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Capitalism, Globalisation and Inequality

"London, UK - March 26, 2011: A protester dressed as a banker particpates in a large TUC organised austerity rally in central London. An estimated 250,000 converged on the streets of the British capital to protest against government spending cuts."

By Kalim Siddiqui

With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system – The author discusses the history and impacts of capitalism, trends in globalisation, and persisting inequality among countries and proposes that an alternative economic system should be adopted.

Since the mid-18th century, capitalism has not only shaped modern societies, but has also witnessed periodic crises that have often threatened these societies’ very existence. A number of theorists have sought an explanation at to why such setbacks to stability and growth take place. For Karl Marx, it was due to control of wealth by a privileged few and he argued that the system produces wealth at one pole and poverty at another and simultaneously becomes immensely strengthened. Rosa Luxemburg proposed that these cycles are due to exhaustion of new land for colonisation and markets; Keynes suggested the lack of demand and the saturation of markets and Kondratieff stagnation in technological development. Despite their differences they all agreed that capitalism was not a natural system and was bound to end sooner or later.

Capitalism as a socio-economic system arose in Europe initially as “merchant capitalism” and subsequently through a technological revolution which metamorphosed into “industrial capitalism”.

The prominent Austrian economist Joseph Schumpeter characterised the dynamics of capitalist development as displacing old equilibria and creating radically new conditions. For him, economic development is accompanied by growth, i.e., sustained increases in national income, which occurs discontinuously rather than smoothly. According to him, the immediate stimulus for development emanating in the sphere of industrial and commercial life takes place due to innovation (i.e. new products, methods of production, markets and sources of supply). The innovation process “incessantly revolutionises the economic structure from within, incessantly destroying the old one, [and] incessantly creating a new one. This process of creative destruction is the essential fact about capitalism” (Schumpeter, 1950:83). The prime motives of entrepreneurs are accumulation and enlargement of profits.

Capitalism as a socio-economic system arose in Europe initially as “merchant capitalism” and subsequently through a technological revolution which metamorphosed into “industrial capitalism”. Slavery and colonial expansion were the main forces behind the establishment of capitalism, first in Britain and later on in Belgium, the Netherlands, France, Germany and Italy. The big question is where the principal accumulation of wealth came from? Of course, slavery and colonialism played a big role.  Historically, capitalism always fought for new territories and markets. It was also instrumental in imparting ‘vertical’ and ‘horizontal inequality’ in the world. However, there was a reaction to colonial capitalism which resulted in the Russian Revolution (1917) and the Chinese Revolution (1949) and decolonisation. However, unequal economic relations and Western control somehow persisted in the former colonies in the form of “neo-colonialism”.

Slavery and colonial expansion were the main forces behind the establishment of capitalism, first in Britain and later on in Belgium, the Netherlands, France, Germany and Italy.

In the West, after successive crises, capitalism has been successful in rescuing itself mainly through exogenous support. For instance, during the “Great Depression” of the 1930s, Keynes advocated in favour of increased government spending to lift the economy out of recession. When consumers and businesses slow down, the government should increase spending to increase demand for goods and services. This fiscal stimulus could take the form of public housing, healthcare, education and infrastructure projects. However, we should not ignore the role of government spending in boosting the defence sector, which is seen as a new avenue to increase profits and also creates jobs. Thus, military Keynesianism became popular among the ruling elites in the post-war period and large corporations also saw military spending as an important form of government intervention to make profits. These defence expenditures in advanced economies such as the U.S., UK and France also helped to counteract the threat of recession in their economies.

In the aftermath of the “Great Depression” and Second World War, capitalism was transformed with the increased role of government in the economy, a strong workers union and welfare state. There was a sea change from the economic system and policies which existed in Western Europe and the United States in the 1920s. After the Second World War, the social democratic governments under Keynesian economic policies were prompted, with active state intervention, to preserve economic stability and social justice within the framework of capitalism, which is known as the “Golden Age” of capitalism. Markets were brought under social control and a number of policies were designed to protect societies from the disastrous policies of the past.

Furthermore, the ruling elites in the West came to the realisation that economic stability could not be achieved unless the poor sections of society were guaranteed some basic benefits, the costs of which were to be shared with the state. In addition, the state must have some sort of regulation over markets. The workers were brought on board to accept property rights and inequality in exchange for political democracy and wage bargaining.

However, in the 1970s economic crisis deepened in the advanced economies, with both rising prices and unemployment, and such arrangements were being questioned. To control rising prices, deflationary measures were adopted along with attacks on trade unions and welfare policies. In order to increase investments, the governments resorted to public borrowing to meet their fiscal commitments. Financial markets were deregulated and liberalised. As a result, the financial institutions started taking ever increasing risks and their reckless drive for higher profits eventually brought the entire system into collapse in 2008. The declining profits on investments adversely affected global growth in output, with money shifted into the financial sectors and speculations and this bubble eventually burst in 2008. The governments had to rescue the financial institutions by bailing them out using public funds, which resulted in a dramatic rise in sovereign debts, which was then followed by severe austerity policies.

The declining profits on investments adversely affected global growth in output, with money shifted into the financial sectors and speculations and this bubble eventually burst in 2008.

Michal Kalecki observed a rise in the “degree of monopoly” within metropolitan capitalism, which provided an opportunity for a greater squeeze on the producers of primary commodities of the developing countries. Samir Amin (2018) found that unequal exchange was manifested in the fact that the value added by a unit of simple labour in the periphery (i.e. developing countries) amounted to less than the value added by a unit of simple labour in the metropolis. This he called super-exploitation of the farmers and workers of the periphery. Amin also developed Paul Baran and Paul Sweezy’s ideas of economic surplus to explain a globally monopolised system in which Marx’s “law of value” takes the form of a “law of globalised value”, generating super-exploitation of the workers in the periphery. Under globalised capitalism, financial capital dominates worldwide production and distribution. Amin also predicts that capitalism’s current phase of neo-liberal globalised capitalism has reached a dead-end (Amin, 2018).

Conservative historian Niall Ferguson equates contemporary political developments with the period at the beginning of the 20th century, when the globalisation collapsed as a result the two World Wars and the Great Depression. He totally ignores colonialism and its impact on today’s economies, both advanced and developing. Others enthusiasts predicted the end of the nation state through rising foreign capital investments and trade, while the critics supported globalisation, but also argued for programs in favour of state-led infrastructure investment and some control over global finance to offset the adverse effects of globalisation. To address this, we need to analyse the trends in globalisation.

Globalisation means that the rate of growth of world trade is greater than the rate of growth of world’s production of goods and services. This would indicate that the world economy is becoming integrated, as cross-border trade and foreign direct investment (FDI) increasingly replaces the production of goods and services for domestic markets. The previous policy of protectionism and import substitution was reversed. This was the case during the inter-war period when import tariffs were imposed along with exchange controls. This began in 1914 as tension between European powers increased. However, after the Second World War, we saw a change in the world economy towards a sharp reduction in tariffs and growth in world trade, which grew on average at 10% annually, outstripping growth of world output two fold.

Globalisation means that the rate of growth of world trade is greater than the rate of growth of world’s production of goods and services.

However, since the 2008 financial and economic crisis, both world trade volumes and FDI have slowed down. According to a recent OECD report, foreign investment flows declined by 7% in 2017 and thus dropping global outputs to 2.2%. Under the new situation, the U.S. has enacted various protectionist measures since 2009, mostly against China.  In such critical times, Trump hopes to triumph by riding on economic nationalism, triggered by increased competition from China’s growing economy, which has now become a net exporter of capital.

During the first wave of globalisation, which was between 1850 and 1913, the colonies supplied raw materials and provided markets for manufactured goods from the metropolis, which led to vast accumulation of wealth in Europe. The treasures captured in the Americas, Africa and Asia by looting, plunder, enslavement and murder, were brought back by Europeans and were turned into capital. Karl Marx highlighted how Britain created an empire and trade through primitive accumulation of capital based on slavery and plunder of its colonial “possessions”. Of course, technological advances in the 19th century, especially with the introduction of railways, shipping and telegraph aided this process. This expansion of trade and business was far from peaceful, and growing economic expansion overseas was backed by military boots on the ground and the Royal Navy at Sea (Siddiqui, 2018a). Commenting on the two opium wars in the mid-19th century, (first opium War (1839–1842) and second (1856–1860)) involving China and Britain over the export of opium and China’s sovereignty, John Newsinger (2006) states in his book The Blood Never Dried, that “the British Empire was the largest drug pusher the world has ever seen”. And finally the British and French troops plundered, looted China and burned down the Summer Palace in 1860, afterword’s China plunged into civil wars, which continued for next ninety years until the communist revolution in 1949.

The colonisation of the economies in Asia and Africa and Latin America in the late 18th and early 19th century put a break on the internally initiated progressive reforms and structural changes. It also imposed de-industrialisation, reoccurrences of famine and forced integration of their economies with the occupying powers. To strengthen their occupation various types of compromises were made with the pre-capitalist and reactionary forces and the policies of ‘divide and rule’ which brought untold sufferings to the people in the colonies.

The colonies did not see any modern industrial growth and the world’s manufacturing remained firmly rooted in the advanced countries. The colonies were forced to specialise in the production of primary commodities such as sugarcane, cotton, coffee, tea, indigo, jute, opium and rubber rather than in modern industries.

This expansion of trade and business was far from peaceful, and growing economic expansion overseas was backed by military boots on the ground and the Royal Navy at Sea.

The prices of these commodities were often suppressed; extortion and theft rather than a free market became the normal behaviour of the colonialists. The surpluses extracted from the colonies helped capital accumulation to be invested in the modernisation and industrialisation of the mother countries, but also gave them extra capital to be exported back to colonies in the form of railways, mining and plantations. All these lucrative areas of investments were only available for Europeans and therefore accentuated the unequal development between countries.

In the mid-18th century, the South had accounted for 73% of the world manufacturing output, but this share fell to 50% by 1830 and by 1914, at the end of the first wave of globalisation, the share dropped to only 7.5% (Bairoch, 1995). Contrary to this fact, Niall Ferguson still portrays British Empire as benign and benevolent. However, the fact is that the process of globalisation was violent and exploitive, brought famines and wars and decimated the native population in the colonies. It is estimated that more than 29 million Indians died in famines during the British rule, while at the same time millions of tons of wheat were exported to Britain while famine raged throughout India (Siddiqui, 1990). For instance, in 1943, up to four million people in Bengal died when the Winston Churchill diverted food to British soldiers. When asked about the famine Churchill said: “I hate Indians. They are a beastly people with a beastly religion. The famine was their own fault for breeding like rabbits.” And when few conscience-stricken British officials wrote to Churchill in London pointing out that his policies were causing needless loss of life, and then he wrote back “Why hasn’t [Mahatma] Gandhi died yet?” Capitalism was responsible for underdevelopment, deprivation, racism and poverty. In fact, colonialism did not contribute to the development of the productive forces of the colonies but conversely inhibited their development. Prior to the Industrial Revolution in Britain, Western Europe had been poorer in natural resources and less developed economically than either China or India (Siddiqui, 2018b).

The second phase of globalisation began slowly in the 1950s, but was limited to the few developed economies of Western Europe, Japan and North America. However, in the 1980s the international debt crisis and mismanagement provided an opportunity for the IMF/World Bank to impose a “Structural Adjustment Programme” (SAP) in developing countries (Siddiqui, 1996). The opening up of domestic markets was one key element of the SAP. Taking advantage of these crises, the mechanisms controlling cross border direct investment, trade and financial flow were removed. The creation of integrated world markets meant that workers had to compete under the fear of capital outflows and jobs moving away. Any country that tries to pursue a path independent from the Western-dominated financial oligarchy is criticised. Further, the IMF/World Bank discredited and dismantled institutions which could have promoted economic independence and self-reliance in the developing countries.

The final success came with the collapse of the Soviet Union in 1991 and the globalisation project received a further boost and almost the entire world economy was open for trade and capital liberalisation. The current drive of globalisation for further integration of markets was also boosted by the development of information and communication technology (ICT). At the same time, governments deregulated the financial sector, which led to the increased financialisation of the world economy which has now become “financialised and globalised oligopolies” located primarily in the U.S., Europe, and Japan. This is global oligopolistic capitalism, in which finance capital has come to dominate worldwide production and distribution. This means expansion of financial markets and an increase in the portion of income generated by the financial sector worldwide. It has also led to further fuelling of global capital flows with a profound impact on global and national economies.

The final success came with the collapse of the Soviet Union in 1991 and the globalisation project received a further boost and almost the entire world economy was open for trade and capital liberalisation.

However, when neo-liberal policies were imposed in the South after the debt crisis mainly through the IMF, World Bank, and WTO, the aim was to create a just and stable global economic system. However, the global recession along with the financial crisis betrayed the neo-liberal claim. This was largely due to the change in the nature of global capital from “productive” to “fictitious”. The “new rich” have enhanced their wealth not by creating “real value” via production but by engaging in speculative businesses. This sort of a “capital” makes the global economy unequal, unstable, unproductive and unsustainable. It is unlikely that crony capitalism will promote economic growth with social and environmental justice.

Donald Trump becoming President of the U.S. last year seems to have successfully convinced U.S. political and business elites that protectionism will restore American power and will harm the U.S. much less than its rivals. For example, in the United States trade measured nearly 30% of total output in 2016. This is compared to 167% in Belgium, 85% in Germany, 59% in the UK and 42% in China. This means that any move towards protectionism by the U.S. will be less adverse than in other advanced economies. Martin Wolf (2017) notes that Trump: “appears to be intent on replacing multilateralism with bilateralism, liberalism with protection and predictability with unpredictability.” Therefore, the future of globalisation depends on the outcomes of such tension in the world and also within the U.S. ruling elites.

Inequalities among nations were stabilised in the early decades of the post-colonial period (i.e. 1950-70) due to decolonisation and commodity boom, but in the 1980s and 1990s rose massively during the debt crisis due to financial instability and the global economic crisis of 2008. For the last three decades, there have been huge economic changes taking place globally and structural changes and patterns of trade have also taken place both in advance and developing countries. However, some developing countries have achieved faster growth rates than the advanced economies, particularly China, India, Indonesia and Turkey. However, they constitute a small numbers among the developing countries, but accounts large number of its population. In fact, international inequality in terms of distribution of per capita incomes among the countries’ population has declined in the last two decades. Trade liberalisation and with the removal of trade barriers did have some positive impact on country’s growth but not all the developing countries have benefitted from it. We also find that with globalisation, transnational companies largely from the advanced economies driven by competition at home for markets (Siddiqui, 2018b) and higher wages and low returns, driven rising competition for markets, whilst also seeking to cut their costs, have started investing abroad especially given by the rise of global value chains since the 1990s.

Neo-liberal policy unleashes a vigorous process of primitive accumulation of capital in the countryside, where the domestic corporate oligarchy and multinational corporations impinge on the small landowners and petty producers, causing them great distress.

Under neo-liberal policies the world’s wealth and income has been concentrating into fewer hands. According to a recent Oxfam study, in 2015 the total wealth of the world’s 388 richest was on a par with that of the bottom half of the global population. In 2017 the top eight richest people’s wealth equalled that of the bottom half. In the U.S. alone, 0.1% of Americans enjoy 90% of the country’s wealth.

Currently, the word “globalisation” in India means capitalist expansion, through over-exploitation of natural resources with the inevitable consequences of marginalisation of tribal peoples, uncontrolled growth of inequalities, and transformation of the country into a crony capitalist state and proliferation of billionaires who symbolise the capitalists’ de facto control over the country’s economic sovereignty. Neo-liberal policy unleashes a vigorous process of primitive accumulation of capital in the countryside, where the domestic corporate oligarchy and multinational corporations impinge on the small landowners and petty producers, causing them great distress. The big businesses attempt to restructure the government by forcing it to be functionally autocratic through bureaucracy, and by legislating centralisation to substitute democratic procedures (Siddiqui, 2017).

Since the 1980s, inequalities within countries has risen sharply, especially after the adoption of neo-liberal economic policies. In India, for example, during the last quarter of a century under neoliberal policies inequality within the population has widened further. According to the latest Human Development Report of UNDP, 55.3% of Indians are under multidimensional poverty. On the Human Development Index (0.624), India’s rank among 188 countries is 131. According to the recent World Bank World Development Report (2018), 172 million Indians live in extreme poverty, thus making India home for 24.5% of the world’s poor. The recent Oxfam Study points out that the richest 1% of Indians now own 58% of the country’s wealth. Another recent study by Chancel and Piketty observed that the top 1% of Indians owns 22% of country’s total income. There is also a concentration of landed wealth in India. 70% of India’s rural population is landless, only 30% owns land. Persistent agrarian distress has been making the life of the majority of people miserable. According to an official estimate, since 1995 more than 300,000 farmers in India have committed suicide (Siddiqui, 2017).

Capitalism has been moving on a relentless march towards automatisation through displacement of labour. This situation has led to further weakening the position of workers towards secure jobs as they are threatened by artificial intelligence and driverless cars. The world has become too vulnerable with the rising craze for automation, robotisation and artificial intelligence. With rising global inequality and environmental crises, capitalism is unable to resolve the crises and thus has become an obsolete social system. Randell Collins (2013) believes that capitalism has reached a dead end, and at present it has no escape routes. In this predicament, we need an alternative economic system which respects ecological diversity, environment, democracy, social-economic equality and facilitates fair and reasonable redistribution of incomes and wealth.

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About the Author

Dr. Kalim Siddiqui teaches International Economics at University of Huddersfield, UK. He is an economist, specialising in Development Economics and has written extensively on development economics, economic reforms as well as on the political economy of development.

 

References

1. Amin, Samir. (2018).  Modern Imperialism, Monopoly Finance Capital, and Marx’s Law of Value, New York: Monthly Review Press.

2. Bairoch, Paul. (1995). Economics and World History: Myths and Paradoxes. Chicago: University of Chicago Press.

3. Collins, Randell. (2013). Does Capitalism Have a Future? Oxford: Oxford University Press.

4. Newsinger, John. (2006). The Blood Never Dried: A People’s History of British Empire, London: Bookmarks.

5. Schumpeter, Joseph. (1950). Capitalism, Socialism and Democracy, New York: Harper.

6. Siddiqui, Kalim. (1990). “Historical Roots of Mass Poverty in India” in edited by C.A. Thayer, J. Camilleri, and K. Siddiqui. Trends and Strains. pp. 59-76, New Delhi: Peoples Publishing House.

7. Siddiqui, Kalim. (1996). “The Debt Crisis – Need for a New Strategy” The News, 17 May.

8. Siddiqui, Kalim. (2017). “Globalization, Trade Liberalisation and the Issues of Economic Diversification in the Developing Countries”, Journal of Business & Economic Policy, 4(4): 30-43.

9. Siddiqui, Kalim. (2018a). “David Ricardo’s Comparative Advantage and Developing Countries: Myth and Reality”, International Critical Thought, 8(3) September, Taylor & Francis Group.

10. Siddiqui, Kalim. (2018b). “Imperialism and Global Inequality: A Critical Analysis”, Journal of Economics and Political Economy, 5(2): 266-291.

Fighting Fraud and Recovering Assets: Civil Versus Criminal Remedies

By Richard Clayman and Holly Buick

Save for certain regulated industries, there is no legal obligation to report an incident of fraud to the police. However, in order to maximise chances of recovering assets, victims of fraud must act quickly once they become aware of their loss, even before knowing all the relevant facts. Here are various considerations that a victim must contemplate when responding to fraud.

Incidents of serious and sophisticated fraud continue to rise, and economic crime is now estimated to cost the UK economy £200 billion a year. However, it is not only individuals who are at risk. Last year’s ransomware attack that crippled the NHS in England is now understood to have cost the state £92 million.1 Price Waterhouse Coopers’ 2018 Global Economic Crime and Fraud Survey revealed a litany of alarming statistics,2 half of the 7,200 organisations surveyed had been the victim of fraud or economic crime in the past two years and of these incidents, approximately 10% cost the victim more than $5 million. In the UK, fraud is increasingly a cross-border phenomenon, with around half of all fraud and cybercrime originating from outside the jurisdiction.3 Save for certain regulated industries, there is no legal obligation to report an incident of fraud to the police. However, in order to maximise chances of recovering assets, victims of fraud must act quickly once they become aware of their loss, even before knowing all the relevant facts. This will include deciding whether to make a criminal complaint or pursue civil proceedings against the perpetrator. In the commercial sphere, a victim’s primary focus will often be to recover misappropriated assets; however, many businesses and organisations also want to see the perpetrator face criminal justice, particularly when the fraud has been carried out by somebody within their organisation.

Ultimately, victims of fraud need to devise smart strategies that best serve their priorities, and are achievable with the time and resources available. The following comparisons of English civil and criminal remedies highlight the various considerations that a victim must contemplate when responding to fraud.  

Speed

A key advantage of civil proceedings is that the victim has a much higher degree of control and can move quickly to instruct lawyers and investigators, locate assets, formulate and issue proceedings, often within a matter of days. The Courts of England and Wales are a world centre for commercial fraud litigation due to the significant legal experience in this field, and the availability of powerful interim remedies which can tackle the sophisticated modus operandi of modern fraudsters.

In this climate, victims of fraud who want to see the perpetrator face criminal charges are increasingly turning to private prosecutions as an avenue for redress where the authorities do not have the resources or will to prosecute.

By contrast, a criminal prosecution will only be an option if an enforcement agency is prepared to investigate the fraud. Only the most serious cases will fall within the remit of the Serious Fraud Office (SFO), the UK’s specialist authority which deals with the most complex and high value economic crime. SFO investigations tend to involve sums in tens or hundreds of millions, and concern major domestic and international businesses, such as recent investigations concerning Tesco, Rolls-Royce and Barclays. It can take years for an SFO investigation to result in charges, let alone a successful prosecution. 

Smaller scale incidents are usually reported to the police via Action Fraud. The service receives some 40,000 reports per month, however a recent report by the consumer group Which? indicated that more than 96% of cases reported via this channel are closed without a successful outcome.4 Where an investigation is opened, the victim has no control over the pace at which matters are progressed, and again it may be months or years before a perpetrator is charged with the fraud.

In this climate, victims of fraud who want to see the perpetrator face criminal charges are increasingly turning to private prosecutions as an avenue for redress where the authorities do not have the resources or will to prosecute. A private prosecution allows the victim to conduct a criminal case against the fraudster using his own resources. Private prosecutions are not cheap, however, often costing as much as (if not more than) civil proceedings.

Locating and Securing Assets

In civil proceedings, a range of tools are available to ensure that assets are located and recovered before they can be concealed, removed from the jurisdiction, or otherwise placed out of the reach of the victim and the courts.

The freezing injunction is the “nuclear weapon” of civil justice. It allows a victim of fraud to obtain an order preventing the defendant from dealing with their assets, including spending money in specified bank accounts, until judgement can be enforced against them. The penalties for breaching such an order can include committal to prison for up to 2 years. The application will usually be made without notice, meaning that the fraudster will not be made aware of the proceedings until their assets have been frozen. Further, such orders can be made against third parties, for example the spouse of, or a company owned by, the perpetrator, against whom no direct allegation of fraud is made.

The English Courts are also prepared to make such orders on a worldwide basis, meaning that the individual is prohibited from dealing with their assets up to a certain value, no matter where in the world those assets are located. Similarly, the English Courts are willing to grant search orders against individuals not party to the proceedings,5 to grant orders allowing claimants to search for and remove property such as electronic devices, and to allow software to be run on those devices to “crack” password-protected documents so that they can be reviewed, all on a without notice basis.

Criminal prosecutors have similar powers to preserve assets at an early stage, through applying for without notice restraint or account freezing orders. However, prosecuting authorities will be reluctant to apply for restraint without strong evidence that a fraud has taken place, because of the risk of being ordered to pay the defendant’s costs if the investigation does not proceed. While confiscation is available to victims pursuing a private prosecution at the end of successful proceedings, restraint orders at the outset are not, unless the state prosecuting authorities are prepared to seek such an order on the victim’s behalf.

The Route to Trial

Claimants in civil proceedings have the maximum degree of control in terms of selecting their legal representatives, deciding which defendants to claim against, which to settle with and on what terms. In some cases, it may be possible to bring civil proceedings to an end without a trial, through settlement or summary judgment.

In criminal proceedings, the victim of the fraud is simply a witness to events, and as such has no control over the proceedings. This is also true to some extent where the victim pursues a private prosecution. The victim’s lawyers must be very careful in conducting the investigation and prosecution so as not to taint the evidence of their witnesses, including the victim, by allowing them to confer or influence each other. In contrast, the victim claimant in civil proceedings is entitled to know what others have said in their evidence, and indeed to direct the selection of witnesses to call in support of its claim.

Finally, criminal prosecutors must convince a jury “beyond reasonable doubt” in order to secure a conviction. In civil cases, the standard of proof required to secure judgment is notionally lower: the “balance of probabilities” standard. However, the seriousness of an allegation of fraud means that civil judges will expect the evidence of fraud to be cogent and compelling.

Recovery of Assets

In criminal proceedings, confiscation orders aim to remove the benefit of the crime by ordering the defendant to pay back the proceeds of the crime, or face imprisonment. In terms of redress for the victim, the prosecution may also apply for compensation to be paid. However, a compensation order will only cover loss caused by offences actually charged in the proceedings. Further, confiscation can be a lengthy process which often fails to result in full recovery.

At the conclusion of a successful civil claim, damages may be awarded with the aim of putting the claimant in the position they would have been in if no wrongdoing had taken place. The courts can also trace misappropriated sums as they are transferred through bank accounts around the world or laundered, for example, through the purchase of property. Claimants can assert proprietary claims over property which represents the proceeds of fraud, even where it has ended up in the hands of third parties. A civil judgment is also often easier to enforce against a defendant’s assets in foreign jurisdictions.

Cost of Proceedings

Where the criminal authorities are prepared to investigate and prosecute, some cost is likely to be incurred by the victim in gathering and providing evidence, particularly in the case of a corporate which has been the victim of a large-scale fraud.

Often, the greatest risk associated with bringing civil proceedings is the cost. Successful litigants can normally recover a large proportion of their costs from the other side, although this is dependent on the opponent having assets against which to enforce the judgment. If the victim were to lose the claim, they would be liable to pay the defendant’s legal costs, which may be equal to their own. Claimants can however mitigate costs risk through conditional fee agreements, after the event insurance, or as is increasingly common, third party funding agreements.

Where the criminal authorities are prepared to investigate and prosecute, some cost is likely to be incurred by the victim in gathering and providing evidence, particularly in the case of a corporate which has been the victim of a large-scale fraud. However, these costs will be far lower than in civil proceedings.

Private prosecutors may apply to recover their reasonably incurred costs either from public funds or from the defendant, but also risk having to pay the defendant’s costs, for example if the matter does not proceed to trial because the prosecution offers no evidence, or the proceedings are conducted improperly.

Running Parallel Civil and Criminal Proceedings

There is nothing in principle to prevent both criminal and civil proceedings being commenced, and in some cases, this will represent the most effective strategy. However, there are a number of risks inherent to running parallel proceedings which include:

• Increasing the overall length of time a victim is involved in litigation. Civil proceedings will not automatically be delayed until the outcome of a criminal case, but each case will turn on its facts. In some cases, the defendant might try to exploit the fact of parallel proceedings to justify failure to comply with Court orders.

• Evidence gathered through one process cannot automatically be used in the other. For example, evidence obtained through civil proceedings cannot be handed to the police.

• It is not permissible to rely on the threat of criminal proceedings as leverage in settlement negotiations. To do so may amount to the criminal offence of blackmail.

There are also particular risks involved with running a private prosecution alongside civil proceeding:

• Communications between claimants and their lawyers may not be covered by legal professional privilege.

• If the criminal courts find that the prosecution has been brought for the improper motive of forcing settlement in civil proceedings, the claim may be taken over by the authorities and discontinued or stayed as an abuse of process, with cost implications.

 

Conclusion

More often than not, the strategy pursued by a victim of fraud will reflect the financial resources they have available to them. A government entity or large corporate may be well placed to pursue an aggressive civil litigation strategy, armed with investigators’ reports and aided by freezing and search orders, with a view to backing the perpetrator into a legal corner from the outset, and winning a swift and favourable settlement or summary judgment in return. However, for smaller businesses and individuals, there may be little option but to rely on the police to investigate and bring the perpetrator to justice.

Naturally, when confronted with this picture, individuals, businesses and governments would be wise to heed the old adage “prevention is better than cure”. By reviewing their fraud prevention measures, identifying weaknesses and building defences, they stand the best chance of avoiding the far greater cost of remedying incidents of fraud in the future.

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About the Authors

Richard Clayman is an Associate at Peters & Peters Solicitors in London. He is a highly experienced lawyer, specialising in high-value and complex, multi-jurisdictional claims and obtaining asset recovery. During his career Richard has been involved in proceedings before the Supreme Court, Privy Council, Court of Appeal and European General Court.

Holly Buick is a Trainee Solicitor at Peters & Peters Solicitors. Prior to joining the firm, Holly spent 4 years in Buenos Aires where she worked at Argentina’s leading human rights organisation on litigation at the Inter-American Court of Human Rights.

 

References

1. http://www.nationalhealthexecutive.com/Robot-News / wannacry – cyber -attack-cost-the-nhs-92m-after-19000-appointments-were-cancelled

2. https://www.pwc.com/gx/en / forensics / global – economic – crime – and – fraud – survey – 2018.pdf

3. https://www.actionfraud.police.uk/data#dataexplained

4. https://www.which.co.uk/news/2018/09/exclusive – more – than – 96 – of-reported-fraud-cases-go-unsolved/

5. Abela and others v Baadarani (Third Party: Fakih) [2017] EWHC 269 (Ch)

The Marketing Mistakes Fintechs Make And How To Avoid Them

Strategy Plan Marketing Data Ideas Innovation Concept

By Mike Teasdale

Many fintechs think their products speak for themselves – It’s simply not true. This article discusses the rise of fintechs in the UK and five classic mistakes they make regarding marketing – and some advice on how to rectify them as proposed by Harvest Digital.                          

Risen from the ashes of the financial crisis, UK fintechs have filled the gap left by a glut of cash-strapped high street lenders failing to innovate. Digital first with user experience at their core; none of the baggage of financial crises past; no mis-sold PPI or dodgy restructuring to tarnish their image, one might think they were onto a winner.

The UK is a hotbed for fintech startups – a light-touch regulatory framework and tax incentives have created an atmosphere in which innovation can breathe.

Most have ambitions of taking on the incumbents. Monzo, the challenger bank, for example, has recently signed up its millionth customer. “Our goal is to provide an account to everyone on Earth,” proclaimed chief executive Tom Blomfield in a recent interview. He has a point. Its bright orange debit cards have become a millennial status symbol virtually overnight.

The UK is a hotbed for fintech startups – a light-touch regulatory framework and tax incentives have created an atmosphere in which innovation can breathe. Most people couldn’t name more than five of these start-ups – and yet, according to EY’s internal analysis, on behalf of the treasury, over 1,600 fintech companies currently operate in the UK.

But not every fintech is Monzo, or even a bank. A plethora of firms working in every space – from international money transfer to retail finance; payment and compliance solutions to online mortgage brokering – are parking their tanks on the lawns of incumbents. But the failure rate is remarkably high. Fewer than 90 percent of startups productise their ideas, or are adopted by the potential users.

The reasons why are abundant – from burnout and fatigue to legal issues and misjudged overheads. According to the Confederation of British Industry, 14 percent of startups fail due to poor marketing. The thin line between life and death – success and failure – is the number of users one can get on board.

You could have the best product in the world, but if you don’t put it in front of the right people, in the right way, at the right time, no one will know about it. Through arrogance or insouciance, many fintechs think their products speak for themselves. It’s simply not true. Rome wasn’t built in a day, nor are incumbent-beating startups. At Harvest Digital, we’ve seen it all over the years. Here are five classic mistakes fintechs make regarding marketing – and some advice on how to rectify them.

Build or buy?

When your budget is tight, your company young and tech-savvy, building your ad operations in-house may seem a no-brainer; a cost-efficient panacea, devoid of the many trust issues plaguing the ad industry in the last few years. But in-housing can be perilous – a lack of skills and pre-existing relationships, plus an inability to match the price points negotiated at agency rates often spells doom for in-housers.

By having all digital channels planned and bought through a dedicated team of experts, advertisers are much better able to re-allocate budgets from poorly performing channels to better-performing ones.

There are basic questions one should ask before DIYing. It is not a black and white decision. Is your finance team sufficiently ready and willing, skilled and agile, to handle hundreds of publisher relationships? Can your firm find the talent to replicate the expertise of a dedicated third party? Will you be able to evaluate the performance of internal teams as rigorously as you would an agency? If the answer is “no”, perhaps consider outsourcing.

When you’re in growth mode, efficiency is king. By having all digital channels planned and bought through a dedicated team of experts, advertisers are much better able to re-allocate budgets from poorly performing channels to better-performing ones. This is not to say that the same cannot be achieved in-house, but it is operationally more challenging – and if you get it wrong, potentially more costly.

Wrong channels

There’s an old marketing adage about “cutting through the noise”, which in the fintech space stands the test of time. As you know, it is crowded out there. “Cutting through the noise” is hard when many firms, offering similar products and services, are chasing the same clients. Some creative targeting goes a long way.

Finding audiences based on location, demography and behaviour is a good place to start. Using sequential storytelling to show ads to a specific audience, in a particular order, using a defined frequency, and structured narrative is another. Important also, is failing fast, learning, and adapting. No two campaigns are the same. A dedicated third party can manage reach and frequency much more efficiently, and coordinate campaign timings and delivery more efficiently, recalibrating as they see fit, hugely increasing your chances of success.

Wrong agency

Startups want agencies that reflect their own work, ethos, and output. For lean, digitally native brands, which thrive in a climate of innovation, the intransigence of a slow-moving behemoth has limited appeal. The advertising industry is going through a similar transformation to banking. The oversized ad networks of the eighties are learning the hard way that they are not agile enough to serve digitally native firms. So why then would you approach WPP to push your message? That’s like approaching RBS for advice on restructuring a small business.

Lack of creativity 

Having a mate that does a bit of graphic design make your adverts is probably not ideal, yet to cut costs, many do. High quality creative has been proven time again to make a significant difference in converting potential customers. Think of all the advertising that has led you to purchase. Was it the low-rent, high volume, product-and-price campaign, or the big creative that “zigged where others zagged”, to borrow a phrase.  The average Londoner can see as many as 4,000 adverts in a day. If your ads stand out among the noise, people will click on them. It’s simple really.

Not seeing the value of marketing

Marketing of all descriptions is often lambasted as a necessary evil; a means to an end, an afterthought. Hurt feelings aside, it’s simply untrue. Fintech’s often have an unenviable marketing task. They cannot rely on decades of brand equity, they do not have pre-existing relationships with potential customers, and worse still, they may have a product that the market doesn’t understand and doesn’t know how to describe. So successful digital marketing needs to educate, excite and engage – and all with a limited budget and impatient investors.  This is why finding the right partner – and preferably one who has been there before with other fintech startups – is so important.

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About the Author 

Mike Teasdale is the Planning Director and Co-Founder at Harvest Digital and heads up the Strategy and Insight Team. He is also an Adjunct Professor at Hult International Business School and helped to set up the IDM’s Award in Digital Copywriting. He has presented at numerous conferences, including three times at SXSW in Austin Texas, and contributed a chapter to ‘Multichannel Marketing Ecosystems: Creating Connected Customer Experiences’. He was recently shortlisted in the Top 100 Influencers of the Year by Creative Pool.

Where Does Innovation Come From Nowadays?

By David De Cremer 

For innovation to take place in the new technological era, collaborations that are open and flexible need to develop, the author argues, as those are the best conditions for all parties involved to learn, pursue their own interests whilst creating shared value for society. A Chinese company that has been focussed on developing this type of innovative process and outcome is Huawei.

We live in a world that is constantly changing. Global forces influence local practices and new structures are quickly emerging to replace more traditional ways of working. With change also comes the need to stimulate and explore new ways of generating knowledge that will lead to innovative and successful approaches to the new situation that has emerged. How can our institutions in such challenging conditions survive to remain innovative?

It is important to realise that innovations in today’s world depend increasingly on how organisations operate and interact within networks of firms and manage to coordinate such interactions in optimal ways. This reality indicates that today a complex ecosystem has emerged when it comes down to innovation. And, even more importantly, because of the necessity to work and function within networks, everyone has their place in the process leading to innovation. Two important institutions that have a significant impact on how innovation is transforming business and society concern companies and academia. In the last decade, the collaboration between the corporate and the academic world has intensified because we want our basic research to generate more practical applications and research funding for this fundamental type of research – usually provided by governments – is gradually decreasing. A Chinese company that has been focussed on developing and contributing to this type of collaboration is Huawei.

It is important to realise that innovations in today’s world depend increasingly on how organisations operate and interact within networks of firms and manage to coordinate such interactions in optimal ways.

Huawei is Chinese in its foundation but has a strong global appeal (more than 40 000 non-Chinese employees – out of 170 000 – are employed) that contributes to its successful R&D efforts (Tian, De Cremer, & Chunbo, 2017). In the fiscal year of 2017 Huawei´s revenue reached CNY603.621 billion (US$92.549 billion) and CNY56.384 billion (US$7.276 billion) in net profit. With respect to promoting innovation by means of research, the Huawei innovation research programme is the company’s flagship funding initiative. It provides funding opportunities to universities and research institutes. The reason for such an initiative is the idea that for innovation to emerge companies need to have an open and flexible mindset to prepare people for a world that we do not know yet.

To promote such reality, the business world has started to explore the philosophy that to achieve innovation for the good of the world, collaboration is the name of the game rather than only competitiveness. In fact, loud voices are saying that to achieve innovation in today’s world it is necessary that organisations seek to influence each other by investing in knowledge creation and dissemination – something the Huawei innovation research programme aims to do.

Is Huawei open to influence others and being influenced?

Being open to influences from outside and contributing to the collective resource of wisdom to promote innovation is nevertheless also related to the mission and self-interest of any organisation.

Huawei as a company is heavily influenced in its operations by the ideas of its founder Ren Zhengfei. By some described as a romantic soul, Ren Zhengfei adopts an outward perspective with the aim to learn from the world around him. Being a first-generation entrepreneur, he still remembers fondly that when China opened towards the rest of the world in 1978, the Chinese people did not really know what the world was like. This reality made it not easy to decide what was normal practice and what not. A perfect illustration of this kind of uncertain thought is the following story. When he was young many people in China did not have much to eat, so he was convinced that everyone in the world was hungry like they were. At the end of the eighties Ren Zhengfei was able to travel to the US and encountered the bread roll dilemma. While sitting in a restaurant he noticed that bread rolls were, on the table, without him ordering them. He wondered whether he would have to pay if he would eat them (as was the case in China). Ren Zhengfei decided to eat the bread rolls and to his big surprise the waiter brought more. Even more surprising, he did not have to pay for these breads.

One defining characteristic of the Huawei culture is that it brings together opposing forces and tendencies.

This experience led Ren Zhengfei to decide adopting an open and welcoming mindset as he realised that the world had many ideas and other ways of business to offer. Hence, Huawei as an organisation, as result of their founders’ experiences has been motivated to foster an open mindset to learn and influence. Of course, being open to influences from outside and contributing to the collective resource of wisdom to promote innovation is nevertheless also related to the mission and self-interest of any organisation. Indeed, organisations can be characterised by a collaborative mindset but at the same time each also pursues individual influence and interest. Huawei acts very much in line with this idea that collective and self-interest are aligned. One defining characteristic of the Huawei culture is that it brings together opposing forces and tendencies (De Cremer, & Tian, 2015). One opposing force that is salient in the company culture is the simultaneous tendency to cooperate versus compete. The idea is that in striving for competition respect should also be shown for its opponents and it is this mix of being competitive but at the same time understand the value of the efforts and ideas of others that drives the company in its pursuit for excellence. This perspective on business is inspired by the heroic tales of the Glorious Revolution that took place in England in 1688. The tale tells the story of how King James II of England was overthrown by a union led by William of Orange in 1688, which was also referred to as the bloodless revolution because the victory of William of Orange was achieved without bloodshed.

Can Huawei guide innovation with purpose?

A second important issue that needs to be taken care of with respect to innovation management concerns nurturing the innovation ecosystem in responsible ways so that it remains fit for purpose. Indeed, innovation usually ends up being used in ways that were not predicted when it was initially discovered. For this reason, companies and their collaborators need to take responsibility to continuously evaluate the potential consequences of their investment in making knowledge breakthroughs. As a company this implies that one works together with reliable suppliers and demonstrates humble and value-driven leadership towards both its employees and the market in general.

The importance of how companies stand for their values when interacting with their suppliers was recently illustrated again when Microsoft demands from their suppliers that they pay their employees at least 12 weeks maternity leave. If they are not willing to do this then Microsoft will not give them a contract. Microsoft wants to work only with suppliers that are value-driven in a way that they take care of the well-being of their employees. Huawei has taken this approach as well in their business with suppliers. Specifically, all suppliers must adhere to a sustainability agreement with Huawei if they want to do business with them. Such an agreement entails that Huawei audits the performance of suppliers in terms of labour, human rights, the environment, social impact and their ability to comply with the Supplier sustainability agreement. In addition, each supplier is also supposed to sign an honesty and integrity agreement that implies a commitment to the values of fairness, justice, and integrity and a rejection of bribery, unfair competition and fraud (De Cremer, 2016).

Taking a responsible attitude towards others has become an important aspect of the type of leadership that Huawei’s wants to convey. Ren Zhengfei promotes the value of talking from the core to do “good” for the organisation throughout the company. According to him, the best way to achieve this is the display of humble leadership. He is known to frequently apologise himself to clients if poor quality in terms of service and products is detected. In fact, this pursuit of trying to deliver the best quality possible has led Huawei to grow to a high international status faster than any other Chinese company. Ren Zhengfei thus wants to demonstrate humility to the market.

At the same time, it is also important to respect one’s own employees. In this respect, Ren Zhengfei is always quick to add that he may not be that good a leader as others describe him to be. He engages in many humble efforts not to feed the myth of his leadership and rather likes the companies track record speak for itself. After all, it is not about himself or any other executive leader. This attitude is very much reflected in the communication of Ren Zhengfei that he is not a technical expert, and that he believes that the combination of his management skills to organise a company and the IT background with their specific technical skills of his executives and employees is the one thing only that can create wonders.

How does Huawei pursue knowledge in collaboration with others?

With today’s rapid change in technological developments innovation does not happen anymore within the silo of universities or companies. Real innovation materialises when universities, (public or private) research institutes and companies address shared problems in collaborative ways that contributes to and satisfies the interests of each party involved. The locus of innovation is thus shifting and requires that universities and companies need to restructure their ways of interacting and collaborating (see also MacCormack, Forbath, Brooks, & Kalaher, 2007).

First, the working relationship between universities and companies is not one of outsourcing tasks from one party to another party but one of co-creation. If both parties would adopt a mindset of “outsourcing” then usually the primary thought is that collaboration is created simply to lower costs. In fact, such a financial mindset is not helpful to create conditions for breakthrough innovation to happen. Second, the collaboration between universities and companies needs to be structured in such a way that they build collaborative capabilities by exchanging thoughts, experiences and even failures to each other to ensure that both parties in collaboration are equipped for the innovation challenge.

Huawei has built a reputation to organise and build collaborative capabilities where their research partners are not regarded simply as suppliers but as equal partners who focus on the shared ambition to improve knowledge that can feed new developments in their industry. This strategy is clearly exemplified by Rahim Tafazolli, director of the 5G innovation centre at the University of Surrey, who noted at a The Times Higher Education workshop in London in 2018: “We don’t work for Huawei, we work with Huawei. Huawei researchers work hand in hand with our researchers. They work on the same problem and come up with solutions [and] publish joint papers ….  it is not one-sided.”

How do you organise an open collaborative work culture across institutional boundaries?

The one characteristic that identifies successful companies to succeed in collaborating with “outside” partners in creating new knowledge required for breakthrough innovation to emerge concerns whether your organisational leadership provides purpose, meaning, and direction. Indeed, leadership is needed to make sense of things and provide vision, so we know what we are striving for and why. If your employees understand the “why” or “purpose” of your business, they will have a clearer focus on the goals you want to achieve. And, in a way, this will make them more agile to identify different opportunities to develop and materialise those goals. It is in this kind of culture that employees find fertile ground to grow their own skills, develop their view on the business world and its markets, and encourage them to act as entrepreneurs contributing to both the organisational and market interest.

For innovation to take place in the new technological era, collaborations that are open and flexible need to develop as those are the best conditions for all parties involved to learn, pursue their own interests while at the same time create shared value for society.

Being an employee-owned company, Huawei’s motivation system relies on providing employees a sense of entrepreneurship where new and creative ideas that work are rewarded. For the company to identify such new ideas, they adopt the approach that they need to listen to employees and customers and use those insights to pave new ways of developing knowledge. This collaborative effort within the company facilitates the mindset of the company to identify shared interests in creating value withtheir competitors, research centres and universities. It is considering this spirit that Huawei created innovation research programmes that provide funding opportunities to universitiesand research institutes.

Conclusion

In our globalised business world, a new innovation ecosystem has developed in which collaborations between different industries are needed for knowledge breakthroughs to happen. Companies like Huawei have learned to adopt mindsets that corporations can create shared values with the more traditional research institutes because it not only helps companies to grow as learning organisations, but also to invest efforts and resources into basic knowledge where its practical implications are not necessarily clear on the short term. For innovation to take place in the new technological era, collaborations that are open and flexible need to develop as those are the best conditions for all parties involved to learn, pursue their own interests while at the same time create shared value for society.

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About the Author

David De Cremer is the KPMG chaired professor in management studies at the Judge Business School, University of Cambridge, UK, and an affiliate at the Justice Collaboratory at Yale Law School, Yale University. He has published over more than 250 academic articles and book chapters and is the author of the book Pro-active Leadership: How to overcome procrastination and be a bold decision-maker and co-author of “Huawei: Leadership, culture and connectivity”.

 

References

1. De Cremer, D., & Tian, T. (2015). Leading Huawei: Seven leadership lessons of Ren Zhengfei. The European Business Review, September/October, 30-35.

2. De Cremer, D. (2016). Corporate social responsibility in China: The Huawei case. The European Business Review.September/October, 61-65.

3. MacCormack, A., Forbath, T., Brooks, P, & Kalaher, P. (2007). Innovation through global collaboration: A new source of competitive advantage. Harvard Business School (no 07-079), Boston, MA.

4. Tian, T., De Cremer, D., & Chunbo, W. (2017). Huawei: Leadership, culture and connectivity. Sage Publishing.

The Predicted 2020 Global Recession

By Graham Vanbergen

There has been much speculation recently in the press about the impending global crash and the inevitable fallout it will cause. While this remains speculative, for many, many expert economists opine that this speculation is, in fact, already a reality. Here, the author analyses some of the reasons being given from some of the most well-known economists around the world and has some more bad news for us all. The predicted 2020 global recession might be optimistic.

The predictions are now coming in thick and fast. It appears that there’s a foregone conclusion that 2020 is the date that crash 2.0 will wreak havoc once again. Unfortunately, these predictions have become truer. As many businesses have filed for bankruptcy and closure, Economies across the globe are failing. As of writing, 2020 is already in its second half. But, there seems to be no light at the end of the tunnel, yet. “Although consumer bankruptcy filings are down on the year, we predict that we will see a sharp increase in the latter half of 2020 and into 2021”, stated Ben Tejes Co-Founder and CEO of Ascend Finance, which has built bankruptcy and debt settlement calculators.

The Predictions Of Well-Known Economists And Journals

The Independent has said: “Next global financial crisis will strike in 2020, warns investment bank JPMorgan – sparked by automated trading systems.”1

Forbes: “2020s Might Be The Worst Decade In U.S. History – triggered by contagion from a global credit crisis.”2 This Forbes prediction has never been more accurate. Today, as more individuals have fallen into debt, there’s a global credit crisis. The pandemic has brought about the closure of businesses. Hence, economies have suffered; jobs are lost. Just to meet their day-to-day needs, many have fallen into debt and are still paying for it now.

Mark Zandi, chief economist at Moody’s Analytics, said that “2020 is a real inflection point.”

True Tamplin from Finance Strategists said, “Although we’ve seen a V-shaped recovery in the markets, the fundamental metrics which create long-term growth are in shambles. What we’re seeing is the direct result of huge stimulus packages, low interest rates, low taxes, and other levers being pulled to temporarily prop up the stock market.”

The newspapers, magazines and credit agencies are speculating. (Find out more about best credit card after bankruptcy.) But what about those in the know?

The Predictions Of Economic Institutions

Apart from the economic journals above, here are also some analyst forecasts from noted economists in the academe.

Nouriel Roubini,3 a professor at NYU’s Stern School of Business. He is also a Senior Economist for International Affairs in the White House during the Clinton Administration. He has also worked for the IMF, the US Federal Reserve, and the World Bank.

Roubini predicts that the current global expansion will likely continue into next year, but warns that the conditions will be ripe for a global recession in 2020.

He makes the point that global stimulus packages are coming to an end, that inflation is coming, that trade disputes will create a drag on economies and that interest rates are now on an upward trajectory. He is of course right on all points.

Interestingly, Roubini makes comment about how curbing immigration will slow growth because ageing populations will be unable to take up the slack. This is an irony that will be lost on same demographic that voted for populist movements to remove them.

While an irony, it’s also true. Immigration across nations has also been curbed, albeit temporarily, due to travel restrictions. Since these aspiring immigrants are forced to stay in their home nations, some may also suffer being jobless or earning less than what they hoped to. This slows down economic growth as the purchasing power of people also decreases. Moreover, investors are also more educated and aware about checking websites to research stocks to invest in.

Roubini also says that China must slow its growth to deal with overcapacity and excessive leverage. On the other part of the world, Europe will have to deal with its own current political dynamics and threats of more exits. The Brexit has, unfortunately, set this kind of model for other countries within the European Union. As has been shown in previous recessions, “the risk of illiquidity and fire sales/undershooting will become more severe and probably more importantly, that the backstop that central banks provided during the post-crisis years can no longer be counted on.”

Roubini predicts that the current global expansion will likely continue into next year, but warns that the conditions will be ripe for a global recession in 2020.

In other words, Keynesian economics has just failed. Few governments were able to save anything from the last crash to pay for the next one.

William White4 is a former deputy governor of the Bank of Canada and former head of the Monetary and Economic Department of the Bank for International Settlements.

White, like Roubini, takes the view that the next recession might be even costlier than the last one, “not least because policymakers will face unprecedented economic and political constraints in responding to it.”

Nations across the globe have incurred so much more debt from the World Bank and other global banking and lending institutions. It’s no longer a battle of politics from one nation to another. But, a united fight of politicians to save their respective countries from a pandemic that’s wreaking more havoc than one could’ve ever imagined.

White focusses more on recent monetary policies that have seen a continuous increase in the ratio of non-financial debt to global GDP. He quite rightly points out that debt has piled up worldwide, with the most significant increases found in emerging-market private sectors.

“The recovery in emerging-market economies was supposed to be part of the post-crisis solution. Now, these economies are part of the problem. The fact that much of this dollar-denominated debt has been issued by non-U.S. residents means that another costly currency- mismatch crisis could be in store.”

Again, over-inflated assets such a stocks and property feature in the critique of these economic experts and all are looking not to be caught out in the “we didn’t see it coming” camp like last time. There is now talk of “covenant-lite” loans – the loans lacking many basic protections for the lender that created the environment for excessive risk-taking. This was how it was in 2008 – lending to high-risk demographics.

Richard Kozul-Wright, Director of the Division on Globalization and Development Strategies at the United Nations Conference on Trade and Development, takes a slightly different angle on the coming crisis. But in the end, it all amounts to the same thing. He says an under-regulated, or more importantly and unregulated “shadow banking” system has grown into a $160 trillion business. That is twice the size of the global economy.

“Thanks to the trillions of dollars of liquidity that major central banks have pumped into the global economy over the past decade, asset markets have rebounded, company mergers have gone into overdrive, and stock buybacks have become a benchmark of managerial acumen. By contrast, the real economy has spluttered along through ephemeral bouts of optimism and intermittent talk of downside risks. And, while policymakers tell themselves that high stock prices and exports will boost average incomes, the fact is that most of the gains have already been captured by those at the very top of the pyramid.”

In 2018, global debt has risen to an eye-watering $250 trillion. Growing from just over $140 trillion in 2008 – this number is now more than 300 percent of 2018’s expected annual global output of $87 trillion.

Andrei Shleifer, the well-known Professor of Economics at Harvard University says that none of the lessons learned from the crisis of 2008 has been learned, irrespective of what various governments have said they have done. Interestingly, what Shleifer says more than anything was that the last crash was indeed predictable and therefore so should the next one. He, of course, comes to the same conclusions, there will be a crash, but for different reasons.

My point is much simpler. I predicted the 2008 crash and moved all money away from stocks (check out automated trading system (bitcoin pro)) and invested some of it in precious metals. Many people have started to invest their stimulus package into cryptocurrency which seems to be thriving at the moment as noted by Coinformant. At the time, my worry was that growth was being fuelled by debt, not by production or rapidly rising wages (of which neither was actually happening) being recycled back into the economy. I thought that the market was built on bluster and overconfidence. It was as it turned out, a bank-led confidence trick. They bet bigger than ever before and gambled that the bailouts would come – and they were right.

In 2018, global debt has risen to an eye-watering $250 trillion. Growing from just over $140 trillion in 2008 – this number is now more than 300 percent of 2018’s expected annual global output of $87 trillion. Again, increased production and rising wages have not featured as the primary driver of growth, but debt has.

“Our economy rests upon four crumbling pillars of debt. If one of these collapses, the entire superstructure may not be far behind,” warns Prins.

Kozul-Wright rightly mentions that “emerging markets’ share of the global debt stock rose from 7% in 2007 to 26% in 2017, and credit to non-financial corporations in these countries increased from 56% of GDP in 2008 to 105% in 2017.” He also rightly mentions that these economies are much less likely to be able to cope with any downturn.

Nomi Prins, the Ex MD at Goldman Sachs, now a journalist who writes about Wall Street and the American economy, comes up with a similar but more focussed reason for the spark of the next crisis. She thinks the four-pillars of debt is on the verge of collapse.

Household consumer debt has hit all-time highs. So has credit card debt and student debt (now the second highest debt held in the U.S.) and finally auto debt. Interestingly, auto debt in the U.S. has not just reached a new peak, delinquencies have now overtaken that of 2008 peak as well. This is much the same in the UK. (see UK stock brokers list)

“Our economy rests upon four crumbling pillars of debt. If one of these collapses, the entire superstructure may not be far behind,” warns Prins.5

And so it appears that most economic pundits are going with 2020 for the global crash to return on all of the aforementioned. And they are all valid reasons.

My view is that the next global crisis has already started but that recessions begin where we are not looking and by the time we notice, it’s too late. We also like to tag an event to downturns like the false assumption that Lehman’s was the epicentre of the worst economic crash for 100 years. The reality is that Lehman’s was just a political scapegoat for the under-regulated neoliberal markets of the day that over-extended itself. It was all smoke and mirrors.

What happened then will happen again, as regulation has not fixed the underlying problems, only this time the responses to it will be muted out of a lack of available resources and that is, of course, a worry.

There is a bigger worry, though. The result of new bailouts will this time be utterly intolerable, especially in countries with resurgent populist movements and their near-insolvent governments. And this time, as a direct result of 2008, there are many to choose from. The fallout could be as game changing this time, as it was last time.

2020: Global Financial Casino Did Not Collapse After All

Two years later we get to see how the predictions fared. Nobody could have predicted the pandemic, however, not even a most significant reduction in  global GDP did not make a dent in many of financial instruments and schemes that analysts were fearing in 2018. In 2020 we saw even more of it as the monetary response boosted value of stocks and virtually everyone joined the stock market. Many would cite the meme stocks and NFTs as not expected, but case in point in their story of financial system upcoming collapse. Well, now in 2021 we can conclude that pandemic did not wreck the financial system, while the money governments channelled to citizens ended up in meme stocks and online gambling as much as it was spent for life’s necessities. In the US new generations flushed meme stocks with money via Robinhood app chasing the hedge funds away. In Finland people stuck at home contributed to massive rise in online gambling. One important fact that was not mentioned by the researchers in the article was prospects of social unrest. as Corona pandemic still rages, societies are getting fractured and this is one important source of instability we have to look into more deeply in the future.

Final Word

Take your pick from the many triggers that could be blamed. But, whatever the reason, it’s safe to say that predictions for a global recession in 2020 have, in fact, come true. Different countries spread across all the continents have their own triggers for each of their respective economic recession. Threatened, if not real trade wars, geopolitical tensions, imploding consumer or corporate debt, shock elections, readjusting asset prices, Brexit, a destabilised EU, rising interest rates, inflation. The expected 2020 crash already has a foot in the door because the experts are already warning it will be so – confidence is rapidly waning. By summer next year, the global markets will have an undeniable new trajectory. All economists can hope for is that markets will, hopefully, start to prosper again and improve.

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About the Author

Graham Vanbergen’s business career culminated in a Board position in one of Britain’s largest property portfolio’s, owned by one of the biggest financial institutions in the world. Today he is the founder and contributing editor of TruePublica.org.uk.

 

References

1 . Stubbly, P (2018), “Next Global Financial Crisis Will Strike In 2020, Warns Investment Bank Jpmorgan,” The Independent, https://www.independent.co.uk/news/business/news/next-financial-crisis-2020-recession-world-markets-jpmorgan-a8540341.html.

2. Mauldin, J (2018), “The 2020s Might Be The Worst Decade In U.S. History,” Forbes, https://www.forbes.com/sites/johnmauldin/2018/05/24/the-2020s-might-be-the-worst-decade-in-u-s-history/#1fd316e448d3.

3. Roubini, N (2018), “The Makings of a 2020 Recession and Financial Crisis,” Project Syndicate, https://www.project-syndicate.org/commentary/financial-crisis-in-2020-worse-than-2008-by-nouriel-roubini-and-brunello-rosa-2018-09.

4. White, W (2018), “Bad Moon Rising,” Project Syndicate, https://www.project-syndicate.org/commentary/global-economy-weak-fundamentals-by-william-white-2018-10

5. Prins, N (2018), “4 Pillars of Debt in Danger of Collapse,” Daily Reckoning, https://dailyreckoning.com/pillars-debt-danger-of-collapse/

Behind Path Withdrawal: User-Generated Content, Fad-Trend-Megatrend and Individualist-Collectivist Behavior

By Jaya Addin Linando

When Path announced that it will close down its operation, many internet users were shocked as Path was one of the most popular applications few years ago and once reportedly valued at $500 million. This article aims to analyse the phenomenon behind Path withdrawal from business and management lenses and portrays that “competition” is not the only factor that led to Path’s shut down.

 

The “Last Goodbye” post1  uploaded by Path on September 14, 2018 shocked the internet users or also known as the netizens given that a lot of social media or internet users are familiar or even were users of Path, back when Path was at its peak. Such a news can be linked to the event where another social media, Friendster, decided to pull out from the business2 on May 31, 2011 after standing at the top of social media industry for years. Some key points from analysis on Friendster’s withdrawal from the business deemed relevant to analyse Path’s recent retreat. However, several things are different between the case of Friendster and Path as the latter is more complex.

The more users a social media outlet has, the more interactions among users exist. In contrary, the less people on a particular social media outlet, the less people who will use that social media network – a snowball effect so to say.

The one and main key word to explain Friendster’s retreat is “competition”.3 In its peak, Friendster was a single player in social media business (though there were few other players, their power seemed insignificant compared to Friendster). Until Facebook came in 2004 and slowly stole Friendster’s market. Keep in mind that most social media applications use User Generated Content (UGC) system which means that every content on those platforms are made by the users.4 This unique feature makes the number of users become one of the most crucial determinants of the success or failure of an application. The more users a social media outlet has, the more interactions among users exist. In contrary, the less people on a particular social media outlet, the less people who will use that social media network – a snowball effect so to say. This is what happened to Friendster; some of their users shifted to Facebook, other users followed, resulting in reduced significance of Friendster in the internet space.

Marketing management discusses this phenomenon under fad-trend-megatrend concept.5 For those unfamiliar with these terms, “fad” is something that can be gone quickly. An example is the Pokemon Go fever. The game peaked, then daily users and time spent on the app per day declined, until it vanished. “Trend” is more predictable because this happens  on a much wider scale and usually it stays a bit longer. Path’s case falls in this category. “Megatrend” has a more massive impact and lasts much longer than trend and fad. Facebook is the best example for this. Since the platform’s launch in 2004, it continues to dominate the internet space and considered as one of the most widely-used social media platform. Its remarkable success can be attributed to its features that allow almost everything, ranging from expanding one’s global network, to promoting events and organisations, to doing trading, and many more.

Back to Path, the resemblance between the cases of Path and Friendster lies on their failure to manage competition. Path’s main competitor, at that time, was the new-entrant Instagram. However, unlike Friendster, competition is not the only problem that led to Path’s closing of its network. On November 14, 2010, the day Path was born, Mike Isaac from Forbes wrote an article6 entitled “New Social Network Path = iPhone + Instagram + Facebook – 499,999,950 Friends” to reflect Path as an exclusive circle for 50 persons only. Path is accordingly not competing vis-à-vis with Facebook, as it is an alternative social media outlet, different from Facebook. With “exclusiveness” as value proposition, Path successfully attracted a significant number of users, boasting 15 million users at one point.

The complex case of Path retreat started in 2011 when Path added their circle limit, from 50 to 150. That decision still sounds reasonable as Path adopted the theory from Emeritus Professor Robin Dunbar of University of Oxforsd who argued that an ideal number of friendship circle ranges from 50–150 persons.7 Then on August 2, 2014, through service.path.com, Path announced that “there is no limit to how many people you can have in your People List’.”8  The main issue behind the new policy is: Path is no longer exclusive. Many analysts criticised such a move by Path. However, Path argued that the decision to relinquish its exclusiveness is the decision to fulfil market demand. The main question that followed Path’s argument is: “which market?”

In early 2014, when Path CEO, Dave Morin visited Indonesia, he said that the demand to expand friendship circle limit mainly came from Path users in Indonesia. At that time, Indonesia is the biggest market base for Path with over four million users.9 Apparently, the decision to prioritise the voice of this majority over their initial value proposition was a big blunder. Path was born and grew in The U.S., where the country has a very thick individualist culture according to Hofstede.10 No wonder Path was well-received by the American people by offering exclusivity that deemed relevant to individualist culture. When Path landed in Indonesia, a collectivist country, the demand to expand the circle limit came up as the 50 friends limit was deemed very tight. Unfortunately, this strategy didn’t come up effective. Path, while trying to further mingle with their loving users in Indonesia, didn’t see that their users have been attracted to a new app in the block with its funny and fresh features – Instagram.

Thus, here we are today, saying Goodbye for the last time, dear Path! 

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About the Author

Jaya Addin Linando is a management lecturer in Universitas Islam Indonesia.  His interests are on topics relating to human resource management and business management. He can be reached at [email protected] or [email protected].

 

References

1.https://shutdownlikeaboss.com/post/178211625315/path-the-last-goodbye

2.https://www.buzzfeednews.com/article/donnad/friendster-to-shut-down-may-31st

3.https://mashable.com/2014/02/03/jonathan-abrams-friendster-facebook/#j1I.JyfpUaqk

4.https://www.tintup.com/blog/user-generated-content-definition/

5.http://omegahrsolutions.com/2014/05/future-friday-what-is-the-difference-between-a-fad-a-trend-and-a-megatrend.html

6.https://www.forbes.com/sites/mikeisaac/2010/11/14/new-social-network-path-iphone-instagram-facebook-499999950-friends/

7.http://service.path.com/customer/portal/articles/257552 -why-can-i-only-share-with-15-people-

8.http://service.path.com/customer/portal/articles/648705-your-people-list-in-path-talk-faq

9.https://en.tempo.co/read/news/2014/02/25/240557214/Indonesia-has-the-Largest-Number-of-Path-Users

10.https://www.hofstede-insights.com/product/compare-countries/

The Top 10 Financial Inclusion Heroes Who are Changing the World for the Better

By Valentina Loiz

Despite the increased resources for providing financial access to the unbanked, 2.5 billion of the world’s adults still lack access to regulated financial services. In this article, the authors provide a comprehensive list of individuals who have been working on initiatives aimed at promoting financial inclusion in order to achieve economic prosperity for all.

A large number of people across the globe have restricted access to conventional financial services which are provided by banks and credit unions. In particular, 2.5 billion of the world’s adults lack access to basic financial services. Such a poor financial wellness is not just an economic and social issue in developing economies but also in developed countries, which are not immune to growing income inequalities.

Greater financial inclusion can be achieved by building innovative social enterprises and applying technology to different consumers and small businesses. Through innovative business models, products and the use of cutting edge technologies, social entrepreneurs are making significant progress in promoting financial inclusion. Here is a comprehensive list of the top 10 financial inclusion heroes globally who are contributing to this cause in big ways.

1. Muhammad Yunus

Recipient of the 2006 Nobel Peace Prize, Professor Muhammad Yunus is internationally recognised as a pioneer of the micro-credit concept that uses small loans made at affordable interest rates for poverty alleviation and the empowerment of poor women. Professor Yunus has successfully blended capitalism with social mission to create the Grameen Bank, a micro-credit institution committed to providing small amounts of working capital to the impoverished people, especially women. Since its inception as an action-research project in 1976, Grameen Bank has grown to provide collateral-free loans to 7.5 million clients in more than 82,072 villages in Bangladesh and 97% of whom are women. Over the last two decades, Grameen Bank has disbursed over 6.5 billion dollars loans to the poorest of the poor, while maintaining a repayment rate consistently above 98%.

2. Connie Duckworth

Connie Duckworth is an American entrepreneur and philanthropist. She founded ARZU in 2004, and currently serves as its Chairperson and CEO. Her philanthropic work, which is very close to her heart, has been the driving factor in changing the lives of marginalised people..She has been working for women’s empowerment to create business opportunities for them. Her organisation is working for Afghan women –  helping them to learn the manufacturing process of artisan goods and providing them a platform to sell such products worldwide, which is a coherent plan towards putting them into mainstream. She recruits weavers by going house-to-house in the remotest part of Afghanistan and explains to them her business concept. Weavers are paid as per the local market rate.

Ms. Duckworth was conferred with 2012 UNICEF Chicago Humanitarian Award, and in the same year, she was honoured with the 2012 Woman Extraordinaire by Chicago International Women Associates. Wharton School Dean also awarded her a Medal in 2011, which is the school’s highest honour. In 2008, Skoll Foundation acknowledged her for Social Entrepreneurship.

3. Ann Cuisia

Ann Cuisia is an entrepreneur in the Philippines. She brings more than two decades of rich experience in banking and finance, payment and donation fields. She is the CEO and head leader of TraXion’s global project. She has been a philanthropist in her country –  helping NGOs to go digital as she has a knack for information technology. She also has led various women to find their own start-ups throughout the country. She organises workshops and lectures for small entrepreneurs to help them adopt cutting edge technology to run their businesses. Ms. Cuisia is among the very few women working for a noble cause in the Philippines. According to her, e-Wallet (a product launched by TraXion) is a revolutionary product where business organisations are given white-labelled wallets to move financial assets at zero cost through tokenisation of their local currencies. At TraXion, merchants, consumers, portals, and banks are connected in one ecosystem.

4. Vikash Das

An internationally-acclaimed social entrepreneur and sustainability expert from India, Vikash Das is known for his innovations in democratising rural non-farming sector and building sustainable impact enterprises. He is the founder of Vat Vrikshya, a social enterprise which seeks to bring about socio-economic development and inclusive growth in rural India by engaging both the community and the market.

Vat Vrikshya provides design, marketing, technical and organisational, and financial support needed to make crafts and develop allied rural industries into viable enterprises, so that they could help provide regular home-based employment to 4000 rural artisans, most of whom are women from marginalised communities. He has imparted business, financial and personality development trainings to about 23,000 tribal women across India. Vikash has been honoured with many awards and recognitions such as The Telegraph True Legend Award, Top 5 Changemakers in India by Business Today, Rashtriya Swayamsiddh Samman, and National Youth Icon, among others.

5. Reese Fernandez-Ruiz

Reese Fernandez-Ruiz, a social entrepreneur, is the President and Co-Founder of Rags2Riches Inc. established in 2007. Rags2Riches empowers artisans, creates eco-ethical fashion and home products, and above all, focusses on poverty alleviation in Payatas, Quezon City. Due to her philanthropic work and contributions in Rags2Riches, she appeared on Forbes’ 2015 30 Social Entrepreneurs Under 30 list, and was named a Young Laureate for the Rolex Awards for Enterprise in 2010.

Ms. Reese made links with factories and asked factory owners to give women entrepreneurs scrap materials. Before, the women working in Payatas used to get a little profit for rugs crafted from cloth and scraps foraged from the Quezon City dump site, as the middlemen controls their supplies and rug sales. Rags2Riches helps these women to sell their products directly to the retailers without any middlemen, allowing them to make good profits. Rags2Riches also ensures education in personal finance, nutrition and health insurance.

6. Jennifer Riria

Jennifer Riria is a Kenyan Microfinance Banker and Practitioner, Researcher, Philanthropist and Gender Specialist. She is the CEO of Echo Network Africa (ENA) and founding member of Kenya Women Holding and Kenya Women Finance Trust Microfinance Bank. She led KWFT for more than two decades, and changed it from an unprofitable NGO to a medium-sized bank, which aims to support women. So far, KWFT has served nearly 3 million women, and disbursed over $3 million just in 25 years since its establishment. In 2006, she was conferred with Moran of the Building Spear by Kenya’s President H.E. Mwai Kibaki for her outstanding contribution in Development. In addition, Ford Foundation honoured her “Champion of Democracy” in 2012 for her role both as a leader of the TUVUKE Initiative and Group CEO of Kenya Women Finance Trust.

7. Chetna Gala Sinha

Chetna Gala Sinha is the Founder and Chairperson of the Mann Deshi Mahila Sahkari Bank, which is a microfinance bank that lends funds to women in rural areas. She also founded the Mann Deshi Foundation. Being a renowned Indian social activist, she has been working to empower women residing in remote areas that are prone to drought by teaching entrepreneurial skills, technical know-how, providing them access to land and different means of production. The Mann Deshi Foundation also organises financial literacy classes aimed at teaching the women various tips and tricks of savings, investing, insurances and loans through modules that comprise games like Monopoly.

8. Zeinab Momany

Zeinab Momany is a social entrepreneur working with Sunergos. She established a Specific Union for Farmer Women in 2007 in Jordan, the first union of its kind in the Arab World, currently retaining around 22 women organisations and 5000 members. She is also a fellow at ASHOKA. Her special focus is on economic empowerment, women farmers’ rights in Jordan and institutional change for women farmers in the Arab World. Sakhrah Women’s Society, which was founded in 2007, has been working for small agricultural organisations to address their needs through its various initiatives. It  has been active in capacity building, empowering farming community and providing them financial support. Today, the Sakhrah Women’s Society Cooperative workforce has increased to 38 staff and 200 volunteers.

9. Atsumasa Tochisako

Atsumasa Tochisako founded MicroManos Corporation, a Microfinance International Corporation, in 2003, and served as its Chief Executive Officer and President. MicroManos creates infrastructure of financial and professional services to collectively address the needs of immigrants. Atsumasa has a long history of taking initiatives to improve the financial sector for the people living at the bottom of the society. He also has been a Chief Representative Officer of the Bank of Tokyo in its Washington, D.C. office..In his 12 years of serving at different posts in four Latin American countries such as Mexico, Ecuador, Peru, and Panama, he observed that many poor people were working hard but were unable to improve their lives due to poverty and the lack of opportunity in the country. In 2014, he introduced a new banking model in the United States by founding the Asiembra, Inc. which was aimed at providing concrete solutions for numerous long-time unsolved or unattended social and economic problems in the U.S.

10. Ziad Refai

Ziad Refai is the Executive Director of Ethmar for Islamic Finance, the first Shariah-compliant Islamic microfinance company, founded by King Hussein Foundation (KHF) in 2015. Licensed by the Central Bank of Jordan, Ethmar for Islamic Finance aims to fight poverty, unemployment and provide financial support to every segment of the society –  with special focus on people from below-the-average income class, and on licensed and household businesses. Apart from providing monetary aid, Ethmar has been an active player in improving living standards, and addressing the social problems of Jordanians. Above all, to bring every section of the society on the same page, Ethmar provides innovative financial products and solutions.

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About the Author

Valentina Loiz is a senior journalist from Geneva, Valentina who has worked with some of the most globally recognised news and media outlets. She has a special interest in reporting on humanitarian issues, social innovation and financial inclusion. She has also worked with leading social entrepreneurs to help them develop profitable and scalable models for reaching poor communities and contributing to global development.

Islamic Economics in Presidential Election 2019: Synthesis of Tension in Political Islam in Indonesia

By Ahmad Dahlan

The issue of political Islam and the state in Indonesia apparently continues to roll ahead of the 2019 presidential election as President Joko Widodo from the Indonesian Democratic Struggle Party (PDIP) took Professor Ma’ruf Amin as a vice presidential candidate. Ma’ruf Amin is an ulema, scholar, and an expert in Islamic economics.

The declaration of cleric Ma’ruf Amin as President Jokowi’s running mate in next year’s presidential election has surprised many as the announcement occurred just hours after former Consitutional Court chief justice Professor Mahfud MD appeared to confirm he was the vice presidential choice of Widodo.

What also made the decision astonishing is the fact that Jokowi was nominated as a presidential candidate by the Struggle Indonesian Democratic Party (PDIP), the ruling party which had been perceived as a nationalist-red party and not too open to Islamic policies, although in the past presidential election, PDIP was supported by a mass Islamic-based party, particularly the United Development Party (PPP), the National Awakening Party (PKB), and several NU cadres.

 Is the election of Amin as Jokowi’s Vice President candidate aimed at alleviating tensions over political Islam within the country or Jokowi is purely  seeking victory?

Issues Exacerbating Political Islam in Indonesia

There are three recent major issues related to the exacerbation of political Islam in Indonesia. First, the left-wing issue relating to the rise of communism. Of course, prejudice about the rise of communism is inseparable from the parties involved in the September 30 movement. “According to historians, in 1965 – 1966 Islamic youth and paramilitary groups with military backing massacred between 500,000 and one million suspected communists across the country.”1

These three issues directly or indirectly create tension against the socio-political-economic conditions of Muslims in Indonesia. Can Amin address these problems?

Second, the right-Islam issue is terrorism and Daulah Islamiyah. Indonesia is panicked by the extreme ideology of right Islam which had given birth to many militant-jihad attacks. Unfortunately, many Muslims are trapped in a circle of terrorism which is allegedly affiliated with the IS (Islamic State) movement in Iraq and Syria, and are willing to commit suicide terrorism. Even the latest Indonesia church attacks in Surabaya is very ironic, because the attacks were committed by a family of suicide bombers.2

Third, bilateral trade and development relations between Indonesia and China continue to be passionate. Xiao Qian (Chinese Ambassador to Indonesia) said in 2017 that the value of Indonesian exports to China reached U.S.$ 28.5 billion (up 35%), and Indonesian imports from China reached U.S.$ 34.8 billion (up 8.3%).3 This bilateral trade relationship is often politicised and linked to communism.

These three issues directly or indirectly create tension against the socio-political-economic conditions of Muslims in Indonesia. Can Amin address these problems? Also, what is the role of Islamic economics in neutralising Indonesia’s economic development going forward?

Ma’ruf Amin As Expert in Islamic Economics

In the socio-political aspect, the appointment of Amin could be correct to alleviate the issue of SARA (ethnicity, religion, race and between groups) or identity politics.

According to the Chairman of the Central Leadership Board of PDIP, Andreas Pareira, the Ma’ruf Amin election could reduce the identity politics attacks aimed at Jokowi. To recall, in the 2014 presidential election, there were groups who spread the issue about Jokowi being a non-Muslim and his affiliation with the Indonesian Communist Party (PKI).4

In my opinion, PDIP seemed to be more interested in Ma’ruf’s position as an expert in the field of economics (Islam) and Chair of the National Sharia Council, which oversees and gives fatwas on the Islamic economic system in Indonesia – roles that are rarely known by the Indonesian people. With his breadth of knowledge and expertise in economics, his victory in the upcoming 2019 presidential election and tenure could help advance macroeconomic policies (national economic development) based on Islamic economics, and encourage the growth of sharia financial and banking institutions in Indonesia.

Relation of Political Islam and Islamic Economics in Indonesia

If you look at the establishment of the first Islamic bank in Indonesia, it was considerably late compared to other Muslim-majority countries. Some findings suggest that this can be attributed to President Soeharto’s regime (New Order) and his policies towards Islam.

Interestingly, it was Soeharto who provided political-economic support for the establishment of the first Islamic bank (Bank Muamalat) at the time when the Islamic trend is giving a stronger sociological effect.

In an interview with Perwaatmadja (founder of the first Islamic bank in Indonesia and had served in the Islamic Development Bank), he explained one thing that Moerdiono (at that time the minister of state secretary) emphasised to the idea of  Islamic bank establishment is not in line with the Indonesian Islamic State (NII).5 In fact, the idea of establishing an Islamic bank is far from the mission of establishing an Islamic state.

Soeharto immediately carried out political and regulatory policies by issuing a Government Regulation (PP) concerning banks with the profit sharing principle,6 and he drive to pool the core capital so the Islamic bank could be realised in Indonesia. It is rare that President Soeharto quickly agrees with the Islamic policies/issues, especially if driven by political parties (pure politics).

This reflects that the use of Islamic economic system and banking as a way to change authorities’ views on political Islam is very effective and does not cause much Islamic tension with the state or Islamic phobia.

Again, in the context of Islamic political economy, basically the Islamic economic system or the personification of Islamic economics like the election of Ma’ruf – which is perceived to be a synthesis and a way to reduce the political Islam tensions in Indonesia did not come suddenly, but has been in a very long process.

Meanwhile, it was suspected that Suharto’s support for the establishment of the Indonesian Muslim Intellectual Association (ICMI) was an opportunist strategy, because of his political stance that saw positive changes about “Islamisation” especially among the middle class.7

Also, Effendy’s research found that the relationship of the Islam and state was not easy. It had an impact on the political role of Islam to participate fully in Indonesian political development, especially in the 1970s and 1980s. Then the deadlock found common ground in 1992 when both accommodated interests.8

That conflict can be seen today in Jokowi-Ma’ruf tandem (a Nationalist-Religious tandem). Perhaps, PDIP wants to have a memorable victory in the upcoming 2019 presidential election the same way as the victory of Ganjar-Taj Yajin, in the Central Java Governor election (2018). If you look at the surveys, Jokowi has better electability than Prabowo.

Again, in the context of Islamic political economy, basically the Islamic economic system or the personification of Islamic economics like the election of Ma’ruf – which is perceived to be a synthesis and a way to reduce the political Islam tensions in Indonesia did not come suddenly, but has been in a very long process.

Referring to Hefner in the late 1980s, new modernists (young Muslim thinkers) began to emerge. They campaign not to conquer the country, but to renew education and culture with new (global) discourse on democratisation and human rights. They stated, the ultimate goal of Muslim politics is not to create a centralised state with monopoly rights to politics and culture, but the building of Muslim civil society that is able to balance the state power, and promote public culture about pluralism, public participation and social justice.9   

Political structure which is the focus of Islamic economic thought and movement has been in motion since the 1980s and were discussed in various books and literatures. Again, at that time, the political Islam relationship and state was known as antagonistic (not mutually agreed).10 Hefner explained that between 1983 and 1985, the Indonesian government required all mass organisations to be founded on the Pancasila ideology. The New Order regime often interfered in Muslim organisations.11

Today, Islamisation is already in the public space, which was pioneered by the rise of the Islamic economy in Indonesia since 1990s. The political space before that barely allowed the formalisation of Islam/sharia now acknowledges many regulations such as sharia banking laws and sukuk.

The Islamic economics also creates external inclusiveness where Islamic financial institutions do not only belong to Muslims but can be owned and accessed by all people regardless of religion, race, ethnicity and class, even from the Chinese group.

Also, there has been various civil Islamic political economic organisations such as the Islamic Economic Community (MES), the Association of Islamic Economics Experts (IAEI), Indonesian Islamic Bank Association (Asbisindo) among others which carry out activities and encouragement for the government to support policies on development of Islamic economics system and Islamic financial institutions in Indonesia.

The positive impact that the Islamic economic system/sharia has is that it can ease tensions in political Islam, and the integration of the word “Islam/sharia” in the financial and business economic systems in Indonesia has created internal inclusiveness (among Muslims) because Islamic economics does not contain sensitive differences (khilafiyah).

The Islamic economics also creates external inclusiveness where Islamic financial institutions do not only belong to Muslims but can be owned and accessed by all people regardless of religion, race, ethnicity and class, even from the Chinese group. To note, some Islamic banks are only business units of conventional banks whose majority shares are owned by Chinese people. This model is difficult to be realised in other Islamic institutions.

These are the best conditions and moments about Islamic economics and its personification.

Feature Image: Indonesian President Joko Widodo (L) and his running mate for the 2019 presidential elections Islamic cleric Ma’ruf Amin (R) meet supporters in Jakarta, Indonesia on August 10, 2018. Darren Whiteside/Reuters

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About the Author

Ahmad Dahlan is a doctor in Islamic Economics and Finance, and a lecturer at the Faculty of Economics and Islamic Business, IAIN Purwokerto, Indonesia. He wrote many books, articles, competitive researches; was active in the Sharia Economic Community Expert Council (MES); and served as a Deputy Chair of the Indonesian Economists Association (IAEI), Banyumas Regency. His article, “Political Economy of Islamic Banking in Indonesia,” was recently published in the American International Journal of Social Science (June 2018).

 

References

1. Lamb, Kate., “Beware the red peril: Indonesia still fighting ghosts of communism.” The Guardian. October 1, 2017. https://www.theguardian.com/world/2017/oct/01/beware-the-red-peril-indonesia-still-fighting-ghosts-of-communism.

2. Horten, Alex. “Family of suicide bombers kills at least 7 in Indonesia church attacks.” The Washington Post. May 13, 2018. https://www.washingtonpost.com/news/worldviews/wp/2018/05/13/family-of-suicide-bombers-kills-at-least-7-in-indonesia-church-attacks/?utm_term=.3ea39b4b9fb9.

3. “Dubes: Nilai perdagangan Indonesia-China meningkat.” Antaranews.com. January 30, 2018. https://www.antaranews.com/berita/681839/dubes-nilai-perdagangan-china-indonesia-meningkat.

4. “Jokowi-Ma’ruf Amin: Politik Identitas VS Isu Ekonomi,” Tempo.co. August 20, 2018.https://fokus.tempo.co/read/1118744/jokowi-maruf-amin-politik-identitas-vs-isu-ekonomi.

5. Karnanen Anwar Perwaatmadja, interview, Tuesday, July 12, 2016 at Jakarta. The sentence were processed by the author.

6. At that time invited PP No. 70, 71 and 72 concerning banking based on profit sharing principle.

7. Hefner, Robert W. “Islam, State, and Civil Society: ICMI and the Struggle for the Indonesia Middle Class.” paper. Mujani Saiful. “Kultur Kelas Menengah Muslim dan Kelahiran ICMI: Tanggapan Terhadap Robert W. Hefner dan Mitsuo Nakamura.” on the Nasrullah Ali Fauzi (ed.), ICMI Antara Status Quo dan Demokratisasi, (Bandung: Mizan, 1995), p. 76-77.

8. Bahtiar Effendy, Islam and the state: the transformation of Islamic political ideas and practices in Indonesia, thesis (doctoral), (Ohio: Ohio State University, 1994), p. 214.

9. Hefner, Robert W. “Public Islam and the Problem of Democratization”, Sociology of Religion, Oxfort Journal, Published by: Oxford University Press, Vol 62, No 4, 2001, p. 504.

10. Hadiz Vedi R., “Indonesian Political Islam: Capitalist Development and the Legacies of the Cold War.” Journal of Current Southeast Asian Affairs. 30, 1, 3-38.

11. Hefner. Public Islam, p. 505.

Empowering SMEs with Islamic Finance

Bali, Indonesia - 26 September, 2016: Produce, meat and dry goods at the Badung Market in Denpasar

By Danis Nurul Yunita and Nur Dhani Hendranastiti

The success story of SMEs in Indonesia began to attract public attention from their strength during the financial crisis in 1998. However, their true potential has not yet been fully actualised due to their difficulty in securing financing from conventional banking. The authors argue that Islamic banks can play a key role on the provision of instruments and capital SMEs need in order to grow, and create a better wealth distribution in the society at large.

Small Medium Enterprises (SMEs), in many countries, act as the backbone of development with great socio-economic significance. Their contribution to the socio-economic development was channelled through the reduction of unemployment numbers, the improvement of economic stability and the growth of real income per capita. Even though SMEs have many advantages, they are constrained by a number of factors, including lack of human resources, skills, training and difficulty in accessing formal credit.1  Indeed, those obstacles have hampered SMEs’ ability to realise its potential and getting developed.  This article attempts to explain the availability of Islamic financial institutions and how it has been putting their efforts in accommodating the financing needs of SMEs. Using survey data collected by Central Bank of Indonesia, consisting of 4,752 SMEs, this article also provides characteristics of SMEs, and how supporting them can affect their ability to obtain financing from Islamic financial institutions.

The success story of SMEs in Indonesia began to attract public attention from their strength during the dark ages of Asian financial crisis in 1998. At that time, SMEs contributed to employment growth and steady decline in poverty rate.2 In addition, SMEs have higher contribution towards economic growth compared to large enterprises, due to SMEs’ independency from formal market and credit, implying that they have the flexibility to respond to any changes compared to the large enterprises.3 Statistically, Indonesia Ministry of Cooperatives and SMEs acknowledged that SMEs have been contributing for approximately 58% of national GDP as well as a significant 97,16% to job creation.4

Despite the crucial role that SMEs played in the economy, its true potential has not yet been fully actualised. International Finance Corporation (IFC) 2017 revealed that 128 emerging market countries are exposed to financing gap of up to $5.2 trillion from the estimated potential SMEs’ credit demand of $8.9 trillion.5 It is due to the difficulty of accessing financing from formal institutions considering that information on SMEs is rare and private, leading to the inability of banking sector, as one of the formal financial institutions, to assess the capability of SMEs to provide collateral and repay their debts.6 Data over banks’ financing on SMEs also confirmed this trend, by looking at the total disbursement of SMEs’ outstanding credit, which is relatively small compared to the total banking credit, presented in Figure 1.7

The existence of Islamic Bank does not only aim to implement Islamic value, but also to create a better wealth distribution. Therefore, there is great expectation that Islamic banking institutions will play a greater role on the provision of instruments needed by SMEs. The central bank data shows that Islamic banks’ proportion of SMEs financing is double compared to its assets proportion to conventional banking, which is less than 5% back in 2016. Although it is a considerably good performance, Islamic banks are indeed expected to play a greater role in the future, benefitting from different contracts that they may offer, namely the profit-loss sharing contracts (mudharabah and musharakah) and sale-based contracts (murabahah).

 

Benefiting from SMEs characteristics and features

Indonesian central bank’s data consisting of 4,752 micro and small businesses points out several interesting characteristics and features of SME’s quality. The study found that cash on hand, account receivable, collateral comprising of machinery, equipment and inventory, sales, purchase, bank financing and SMEs’ ability to pay loan have positive relationship with profitability. In other words, if SMEs have higher cash availability, account receivable, collateral, sales, purchase and bank financing, their profitability will be more likely to be higher as well. It is important to note that profitability is one of requirements from the formal financial institutions to provide financing for any enterprise.8 Therefore, there seems to be a cyclical effect: SMEs have difficulty obtaining financing from formal financial institutions, which leads to the low volume of cash available, implying that their profitability is lower; consequently their inability of obtaining financing is increased as well.

Although it is a considerably good performance, Islamic banks are indeed expected to play a greater role in the future, benefitting from different contracts that they may offer, namely the profit-loss sharing contracts (mudharabah and musharakah) and sale-based contracts (murabahah).

In order to overcome this issue, the existence of Islamic financial institutions, which promote equality and justice, may have the ability to provide financing for SMEs. It has distinctive contracts to deliver their financing, as previously mentioned: mudharabah, musharakah and murabahah. Mudharabah and musharakah are profit-loss sharing (PLS) contracts, while murabahah is sale-based contracts.

Mudharabah is defined as PLS contract in which one party is the capital provider and another party is the entrepreneur. They share any profit resulted from the entrepreneur’s business and the capital provider will bear if there is any loss incurred. As for musharakah, it is a PLS contract in which both parties contribute to the enterprises, which the contribution can be capital, labour, reputation and many else; they will share any profit or loss that incurred from the business activities.

On the other hand, murabahah is a sale-based contract in which one party sells goods or services in an agreed mark-up price and another party is the buyer. The first two contracts are suitable for providing capital or acting as an investor to the enterprises, while the last one is convenient to provide equipment, machinery or building to the enterprises.

By having specific contract and needs, it can prevent the misuse that might be conducted by the entrepreneurs and the financing received can be channelled towards productive activities since Islamic finance promotes productive rather than consumptive activities, and it is apparent that SMEs are operating in producing or trading goods and services.

In addition, since Islamic finance promotes equality and justice, it is encouraged to provide financing for the ones who have not been able to be included in the mainstream financial transactions, including SMEs. It can do so by operating in different manner compared to the conventional ones and having their attention towards the characteristics of SMEs, such as availability of cash on hand, account receivable, machinery and equipment, the ability to generate sales and pay back loans which can affect their profitability and consequently lead towards the ability to perform well in financial transactions.

The existence of different types of Islamic financial institutions can complement other institutions’ weakness. The ability of BMT to cover the rural area which cannot be reached by Islamic banks is one of the advantages of the co-existence of different financial institutions.

On the other hand, operating under mainstream economic system, Islamic financial institutions might still need to implement the five C’s of credit system, namely character, capacity, capital, collateral and conditions, which again will hinder the SMEs to obtain financing formally. It can be said that Islamic finance has to be efficient without foregoing its spirit of providing wider outreach of financing.

Considering the urge to balance between outreach, sustainability, profitability, as well as the risk management issues, Islamic financial institutions have been putting their efforts to accommodate the condition of SMEs by having different types of institutions. Islamic banks, Islamic rural banks, Islamic microfinance and Baitul Maal wa Tamwil (BMT) are some to be mentioned.9  BMT is a particular institution being developed only in Indonesia, which started in 1980 by the Muslim society and currently being managed under different institutions such as Islamic banks, Islamic traditional boarding schools, and various institutions who have concerns with providing financing for wider people.10 BMT aims  to collect the social fund, such as zakah, waqf, infaq and sadaqah, from the society and then disburse it into any other parties who are in need of financing.11

The existence of different types of Islamic financial institutions can complement other institutions’ weakness. The ability of BMT to cover the rural area which cannot be reached by Islamic banks is one of the advantages of the co-existence of different financial institutions. On the other hand, Islamic banks have higher capital compared to BMT, implying that they can provide larger amount of financing which can also be utilised by establishing linkage programme between Islamic banks and BMT through channelling, executing and joint financing.12 Indeed, such programme has been massively used by the four thousand BMTs currently operating in Indonesia.

Operating under mainstream economic system, Islamic banks can not avoid the fact that they need to be efficient and profitable, while the spirit of Islamic economics needs to be embedded in their operational activities. Nevertheless, the existence of different types of Islamic financial institutions can provide better support for the financing difficulties faced by SMEs since Islamic banks, who have larger amount of capital, can have linkage programme with Islamic rural banks, Islamic microfinance and BMT which have the flexibility of disbursing funds into higher number of SMEs who are un-bankable and operate in rural areas. Such cooperation, indeed, in the end is expected to be the source to enable Islamic finance to empower the SMEs, which are widely considered as important ingredients for healthy market economy.

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About the Authors

Danis Nurul Yunita is currently pursuing a Master Degree in Islamic Finance and Management, Durham University. Her research interest areas are Islamic Banking, Microfinance, Islamic Accounting and Islamic Management.

 

Nur Dhani Hendranastiti is currently pursuing her PhD in Islamic Finance in Durham University after obtaining an MSc in Islamic Finance from Durham University and BSc in Economics majoring in Financial Management from Universitas Indonesia. Her research interests are in the fields related with Islamic finance, sustainable development, and SMEs.

References

1. Beck, T. and Demirguc-Kunt, A. (2006). Small and medium-size enterprises: Access to finance as a growth constraint. Journal of Banking & finance, 30(11), pp.2931-2943

2. Nurhalim, Y. (2014). Reforming Small and Medium Enterprises (SMEs) in Indonesia: Proposal of a New Legal Entity. Thesis International Business Law. Tilburg University.

3. A. Berry, E. Rodriguez and H. Sandee (2001), “Small and Medium Enterprise Dynamics in Indonesia”, Bulletin of Indonesian Economic Studies, Vol. 37, No. 3, pg. 363-384.

4. Dipta, I. (2017). Indonesia SME Strategy, Ministry of Cooperatives and SMEs. Presentation on ILO/OECD Workshop. Jakarta.

5. International Finance Corporation. (2017). Msme Finance Gap. Assessment Of The Shortfalls And Opportunities In Financing Micro, Small And Medium Enterprises In Emerging Markets. Washington, D.C, p.52.

6. Baas, T. and Schrooten, M. (2006). ‘Relationship Banking and SMEs: A Theoretical Analysis’. Small Business Economics, 27(2-3), pp.127-137.

7. Central Bank Indonesia (2016). Perkembangan Kredit UMKM dan MKM Des 2016. Available at: https://www.bi.go.id/id/umkm/kredit/data/Pages/Data-Kredit-UMKM-Desember-2016.aspx

8. Hainz, Christa; Nabokin, Tatjana (2013) : Measurement and Determinants of Access to Loans, CESifo Working Paper, No. 4190, Center for Economic Studies and Ifo Institute (CESifo), Munich

9. Hasanah, A., & Yusuf, A. A. (2013). Determinants of the Establishment of Islamic Micro Finance Institutions: The Case of Baitul Maal wa Tamwil (BMT) in Indonesia. Retrieved from http://www.ceds.fe.unpad.ac.id

10. Dewanti, D. S. (2013). Prop Poor Strategies Using Sharia Microfinancing in Indonesia: Case Study of Baitul Maal Wat Tamwil (BMT). JESP: Jurnal Ekonomi & Studi Pembangunan, 14(1), 1–8.

11. Nazirwan, M. (2015). The Dynamic Role and Performance of Baitul Maal Wat Tamwil: Islamic Community-Based Microfinance in Central Java. Victoria University.

12. Nasution, R. E. F., & Ahmed, H. (2015). Outreach and Profitability Trade-off: Does Synergy between Islamic Banking and Islamic Microfinance Institutions Matter? Indonesian Capital Market Review, 7(2), 57–73.

North Rhine-Westphalia: Investors’ First Choice in Germany

­­North Rhine-Westphalia (NRW) is strong, dynamic and ideally located. The state is the most important economic region in Germany and has for years been one of the most popular locations for foreign companies in Europe. For them, the location is a real success factor – NRW is an innovative and cosmopolitan state with plenty of room for investment.

 

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