic Committee President Patrick Hickey will also address the dinner guests.

The organisers of the Baku 2015 mega-event set up a comprehensive exhibition at the hotel where Davos attendees may get the inside scoop on the first-ever European Games.


Nordea’s Sasja Beslik on Davos 2015: Rising Inequality Unsustainable, Inclusiveness Answer

[caption id="attachment_8779" align="alignright" width="153"] Sasja Beslik[/caption]

Davos - A participant of earlier World Economic Forum (WEF) meetings in Davos, Sasja Beslik, head of Responsible Investment and Governance at Nordea Investment Funds, applauds the attention awarded to rising income and wealth inequality at this year’s get-together in the Swiss Alps. “This is a huge topic and one of immense importance. Questions regarding inclusive development gain in relevance as income disparities rise and become quite unsustainable.”

Mr Beslik emphasises that “normal” investment strategies take little or no account of values that promote inclusiveness: “Mainstream investments can and should embrace sustainability values which pointedly includes taking the best interests of all stakeholders into account.” Mr Beslik goes on to explain that the proper application of environmental, social, and governance (ESG) parameters will inevitably facilitate a more equitable distribution of wealth.

“Inclusiveness now tops the agenda as a response to income inequality reaching levels that are not sustainable. The continued growth of emerging markets will swell the ranks of the global middle class. Within a few years, anywhere from 300 to 500 million people will leave poverty behind and aspire to consumption patterns not dissimilar from our own. Nobody is talking about that, yet the pressure on the world’s finite resources will become quite unsustainable. Demographics are about to change radically while the global capacity to meet the added demand remains virtually unchanged.”

"Inclusiveness now tops the agenda as a response to income inequality reaching levels that are not sustainable."

- Sasja Beslik

Mr Beslik is certain that the world will experience profound change and conflict over the next decade as economies grapple with climate change and security issues that will stress inequality yet further. “The writing is already on the wall. Instability in North Africa is directly affecting developments in Europe with immigrants knocking at the gate and neighbourhood security threats on the rise. This forces the people now present in Davos to place inequality at the top of their agenda. A new equilibrium is urgently called for and this cannot be reached with continually rising disparities in income and wealth.”

Mr Beslik warns that economic imbalances in what he calls “a tired and old Europe” may cause political upheavals with extremist parties gaining a solid foothold as disenfranchised middle classes look for ways to preserve or regain the modest level of prosperity lost as a result of the generalised economic malaise.

“This is already visible in countries such as Greece where people formerly belonging to the middle class have been deprived of their livelihoods and, as a result, are now highly annoyed. They have many ways to act and most of them involve empowering movements and political parties erstwhile confined to the outer fringes of public discourse. This does not paint a rosy picture.”

Briefly reviewing the state of the world, Mr Beslik notes that while Mexico is doing quite alright thanks to its proximity to the United States, elsewhere in South America developments are less encouraging: “Venezuela is about ready for a change of government while Brazil remains mired in corruption on an almost epic scale. The potential is huge, but largely untapped.”

Asia and Africa, meanwhile, are offering much hope for accelerated development, contrasting sharply with a mostly stagnant Europe: “With its huge population, India looks set to become the world’s next manufacturing giant, possibly overtaking China in the process. The Middle East is somewhat less promising with its many and often violent conflicts. Throw Israel into that explosive mix and you have a most disconcerting scenario.”

Mr Beslik, somewhat of a contrarian banker who revels in calling things by their proper name, cautions that demographic pressures are about to escalate: “Income equality is a prime reason for people to get on the move. People will pull up stakes if they see no better future taking shape. They will move, regardless barriers. Perhaps the time has come to accept this fact and open our borders. Europe stands in need of enterprising people. The continent is growing old. Shortly, about a fifth of the Swedish population will be over 65. If we are to keep the welfare state more or less intact, we need to open our borders. Sweden is doing just that, but other European countries are reluctant to follow suit.”

Mr Beslik remains, however, cautiously optimistic and sees the WEF meeting in Davos as a unique opportunity for people who actually care about global wellbeing to meet and address pressing issues through a frank and open exchange of ideas and experiences: “Davos is a truly fantastic event for those concerned about the world to cut to the chase, name the issues, and provide the beginnings of a solution. What sometimes worries me slightly is the perception that, after all good intentions have been laid bare at Davos, the follow-up remains iffy. That said, I do fervently hope that the World Economic Forum is able to use its considerable clout to reach out with all the good stuff they produce.”