Robots! Clear and Future Danger For Economies

I was at a conference recently and there was a speaker who was extolling the power of robots, technology, automation and artificial intelligence (AI) in the modern workplace and how it was going to revolutionise the global economy.

There was quite a catalogue of achievements as a result of increased robotics and AI including lower ‘FTE’ (or ‘Full Time Equivalent’ of human labour) requirements and greater efficiency, productivity and decreased errors and mistakes. These were achievements that were backed by undisputed statistics and data.

The ability to create consistently high economic value using systems, robots and AI which do not make mistakes, which do not break down often, which can even be self-correcting becomes very appealing.

However amidst the glories of robotics and AI, I felt increasingly concerned about where the world was heading with the increased introduction of automation, robotics and AI and the impact this was going to have on employment, social mobility and income equality.

My concerns

Technology as a displacer of jobs.

Technology, automation and robotics initially replaced blue-collar jobs and roles from the economies. Increasingly greater sophistication of AI means that white-collar jobs are also being replaced. We read various reports about the jobs of the future being technology-related roles that help create, maintain and repair robots and their related technology, but I postulate that robots can fix themselves (and their ‘peers’) better than people ever can and over time, robots can create other robots to do the tasks which they need done.

In the past, technology was an enabler. It was a great source of enhanced productivity for nations’ economies.

However, technology has now become a replacer or displacer – of jobs, of people, of roles. It has now become a tool to enhance economic output but ends up depleting people and their earnings.

This is going to be a longer-term fundamental problem and challenge to societal and economic growth and development.

The impact on developing economies

Let us consider Philippines and India. They have spent billions of dollars investing in the infrastructure and ecosystem to help create thriving shared services and business process outsourcing (SSCs / BPOs) businesses. This was to help meet the needs of multinational companies. However, with AI and automation increasingly taking on a majority of the roles and jobs that are currently being done by millions of people in both countries, it is going to lead to a significant job loss and risk the potential collapse of the SSCs and BPO sector in both countries.

Over time, with increasing automation and AI, multinationals need not outsource various roles to locations of lower labour cost. They will instead seek to outsource the roles to nations with the lowest tax and the best technology infrastructures in which they can base their systems and robots. 

The moral obligation and income inequality

With increasing AI and automation, I struggle to see how the job losses faced by millions as a result of robots taking on their roles are going to be mitigated. There also seems to be little alternative sources of formal employment.

Whilst it is easy to highlight how automation can reduce expenses by 66% and reduce ‘FTEs,’ I think we need to look at people beyond merely being an ‘FTE’ or as a mere factor of production.

 

Over time, it is going to also exacerbate the issues of income inequality which is already one of THE pressing moral issues of our time. I’ve covered this topic at length previously.

The factors of production, the technologies, the AI and robots are going to be in the control of a very small segment of society. Whilst it may create vast economic growths, it does not lead to growth in income or wealth for the majority of the people. This will lead to societal fractures which can be devastating to nations and society.

What then the moral obligation to people and society?

Possible solutions?

Leaving this issue to be dealt with purely by market forces will not result in resolution and frankly will be disastrous in my opinion. There needs to be a concerted governmental approach to resolving this and finding solutions that work.

Using levers such as tax policies will be ineffective, particularly in a world with little tax harmonisation. For instance, increased taxation for robotics-led solutions will only encourage a beggar-thy-neighbour policy and in a world with little tax harmonisation, it becomes a useless endeavour.

 

If we accept that robotics and automation are an inalienable part of the development of society, then we need to accept that the current economic models  will not be best suited for what the world needs. Maybe it is time for us to seriously consider and contemplate universal income as a way to mitigate and tackle some of the problems coming our way as a result of robotics and automation.

Universal income is something a number of countries are experimenting with to tackle income inequality which as I’ve explained earlier will only be growing with greater automation and robotics. Finland for instance has started a pilot programme, the Swiss held a referendum in June 2016 to consider universal basic income which did not pass as only a quarter of the Swiss agreed with it, the Dutch will be carrying out a pilot programme this year, and this is just a start.

What is increasingly clear is that it is not enough to simply hope the challenges brought on by AI and robotics are going to go away, there needs to be a concerted and strident efforts made to mitigate them.

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China / Japan? History repeating itself?

japanchina2

Too far fetched?

Let’s consider briefly the facts and also some important caveats.

Population demographics

The results of a census taken in 2015 has placed Japan’s population at just over 127 million – a decline of about 1 million in about 5 years. Japan’s birth rate has been long below the total fertility ratio of 2.1 (currently 1.4) and nearly a third of all Japanese citizens are now over 65. This is already a source of policy and economic challenges for Japan and one that is likely to keep growing.

China’s one-child policy starting in the 70s has had a major impact. Whilst the policy has now been relaxed, the population control genie, once out of the bottle can rarely be controlled. Changing economic trends, mindset shifts, and a movement towards an urban citizenry means less people are keen on having children. The United Nations estimates that that the number of Chinese over 65 will increase by 85% to 243 million in 2030 (from the current 131 million). The Chinese working population saw its biggest decline in 2015 – a fall by a record 4.87 million.

Both Japan and China have very restrictive and insular immigration policies which will only serve to further exacerbate the population and demographic challenges. These demographic issues will also impact economic growth and development as in time both economies will have inverted population pyramids, where one active working individual will be supporting two parents and four grandparents – and better medical facilities and healthcare will lead to a greater demand on the working population.

Perhaps the spur in investment in robotics will help alleviate these challenges?

Economic growth history

Japan’s economic growth started with the development of its manufacturing base following World War Two with support from the USA and other Allied nations. Japan’s growth was an average of 9% between 1955 and 1973 (when the first ‘oil shock’ impeded growth).

In the case of China, following a debilitating post-war economic situation and the challenges of the Cultural Revolution, the opening up and reformation of the economic system from 1978 was instrumental in China’s economic story. China’s growth has averaged between 7% and 10% since.

The main engine of growth both in the case of Japan and subsequently China was manufacturing. It will surprise users of top-notch Japanese products today to learn that from the 1950s to around the 80s, ‘Made in Japan’ meant low-quality and cheap and people preferred to use American or European produced goods. However, the Japanese investment into their manufacturing processes, research and development over time meant that they started developing high-value and high-quality goods and products. It’s a process that took decades and systemic investment into innovation.

In the case of China-made products, there are still some challenges around quality and value, but this is something that is being addressed as we now increasingly see greater investment into research and innovation.

Funding world’s developing needs

Japan became development donor from as early as the mid-50s and by the early 90s, Japan became one of the largest officual development assistance (ODA) providers in the world. Grants, aids and soft loans were provided through agencies such as the Japan International Cooperation Agency (JICA) to countries across Asia, Latin America and Africa.

Japan then became instrumental in the establishment of the Asian Development Bank (an institution for which it has maintained presidency since inception in the 60s).

This allowed Japan to project its soft-power and help foster policies favourable to Japan across recipient nations.

If we examine China’s development assistance, aid and grants – it has grown from less than US$1 billion in 2002 to over $25 billion in 2007 to currently over US$100 billion. Due to differences in the way ODAs are valued, it is possible that China’s current aid and grants may be undervalued.

China also was instrumental in the set-up of the Asian Infrastructure Investment Bank (AIIB) with an express aim of building infrastructure across Asia-Pacific. Whilst both ADB and AIIB officials have been at pains to stress that they do not see each other as competitors (indeed they have already co-financed a number of projects), a primary reason why the AIIB was set up so as to have greater autonomy by China and other partners in multilateral banking institutions.

Slowing growth and liquidity trap

In the late 80s, Japan was running a very large trade surplus and the stock market and property prices were booming (there were properties which were valued at US$1.5 million per square meter – or ten square feet in Ginza!) which collapsed in the 90s. There was an asset bubble across both the stock and property markets and when the bubbles burst, it led to the loss of trillions of dollars of value.

Deflation set in and whilst the Japanese government tried its best to promote spending (including setting interest rates at near zero levels), there was little effect. Growth has been anaemic and in 2009 the GDP fell by 5.2%.

Japan found itself stuck in a classic liquidity trap where where its monetary policy had little or no impact on economic output and production levels. This led to the ‘tragedy of Japan’s lost decades.’

Let us now consider China. Relatively easy loans made by banks? Check. Booming property prices? Check. Booming stock market? Check. Corrections across all three areas? Check.

China’s economy has been slowly significantly and it’s GDP growth rate has fallen to a level not seen since 1990. A report from the Wall Street Journal indicated that investors are hoarding cash rather than investing – a classic sign of a liquidity trap. The stock market debacle in Shanghai in 2015/2016 has also dampened investor enthusiasm.

The Chinese Communist Party Politburo has also cautioned against debt-fuelled growth and rising asset bubbles. There is also evidence to suggest that the stimulus packages initiated by the government are having little impact.

Some key differences.

Whilst there are some similarities, it is important to note a number of major differences and caveats before any quick conclusions are made. Firstly, China starts off with a much bigger population base and the reverberations from the impacts will take a much longer time before they are felt.

Secondly, China’s political system lends itself to a greater continuity in policies which may be effective in warding off economic downturns and avoid ‘lost decades’ the likes which Japan went through. Japan on the other hand went through nine prime ministers in the 11 years between 1989 and 2000 which hardly allows for lasting measures and policies.

In order to avoid the liquidity trap challenges, the Chinese government will need to focus on its war against graft and corruption and instil trust in the public institutions. Long-term and difficult policy decisions in the areas of state-owned enterprises reform need to be made in order to boost productivity. There needs to be continued efforts to keep narrowing the inequality gap and create greater employment opportunities which will in turn boost spending and help deter deflation.

The road ahead is a difficult one but there is no reason for history to repeat itself as long as the mistakes of the past are not repeated.

 

The Wheels Are Off – the Italian Referendum Results

The majority of Italians have voted against the constitutional reforms proposed in a national referendum and Italian Premier Matteo Renzi’s “experience of government” is now over as he steps down.

The Italian economy has been like a Ferrari with its wheels slashed – its economic performance has been the worst amongst any of the Eurozone country with the exception of Greece; it’s government loans sit at 130% of GDP and unemployment exceeds 11%.

This failure of the referendum is now akin to the Ferrari with its wheels completely off the axle – and the casualties won’t just be the Italians in the Ferrari but indeed the whole of the Eurozone.

Early indicators are that the Euro has fallen sharply against the Dollar and the Asian markets are spooked by what is to come from Europe.

What does this result mean for Italy, Europe and the world?

1. Brace for a hard landing of the banking sector.

We could see the demise of a few banks in Italy, starting with the Monte dei Paschi di Siena (MPS) – the world’s oldest bank – which has already lost almost 90% of its value this year. MPS is already one of Europe’s weakest banks and they are subject to a bailout plan which may now not come to fruition.

Italian banks are struggling with about €360 billion of bad loans and are significantly undercapitalised. There will be a huge sell-off of Italian and European banking stock once the markets open.

The problem is that the scale of interconnectedness means that a hit to the Italian banking system will leave a trail of destruction across the rest of the European and global banking sector starting with the largest European lenders such as Deutsche Bank.

2. The EU and Euro are both going to go through an existentialist phase

Brexit dealt a big blow to the EU project. The rise of the Five Star Movement, a Eurosceptic opposition which has already claimed ‘victory’ in this referendum means that over time their views on EU and the Euro are going to gain even further traction. Even if the Five Star Movement do not win in any early elections called as a result of this referendum (they have a campaign promise to hold another referendum on Italy’s membership within the EU), their views are going to be, over time, become mainstream.

3. Imposition of capital controls?

In 2015 we saw capital controls applied in Greece to stop a run on the banking system and see a flood of capital out of the country. A run on the Italian banking sector will have a colossal impact and a pre-emptive series of capital controls, though damaging from a reputational perspective, may be required for reasons of survival.

4. An Italian sneeze will cause an European contagion.

This result will no doubt cause another slump in the Eurozone economy and will cause a negative investment sentiment. Unemployment will continue rising and living standards will fall, not just in Italy but across Europe.

The people have spoken and have demonstrated a willingness to face a hard landing. Whether they are prepared for a hard reset is another matter altogether and this is going to be the start of a period of extreme uncertainty, economic uncertainty and hardship.

What Italy needs now is an expert driver who is going to be able to manouvere the Ferrari with no wheels skillfully so that it causes the least damage both to the Ferrari’s passengers and other Eurozone travellers.

 

 

 

FW: INCOME INEQUALITY RE: MAJOR PROBLEM

 

“I believe this [income inequality] is the defining challenge of our time.”
Barack Obama (2013)

 

“One of the leading economic stories of our time is rising income inequality, and the dark shadow it casts across the global economy.”
Christine Lagarde (2015)

 

There is a clear recognition of the risks, dangers and the pain which income inequality imposes on society. Despite the recognition, it is a problem which seems to constantly be forwarded on to successive generations to resolve rather than finding a decisive set of solutions.

We will all do well to pay heed to the US Senator John Sherman who in 1890 when he introduced his landmark Sherman Antitrust Act said that he sought to “put an end to great aggregations of capital because of the helplessness of the individual before them” and also because he fundamentally believed that amongst all of the nation’s problems, “none is more threatening that the inequality of condition, of wealth and opportunity.”

So why does inequality matter? Why is it important that we all strive towards resolving it? Societies that are hugely imbalanced and unequal ultimately become fractured which in turn lead to painful social and economic consequences that affect everyone. Neither the rich nor the poor will be able to avoid the huge social costs of a fractured society.

The stark facts

  • 62 of the richest people in the world own what the bottom 50% of the world’s population own.

  • 1915: The richest 1% of Americans earned 18% of the national income.
    1930s to 1970s: The share plummeted and remained below 10%
    From the 1970s: The share has increased to almost 30%

  • 1980: The top 0.1% wealthiest Americans controlled about 9% of all household wealth
    2015: The top 0.1% own 22% of all household wealth.

  • USA: The top 1% of America control 40% of America’s wealth

  • Germany: Poverty has risen by half since 2000.

  • 1965: CEO pay at the largest 350 U.S companies was 20 times as high as the pay of the average workers
    1989: The figure is 58 times as high
    2012: The figure is now an astounding 273 times as high.
    (It is worth bearing in mind that Peter Drucker argued that the pay ratio between the top executive and the humblest worker should be no greater than 20 to 1.)

  • OECD: The gap between the rich and poor is now at its highest level in OECD economies in 30 years according to a report produced in 2014. The overall increase in income inequality has been driven by the richest 1%.
  • 2008: The United Nations University (UNU) and the World Institute for Development Economic Research (WIDER) estimate that the global Gini coefficient (a measurement of inequality between 0 – representing complete equality and 1 – representing complete inequality) was 89.

    An alternative way to interpret this is that in a population of 10 people, if one person had $1000, the other nine have only $1 each.

  • 2014: The Credit Suisse Global Wealth report estimates that that the richest 0.7% (who hold over US$1 million in wealth) held 44% of the global net worth.

Some context

The economic success stories of many countries hides a dangerous truth – that a significant majority of economic gains are going to those at the very top of the income distribution whereas those lower down have seen real incomes stagnate or diminish.

This has in turn perpetuated further inequality as those in a position of privilege often use their wealth and influence to shape policies that further increase their concentration of power. These policies have not necessarily been in the interests of those lower down the income ladder.

A research conducted by Martin Gilens, a political scientist at Princeton, lends credence to the notion that the US government responds more positive to the most affluent ten percent of Americans whilst “the preferences of a vast majority of Americans appear to have essentially no impact on which policies the government does or doesn’t adopt.” (A video of Gilen’s lecture can also be viewed here.)

The erosion of the social compact

This wasn’t always the case though. Whilst there has always been inequality, it has never been to this extent or been as pervasive. There was also more concerted effort to reduce the level of inequality and dampen its deleterious impact on society.

The experience of the First World War revolutionised American attitudes towards taxation and redistribution of income. When the War Revenue Act of 1917 was passed, there was talk of “conscription of income” and “conscription of wealth” at a time when young men were enlisting en masse. “Let their dollars die for their country too,” one congressman said. The call for fiscal patriotism helped legitimate the progressive income tax in the United States, and by 1944 the top marginal rate had risen as high as 94 percent.

Across Europe, a fear that the lack of reform could lead to social and political turmoil and the horrors of two World Wars meant that policies such as social insurance, minimum wage, a strong welfare state and progressive income tax were implemented leading to more egalitarian societies and economies.

inequality 2The experiences of global ears produced visions of a social bond holding countries together and nurtured the notion that every single person owed a debt to the welfare of the broader community and society.

However since the 70s, the disappearance of these conditions has meant that the support for egalitarian public policies has also diminished.

We now live in a world where even high skilled jobs are being commoditised so that even highly educated workers are not making sufficient progress as gains in economic growth are limited to a very elite group of financiers, entrepreneurs and managers. In the past only unskilled workers lost jobs to automation, now even highly skilled occupations are at risk with the advancement of artificial intelligence, robotics and automation.

The social structure of Silicon Valley provides us with an instructive view of the future: One where expert systems have replaced the majority of people and a tiny but well-remunerated minority direct the economy whilst the majority exist to serve them alone.

The conflict is no longer just between the working class and the middle and upper classes – it is now between a tiny elite and the great majority of citizens. As the majority develop a sense of common interest, or what Marx may have termed ‘class consciousness’, the need to resolve inequality will become more acute as the resentment of it intensifies.

 

What happens when income inequality starts to become entrenched?

  • Health: Societies that are more unequal tend to have lower life expectancies, higher infant mortality, higher levels of infant mortality and high levels of diseases and conditions such as HIV/AIDS.
  • Human capital development: As inequality rises, scores on the UNICEF index of child well-being become significantly worse. Literacy rates are also lower and youth unemployment also becomes a major issue. A higher level of equality also leads to a greater level of innovation as a result of greater access to opportunity.
  • Social mobility: Inequality restricts social mobility – equality of opportunity is enhanced by greater income equality. Reduced social mobility further exacerbates income inequality and this becomes a vicious spiral from which an effective functioning economy becomes more and more difficult.

    inequality1 2
    (C) Walt Handelsman
  • Economic progress and stability: An IMF report highlights that by reducing inequality and bolstering longer term economic growth are “two sides of the same coin.” In both rich and poor countries, inequality is strongly correlated with shorter spells of economic expansion and growth over time. Unequal economies are also more susceptible to severe boom-and-bust cycles leading to greater volatility and crisis. Extreme levels of income inequality depress economic growth. An OECD report estimates that inequality has had a cumulated loss of GDP across OECD economies of 8.5% over twenty-five years.
  • Social challenges and issues: Inequality breeds corruption. Unequal societies also lead to greater economic instability. If one considers the root causes of the Arab Spring, the lack of economic opportunity or equality is one of the main drivers leading to revolt.

A blueprint for change and resolution

The solution and change required for income inequality is not a zero-sum game. There will be those who are impacted more than others, but it is essential in calibrating the world in a more equal way.

It is very easy to be dangerously complacent and ignore equality, but chronic economic inequality hurts everyone, both the rich and the poor.

Resolution of a problem like inequality requires a revolutionary approach. We need to accept a fiscal revolution or risk a social one.

I’ve highlighted below briefly some key practical steps that need to be considered as we seek an urgent resolution to the problem of income inequality.

  1. Tax reforms – Income taxes need to be more progressive (the way they were previously in times of greater equality). There needs to be a reform in the way the transfer of wealth is also taxed. The OECD has suggested that attempts to reduce inequality tax and transfer policies will not harm growth as long as the chosen policies are well designed and implemented. The OECD further argues that redistribution efforts should focus on families with children, on the youth and the improvement in human capital investment through the promotion of skills learning and development.
  1. Continued focus on economic growth and employment – Policies targeting economic growth need to continue as growth ensures jobs are created and ensures employment. Employment will support social mobility which is essential to the reduction of inequality.
  1. Ensure emphasis on social mobility – Social mobility is a key driver towards the reduction on inequality. Emphasis on education, skills learning and development is vital to support social mobility.
  1. Support small savers and small businesses – Policies should not be tilted towards just merely taxing the rich but also be aimed at increasing the wealth of small savers and businesses. For instance we should consider the introduction of accounts for small savers and businesses that guarantees positive returns in excess of inflation. It is also a widely observed phenomenon that lower income families borrow more to support their consumption and this in turn creates a systemic risk.
  1. Enhanced social policies – Governments and policy makers should also consider more directed interventions to enhance the social conditions of lower income families. For instance, in the UK, the Child Benefit offers a weekly allowance to parents for every child they raise. The transfer could be better targeted by making the income taxable as personal income, which will reduce the size of the benefit for those in higher tax brackets or who do not have face any other mitigating circumstances. In the UK, child poverty has dropped sharply whilst in the USA; it has risen by a third between 1969 and 2013. A child-benefit programme will help make a major dent in child poverty and also represent a powerful investment in the future. Introducing a child-benefit program in the US will make a major dent in child poverty and represent a powerful investment into the future.
  1. Minimum wage – Governments should also take an active review of the minimum wage policies in their countries and recalibrate them to local conditions. There is always a temptation to keep minimum wage lower because neighbouring countries are keeping theirs lower, but this beggar thy neighbour policy will not benefit anyone in the long run. Countries that make the effort to ensure greater equality will be healthier in the long term.
  1. Automation and technological change – Governments should take an active interest in the direction of technological change. It is mostly governmental grants and labs that are responsible for the underlying research that has led to the progress in automation and technology and they therefore have the right to ensure a clear review is undertaken to mitigate the social impacts of technological change through appropriate fiscal and taxation policies.

It is crucial that we as a collective rise up to face the challenges of income inequality and work closely to create a more equal society. The corrosive impacts of inequality will affect us all and the sooner we can find solutions to achieve an equal society, the better, for all.

Seven beneficiaries of UK’s Brexit

Following the  proxy class war that was the EU referendum, I was reflecting on who I think will be some of the beneficiaries of UK’s Leave or Brexit result besides the obvious parties like the Leave campaigners and Boris Johnson.

As a slight aside my personal view is that the root cause of this result is inequality which has led to a disenfranchised populace that is reacting against the increasing economic marginalisation an increasing majority of citizenry are facing. Even the issues of migration are being amplified against this backdrop of growing economic inequality. This is one of THE policy challenges of our time. Resolve this huge issue of rising economic inequality and I suspect we will find in it the panacea to a large number of other issues we are facing.

So on to who I suspect will be benefiting from this:

  1. Scottish independence campaigners – The will of the Scottish people is reflected in the results – they want to remain in the EU. During the last independence referendum, there was a clear statement that any exit from the EU by the UK may trigger another call for independence. Whilst 2014’s independence referendum was deemed a once in a generation campaign, I suspect the result of the 24th of June 2016 may bring forward the next independence referendum to as soon as the next two years.
  2. The United Irish brigade / and IrelandSinn Fein have been quick off the mark to argue their case for a union of the Northern Irish with the Republic of Ireland. Similar to the Scots, the Northern Irish were also in favour of remaining with the EU and there is a case for them to argue for independence and fulfil the long-held dreams and aspirations of Irish nationalists.

    Any push towards reunification will also lead to the levels of investment and pump-priming of both Irish economies leading to further growth. Furthermore, in the near term, I suspect some of the investment meant for the UK may be diverted to Ireland, particularly in the financial services and outsourcing sectors.

  3. First time home buyers – With the expected fall in asset prices, it may finally become easier for people trying to get onto the property ladder. Furthermore, a reduction in immigration will also dampen demand for housing and rental yields, leading to more affordable homes. It is also widely expected that the Bank of England will not be hiking rates any time soon to carry on fostering demand as well, making the overall cost of home ownership more affordable.
  4. Lawyers and accountants – Over the next two years, as major UK enterprises and companies seek to understand their legal, tax and financial planning positions vis-à-vis the EU, they will rely on an army of lawyers and accountants to make sense of their obligations and required strategies to maximise profit and minimise liabilities (legal and financial).
  5. Management consultants – I am fairly sure BCG, McKinsey, Booz (PwC), and other management consultants heard a loud ker-ching of cash registers going off collectively as they seek to become the ‘experts’ in EU law and supporting both the public sector (particularly as they become overnight subject matter experts in Article 50 of the Lisbon Treaty that governs EU exit) and private enterprises as they help organisations make sense of what Brexit means for them (by first asking them what it means for them and then re-writing it into 100 PowerPoint slides and charging them a fortune for it…).
  6. Trump’s policy advisors and US isolationist/protectionist campaigners – The Donald will point to UK’s EU referendum results to his domestic base and use it as an argument about why his protectionist and isolationist policies are for the best and will help “Make America Great Again (TM).” It could also be a powerful argument against the likely Democrats’ positions about open economies and trade reforms.
  7. UK exporters – At least in the short to medium term, as there is a downward rebalance of the UK Sterling, I suspect it will help improve UK’s exporters (particularly seeing as 50% of UK’s 15 export partners in volume are outside the EU). However, it has to be also noted that UK’s net deficit is roughly £300 billion and given the higher level of imports, it is also likely there will be a strong inflationary pressure with little monetary tools or options at the Bank of England’s disposal.

Muzzling a rockstar central banker – the Indian way

This article reflects only my own personal thoughts and do not reflect the official position of any other organisation. Responsibility for the information and views expressed this article lies entirely with me. 

The news of the resignation of India’s central banker Raghuram Rajan has unsettled Indian investors, and rightfully so.

Rajan was one of India’s best central bankers and was a cornerstone in driving the Indian economy over the last three years.

Here is a man who in 2005 at a conference in Jackson Hole made some prescient statements about how financial developments have made the world a riskier place and called out the systemic risks posed by banks to the global economy. (His speech can be found here: https://www.imf.org/external/np/speeches/2005/082705.htm). He was derided as a luddite who was misguided. However, the developments of the 2008 financial crisis proved him right and a number of his proposed safeguards have since been implemented.

Some may question why the current Indian administration has removed a man who is widely recognised as an architect of India’s growth story.

It goes back to 2014, when Rajan questioned Modi’s “Make in India” campaign and cautioned against “against picking a particular sector such as manufacturing for encouragement, simply because it has worked well for China. India is different, and developing at a different time, and we should be agnostic about what will work.”

Last year, Rajan also questioned the rising of sectarian tensions and intolerance propagated by factions associated with the currently ruling government.  In a speech to the Indian Institute of Technology last October, Rajan lambasted the rising intolerance and stated: “India has always protected debate and the right to have different views. Excessive political correctness stifles progress as much as excessive license and disrespect.”

This is consistent with the pattern of behaviour displayed by the current Indian administration .

What have Modi and his administration achieved in the last two years:

 

So what does this administration do in response? Remove one man who can help make a difference and help improve matters.

Another great article here: By getting Raghuram Rajan out, Modi may have won, but India has lost

I am genuinely concerned at the state of affairs in India and despite the sometimes effective PR campaign Modi’s government may run, the cracks are beginning to show.

India’s always been a home to alternative thoughts, ideas, ideologies, religions, faiths, beliefs, ethnicities and ways of life. We have been a beacon of hope and democracy for all and it is very sad to see the very edifices of inclusivity and secularism crumbling.

 

 

Challenging poverty the Brazilian way

An amazing revolution has been taking place in Brazil over the last decade – one that could save the world. This revolution was done against the advice of experts from leading institutions such as the World Bank and leading academics.

This revolution, named Bolsa Família has had a huge transformational shift in the fight against inequality and poverty across Brazil. It was based on a simple premise that if you place cash in the hands of the extremely poor and have faith that they will do the right thing, then good things will happen and transform their lives and fortunes.

It was rolled out by a President, Luiz Inacio Lua da Silva (or Lula), who was of the poor and understood what it meant to be poor and therefore had the belief that the Bolsa Família scheme will shape the life of millions.

There is a fantastic article written about it in the Foreign Affairs magazine (by J. Tepperman) for those who want to find out more (this post was inspired by the article). Below are some key highlights about how the Bolsa Família works, how it helped move millions out of poverty, reduce income inequality and radically transform a society.

First – the situation in Brazil before the Bolsa Família

  • In 2000, a third of Brazil’s population of 175 million people lived below the poverty line (under US$2 a day) and 15% were deemed to be indigent (living under US$1.25 a day)
  • By 2010, over 40 million people had moved from below the poverty line to the middle class.
  • Income inequality has also dropped significantly in that time

What led to the birth of the Bolsa Família?

In 2003, a man who was born into an extremely poor family and started his professional life as a shoeshiner became the President of Brazil. This was the time of Luiz Inácio Lua da Silva, or Lula for short.lula-bolsa

When Lula was campaigning for Presidency, he was reviled by the business community and foreign banks. Foreign investors were backing off and international banks were cutting credit.

Goldman Sachs even came up with the ‘Lulameter’ – a meter that predicted an inverse relationship between Lula’s popularity and Brazil’s economic future.

Lula was committed to social policies that benefited all of Brazil rather than just the elite and launched a far-reaching social programme called Fome Zero (“Zero Hunger”) and at the centre of this campaign was the Bolsa Família or Family Grant.

This was a revolutionary and ground-breaking anti-poverty effort that transformed a society and has inspired many similar programmes.

How does the Bolsa Família work?

Rather than provide the poor with perks and benefits which sometimes has the effect of increasing the layers of corruption and bureaucracy, the idea was to simply give the poor money.bolsa_familia_foto_felipe_gesteira_0067

In most developing countries, the poor are given subsidies or physical items such as food or basic tools and equipment which tended to be a largely inefficient process that only engendered a culture of patronage.

The Bolsa Familía was a programme which was easy to qualify for.

If a family proved that it lived in extreme poverty and earned less than 50 Brazilian reais ($42) or 100 reais ($84) per person per month, they will be eligible for the scheme.

An average family gets $65 cash and the benefits tops off at $200. To obtain the cash, families needed to go to a bank and draw the money from their own accounts There were no middleman handing them the cash and they had full control over the receipt and expenditure of the cash.

Whilst getting into the programme itself was easy, staying in required that the beneficiaries signed up to a range of conditions or contrapartidas (counterpart responsibility). Some of these included:

  • Ensuring all the children between six and fifteen years old attended school at least 85% of the time
  • All children got immunisation
  • Both mothers and children got regular medical check-ups
  • Pregnant women needed to get prenatal care and breastfeed their children.

President Lula was determined to break the intergenerational trap – and ensure that parents gave their children a better head start and advantages which they themselves may not have enjoyed.

This social contract between the government and the beneficiaries meant broadly there was a greater adherence to the conditions.

There were also strict penalties for those who did not comply and non-compliance meant being first suspended from the programme before being completely struck-off for continued transgressions.

 

The initial sceptics

When Lula launched the programme, he faced very highly qualified cynics and naysayers, economists and development agency experts who thought the notion of giving cash directly to the poor will be misspent and be ineffective as they felt it created a culture of dependency and that the poor will spend the money on alcohol and other demerit goods.

However, the visionary Lula had the right idea when he mentioned to J. Tepperman:

“The number one teacher in my life was a woman who born and died illiterate: my mother. With all due respect to experts and academics, they knew very little about the poor. They know a lot about statistics, but that’s different, sabe?

To an intellectual, putting $50 into the hands of a poor person is charity, an academic has no idea about what a poor person can do with it. But that’s because at university, they don’t teach you how to care for the poor. And it’s because most experts have never experienced what the poor go through every day. They’ve had to work without breakfast. They’ve never lived in a flooded house, or had to wait three hours at a bus stop. To experts, a social problem like inequality is only numbers.”

 

A policy that favours the poor favours all

Whilst Lula and the policy’s opponents and economists were convinced this hugely controversial policy was going to be a terrible idea, Lula was convinced in his belief that this was the right thing to do. He also had a strong notion that putting cash into the hands of the poor will help them participate in market economics and help the economy grow.

Lula remarked: “When millions can go to the supermarket to buy milk, to buy break, the economy will work better. The miserable will become consumers.”

The premise was simple: If the poor start spending, businesses benefit, social ills go down and society as a whole improves.

 

The fantastic outcomes that transformed a society

  • Bolsa Familía now supports 14 million families (or 55 million Brazilians)
  • It has reached a quarter of Brazil’s population and 85% of the poor.
  • The small payments have helped double the incomes of Brazil’s most destitute.
  • In the first three years of the programme, extreme poverty was cut by 15%.
  • Income inequality has also reduced by a third as a result of the Bolsa Familía. The poorest 20% saw their incomes rise by 6.2% while the richest 20% saw growth of only 2.6%. (In contract, in the US, the richest 10% grew their wealth by 2.6% while the poorest 10% actually saw their wealth decrease by 8.6%).
  • Vaccination rate has increased to 99% of the population.
  • Malnutrition amongst children has reduced by 16%. Infant mortality dropped by 40% over the last decade, with deaths from malnutrition dropping by almost two-thirds – the sharpest decline anywhere in the world.
  • Children of Bolsa Familía recipients have graduation rates that are double that of poor Brazilian children who are not in the programme.
  • The number of children forced to work has reduced by 14%.

When the Bolsa Familía was originally launched, opponents of the programme were of the view that it was going to drain the national coffers and be a huge drain on public finances. However, the entire programme has cost the government less than half a percent of Brazil’s annual GDP. In 2011, a study by the British Government also demonstrated that cash-transfer programmes like the Bolsa Famiía cost 30% less per person than traditional aid programs.

Further evidence has also shown that for every real disbursed by the government towards the Bolsa Familía programme, it has increased Brazil’s GDP by 1.7 reais!

Where next?

Ultimately the recipients of the Bolsa Familía have said that rather than feel stigmatised and shamed, they have felt pride in being enrolled into the programme. The programme has allowed parents to give their children a good life and in the process given them greater autonomy, independence and above all, dignity.

This is an important facet of development which sometimes gets lost when viewed through the lens of economic analysis and statistics – that people need a sense of dignity and a programme that recognises this will ultimately be successful and be a driver of societal benefits.

The Bolsa Familía has become a pioneering programme that is inspiring many more countries and cities around the world – indeed Brazilian government officials responsible for the Bolsa Familía delivery are providing training and seminars for others seeking to emulate them. It is not just the emerging economies of the world learning from Brazil, but even major American cities like New York, which only goes to show that addressing poverty and inequality is THE policy issue that needs to be urgently addressed.

Social mobility and breaking intergenerational poverty and illiteracy traps are fundamental areas that need to be addressed by leaders and policymakers, in countries rich and poor.

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