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Global Economic Outlook after Trump-Xi Timeout

By Dan Steinbock

As many hoped, the highly anticipated Trump-Xi meeting in the Buenos Aires G20 Summit resulted in a truce. The devil is in the details.

As the G20 Summit ended in Buenos Aires, the G20 official summit statement acknowledged flaws in global commerce, called for reforming the World Trade Organization (WTO) and deleted the word “protectionism” after U.S. resistance.

The statement was completed only after hours of diplomatic bargaining over the night. As far as the European Union (EU) was concerned, the U.S. was the lone holdout on almost every issue in Buenos Aires, particularly in climate change.

The G20 economies preferred a diluted final statement to further G20 division.

Tango in Buenos Aires

Following the summit’s close, Presidents Trump and Xi and their top aides met in a highly-anticipated dinner, which lasted longer than expected. Either there was magic dust in their grilled sirloin steaks paired with a malbec from the Argentine winery Catena Zapata. Or perhaps, just perhaps, reason finally prevailed.

Before Buenos Aires, Trump threatened to impose tariffs on an additional $267 billion in Chinese goods. He also indicated he would raise the existing tariff rate on $250 billion in Chinese imports from 10% to 25% on January 1.

According to early reports, U.S. and China agreed to put on hold new tariff increases. Following Buenos Aires, the White House said that, after a “highly successful meeting”, Trump had agreed to leave tariffs on U.S. products at a 10% rate after January 1, while China agreed to buy a substantial amount of products from the U.S.

The White House also said that China has agreed to start purchasing substantial U.S. agricultural, energy, industrial and other products from the U.S. to reduce the trade imbalance; and that the US and China agreed to try to reach an agreement on several trade issues “within the next 90 days.”

The first impression is that the Trump-Xi Summit may have achieved a critical truce, de-escalation of tensions, and possibly a path toward a long-term compromise.

The timeout came at the 11th hour.

Three trade-war scenarios

Last October, Roberto Azevêdo, Director of the World Trade Organization (WTO), said that the trade war between the U.S. and China was far from over. The speech preceded the release of the WTO Indicator, which suggested that trade growth is likely to slow further into the fourth quarter of 2018 and below-trend trade growth in the coming months.

Three scenarios illustrate the rising economic stakes of Trump’s tariff wars that have rapidly expanded from a bilateral trade conflict to a potential global trade war.

After a sharp upswing in 2017, both exports and imports in Asia had held up very well year-to-date, with continued double-digit growth in many economies. But since the onset of Trump’s tariff wars in spring, elevated uncertainty has haunted the global economy.  

According to WTO, merchandise trade volume growth was expected to reach 4.4% in 2018, which is still below the 2017 level. But as Trump’s tariffs have escalated tensions, a fall in business confidence and revised investment decisions may soften the outlook. Moreover, a full trade war could derail trade recovery for years.

According to the UN, global investment flows were projected to resume growth in 2017 and surpass $1.8 trillion in 2018. Thanks to U.S. neo-protectionism, they fell to $1.5 trillion last year. The current status quo looks even gloomier; especially with the trade tensions and central banks’ planned normalization.

Three scenarios illustrate the rising economic stakes of Trump’s tariff wars that have rapidly expanded from a bilateral trade conflict to a potential global trade war.

In this Global Trade War Scenario, China’s GDP could take a hit of 1%, but the U.S. GDP would suffer a 2% impact.

Last July, U.S. and China imposed 25% tariffs on $34 billion of the other’s imports and levies on another $16 billion. In this $50 billion Muddling Through Scenario, the tariff’s economic impact would have been limited to 0.1% of Chinese GDP and 0.2% of U.S. GDP, respectively.

Recently, Trump has threatened with further tariff escalation. In the ‘America First’ Scenario, the stakes will quadruple to $200 billion, with soaring collateral damage. In China, it could shave off 0.4% of GDP; in the U.S., 0.8% of GDP.

If the stakes of the White House’s tariff war would escalate to $500 billion – Trump’s pre-Buenos Aires goal – the potential collateral damage would increase tenfold from the first scenario. In this Global Trade War Scenario, China’s GDP could take a hit of 1%, but the U.S. GDP would suffer a 2% impact.

How will these trade war scenarios impact global growth prospects?

Three global scenarios

As the global economy has passed its peak, thanks to rising interest rates and global trade tensions, each trade war scenario implies different growth prospects (Figure).

Sources: Difference Group (WEO/IMF growth data)

In the Muddling Through Scenario, both full trade war and ‘America First’ prospects are avoided. A good start would be a bilateral tariff truce starting in early 2019. But it is predicated on successful bilateral diplomacy that will lead to positive prospects in the second half of 2019. In this case, global growth prospects would remain close to the OECD/IMF baselines at around 3.5%-3.9% – possibly even higher.

In the ‘America First’ Scenario, neither truce nor diplomacy would prevail. After spring 2019, continued friction would result in progressive escalation and spillovers in global economy. As a result, global prospects would dampen as world GDP growth in 2019 would sink to 3% or worse.

In the Global Trade War Scenario, diplomacy would fail, while ‘America First’ escalation would spread across the world economy. Risks to global outlook would overshadow world GDP growth, which would plunge to 2%-2.5% for several years to come – which would translate to plunging world trade and investment, and new geopolitical conflicts.

High stakes

After Buenos Aires, the Global Trade War scenario has been temporarily suspended. Yet, the ‘America First’ scenario has not been fully reversed.

We’ve been there before. After the Trump-Xi Florida summit in April 2017, U.S. and China announced a 100-day action plan to improve strained trade ties. Yet, only two weeks later, Trump issued a memorandum, which directed Commerce Secretary Wilbur Ross to investigate the effects of steel imports on national security – and that became the first shot in the bilateral trade war last spring.

With the truce, the Muddling Through scenario prevails momentarily but it can easily reverse back toward escalation, even global trade war.

If the White House and the Congress fail to achieve a decent compromise in the Trump trade wars, the complications would degrade global economic outlook for years to come.

The stakes are historical. Failure should not be an option.

Based on Dr. Steinbock’s briefing on the Trump-Xi meeting and its impact on global growth prospects on December 2, 2018.

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About the Author

Dan Steinbock is the founder of Difference Group and has served as research director of international business at the India, China and America Institute (US) and a visiting fellow at the Shanghai Institute for International Studies (China) and the EU Center (Singapore). For more, see http://www.differencegroup.net/ 

2018 Global M&A: A Bad Year for Shareholders?

World Business teamwork puzzle pieces 3d rendering

By John Colley

In this article the author sheds light on why the likelihood of success, in terms of shareholder value creation, is further diminished during an enormous spending spree. He concludes that the various corporate governance measures designed to ensure there is alignment between boards and shareholder interests, although better than nothing, are far from being fully effective.

 

Year 2018 may become a global record year for the sheer volume of mergers and acquisitions, possibly approaching the previous highest of $4.6 trillion in 2015. Driven by high corporate profits, large cash balances and the ease of lending, corporates have spent like never before. Real costs of borrowing are around zero after tax relief and inflation. In the U.S.A., the spending spree has in addition been driven by significant tax concessions and a relatively strong dollar. The business environment outlook is also benign with only Brexit a significant shadow together with other global moves towards protectionism. How will shareholders fare during this enormous spending spree? Certainly, if large corporates have access to significant funds there is a temptation to spend it rather than distribute to the shareholder. History suggests the likely outcome is destruction of shareholder value on an industrial scale.

 

Shareholder Value Destruction

We do know that business prices relative to earnings have been increasing steadily ever since 2008,1 largely consistent with the increasing availability of funds for acquisitions. In effect the availability of more money is chasing prices higher to the point of almost certain shareholder destruction. In recent months we have seen Comcast, a U.S. global telecommunications conglomerate, acquire Sky, a European cable operator with 23 million customers, for £30.6bn. This was over 100% more than the previous undisturbed share price. Comcast shareholders immediately sold shares wiping £10bn off the Comcast share price indicating the extent of overvaluation they felt the deal demonstrated. On a lesser scale, Coca Cola has just agreed with UK-based Whitbread on the acquisition of Costa Coffee, a chain of predominantly UK-based coffee shops, for £3.9bn. This is around £1bn more than the expected IPO would have raised. The bid was also significantly above other buyer interest possibly also by £1bn. Coca Cola thought it was buying a “scalable coffee platform” to develop a global position. Instead they are buying a business with 88% of its sales and 95% of its profits in the rapidly maturing UK market. It is their first move into hot beverages. Some may say 20 years too late in view of the speed of the coffee market development.

 

Research

Research is relatively clear and unambiguous on the success or otherwise of large scale mergers and acquisitions activity. Study after study finds that 60% to 80% fail to meet expectations and around 60% destroy shareholder value.2  Around half of all acquisitions are sold off again within 5 years. We also know that the performance of so-called mega deals is worse. When prices are reaching current heights, the likelihood of success in terms of shareholder value creation are still further diminished. In effect, very few of the recent mega deals will create value and the vast bulk will be value destroying. So why do shareholders let boards commit to so many deals which are not in shareholders’ interests? What motivates boards to take such major risks? 

 

Board Motivations

Boards do it as they see more power, status, and ultimately pay arising from the increase in size of the business. They also have a different outlook on risk when managing shareholder money rather than their own. They are well aware they would not see these benefits from giving the money back to the shareholders. Ultimately they have a significant conflict of interest, which is not aligned with the best interests of the shareholder. As for shareholders, they appoint boards to increase the value of the business and their shares. The job of the shareholder is not to run the business. In effect, the shareholders recourse is once boards have failed when they can fire the CEO and Chairman. In 2017, GE CEO Jeff Immelt was fired after 17 years in charge during which he completed transactions to the value of $126bn (advisors benefitted to the tune of $6bn). In 2018 the succeeding CEO, John Flannery, wrote $44bn off those transactions representing the extent of shareholder value destroyed. He was also duly fired as shareholder confidence in GE Leadership was lost.

Announcement of deals is normally surrounded by much hype and euphoria particularly from the many constituencies who will directly benefit. This includes target shareholders who usually see a highly priced exit, and the many advisors such as investment banks, accountants and lawyers.

Studying the aftermath of major transactions during the immediate following years is instructive regarding the success or otherwise of the deal. If the deal does not meet expectations, corporates are not keen to admit to their failure. However, for major deals it is very difficult to suppress or disguise significant underperformance. Announcement of deals is normally surrounded by much hype and euphoria particularly from the many constituencies who will directly benefit. This includes target shareholders who usually see a highly priced exit, and the many advisors such as investment banks, accountants and lawyers. The bidder shareholders are normally presented with a rationale supporting the deal which projects increasing shareholder value. Most major deals require shareholder approval. However is the presented case optimistic and what is the likelihood of it being achieved? That will become apparent over the following years.

 

Overpaying

What we do know is that businesses significantly overpay to the extent of passing all their future synergies from merging with the target to the target shareholders. Typically we see share price premiums of 30% to 40% over the undisturbed share price prior to any bid. This premium reflects the current value of the business plus future benefits. However currently this premium looks to be increasing not just with the 100% plus paid by Comcast for Sky. The price paid by Coke Cola looks extreme and seems unlikely to be recouped.

AB InBev, the world’s biggest brewer bought the second biggest SABMiller in 2016 for $107bn, more than 50% above the undisturbed share price. Two years on the share price is down over 40% as the business struggles with $108bn of debt and the dividend has just been cut. Competition authorities forced the sale of all the acquire businesses in North America, Europe and China.

Trade buyers are often willing to pay whatever it takes to capture a target unlike the more disciplined financial buyers. Indeed in most bidding situations which involve both trade and financial buyers, the trade buyers usually heavily outbid the financial buyers. Trade buyers often feel that the target may not become available again, or could be acquired by a competitor, and so pay whatever is necessary aware that they ultimately may be destroying value.

 

Integration

Another key source of value destruction is the integration period. Integration is an inward looking process in which staff jockey for a reducing number of positions. Uncertainty reigns as it may take some time to determine who goes and who stays. During this period key staff may leave as they want to control their own destiny. Often, the younger more dynamic staff moves leaving those who may have more difficulty moving. Indeed competitors, aware of the uncertainty, will target staff with attractive offers to lure them away. The impact can be significant.

Many acquiring businesses have not fully thought through their integration plans resulting in protracted and defective integration. The people negotiating the deal are quite different to those charged with integration who are often only introduced late in the progress.

During this highly vulnerable integration period it is common to also lose market share. Customers may be uncertain about the new ownership. Sales people may be more concerned about their jobs than keeping customers happy. Again customers are normally targeted by competitors during this period and lured away. In recent major acquisitions the London based software house Micro Focus acquired a bundle of businesses from Hewlett Packard (HP) for $8.8bn in a cash and paper deal in 2017 (These businesses included Autonomy, a big data UK-based business previously bought by HP for £11.7bn. Ninety percent of the value had already been written off the business in a year). In 2018, around a year after the deal with Micro Focus was done, U.S. sales collapsed by 12% as many of the U.S. sales force left. With no new pipeline for U.S. sales Micro Focus’ share price crashed by 46%.

A similar situation occurred in the £11bn merger between two Scottish fund managers Standard Life and Aberdeen Asset Management in 2017. The objective of the merger was to lower costs by saving £200M to better compete with the lower cost passive tracker funds. However, there was a major haemorrhage of investment funds as clients took their money elsewhere. The share price of Standard Life Aberdeen has now collapsed 40% since the merger took place.

Many acquiring businesses have not fully thought through their integration plans resulting in protracted and defective integration. The people negotiating the deal are quite different to those charged with integration who are often only introduced late in the progress. Deal makers are dominated by finance and legal personnel whilst integration requires operational people who know how to run the business. The more protracted the integration period the greater the prospect of lost market share and key staff. This period should be kept to a minimum. Indeed it is an advantage of Private Equity that they very rarely integrate businesses.

 

Corporate Governance

In view of the apparent divergence between the actions of the board and the interests of the shareholders then, what measures are in place to attempt to create some form of alignment between these divergent interests? Clearly these vary in almost every country. As a general principle it is apparent that the more concentrated the shareholdings, the more influence shareholders wield. In the UK, listed shareholdings are quite concentrated in the hands of institutions, fund managers and pension schemes. As a consequence, boards can meet a significant percentage of their shareholders in a few meetings. It was London-based institutions which recently voted down Unilever’s plan to move its head office to Holland in an apparent protectionist measure, where courts are resistant to foreign takeovers. This would also entail leaving the FTSE100 Index which attracts many passive investors. This was following the Kraft Heinz $143bn bid for Unilever a year earlier.

 

Non-Executive Directors (NEDs)

In some corporate governance regimes, NEDs are appointed to ensure that the position of the shareholder is considered when making important decisions. NEDs are also there to ensure compliance with laws and listing requirements, offer advice and ensure that values and ethics are upheld. However there remains some scepticism as to their effectiveness. They are normally chosen by the Chairman although this is usually after consultation with the CEO. Neither is likely to select people who might “make waves”. Indeed, NEDs often have a number of similar positions which means they can spend only limited time on any business. Whilst their contracts may stipulate two days a month many will try and keep it to board meetings and little more. They are rarely from the industry in question and so may have little grasp of the competitive dynamics. Information fed to them is carefully filtered and managed to achieve the desired effect in terms of actions and approvals.

NEDs are also there to ensure compliance with laws and listing requirements, offer advice and ensure that values and ethics are upheld.

Remuneration is significant in relation to responsibilities which may encourage NEDs to ‘tow the line” and not make stands against potential high risk decisions. Famously the late Richard Cousins resigned as NED of Tesco in protest at the Booker Diversification deal at a time when Tesco was struggling in its home markets. However that is a somewhat rare event. NEDs rarely resign even when facing serious value destroying decisions. The chairman apart they rarely meet shareholders to understand and represent their views. There is some evidence to suggest NEDs may not always entirely understand the position of the business. Certainly recent casualties such as Carillion suggest that NEDs had limited insight into the finances over quite a protracted period prior to the business entering liquidation. Again the specialised nature of the contracting industry may have played a part.

 

Conclusions

Overall, the various corporate governance measures designed to ensure there is alignment between boards and shareholder interests are better than nothing. However, they are far from being fully effective. Meanwhile, surplus cash and the ability to readily borrow at almost nil cost are driving acquisition activity and prices steeply upward. The prospect of current mega deals creating shareholder value are thin indeed. Shareholders are unlikely to benefit from the current acquisition binge and boards may find there is a day of reckoning to come when the outcome of these deals is known over the next few years.

 

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About the Author

John Colley is Professor of Practice in Strategy and Leadership, Pro Dean, at Warwick Business School. Following an early career in Finance, John was Group Managing Director of a FTSE 100 business and then Executive Managing Director of a French CAC40 business. Currently, John chairs two businesses and advises private businesses at board level. Until recently he chaired a listed PLC.

 

References

1.https://www.bcg.com/en-gb/publications/2017/corporate-development-finance-technology-digital-2017-m-and-a-report-technology-takeover.aspx

2.Martin RL. (2016). M&A The One Thing You Need to Get Right. HBR Org. https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right

Private Equity: Past Performance is Not a Guide to the Future

Businessman working using laptop computer with strategy and growth of business on screen

By John Colley

With risks being inherent in  investing especially in today’s business climate where they are emerging at ever-increasing speeds, there seems little prospect of previous performance being achieved again in the future, take for example the case of private equity. As the author argues, the sheer volume of money at PE’s disposal is slowly degrading the key elements of PE value generation – PE is becoming a victim of its own success.

 

There is little doubt that Private Equity (PE) has performed well since the 1980s when it first emerged. Whilst there is always conjecture over the extent,1 there seems little doubt that it has outperformed the main stock market indices over that period.2 Consequently, the returns are attracting significant money to the industry from rich individuals and institutions such as pension funds. The number of partnerships has quadrupled over the last 20 years and current “dry powder” is now estimated at $1 trillion, and with a similar amount being raised through new funds. Ironically, funding is now being rejected as there are insufficient suitable investment opportunities. This creates a problem for the PE industry as the model is focussed on raising funds to buy, improve and sell businesses. At this point, funds plus profits less the partners’ commission are returned to investors. The lack of suitable targets and the sheer volume of money raised are resulting in the original premise of the industry being stretched. This is increasingly resulting in the dilution of the disciplines which have made the industry so successful; PE is becoming a victim of its own success. As funds generally have a life cycle of 10 years before performance is assessed, it may be some time before reducing returns become apparent in industry performance studies.

 

Trade Buyers

If one contrasts the performance of corporate trade buyers with PE then the advantage is obviously with PE. PE adheres to certain disciplines, in this way avoiding the value destruction so frequently experienced by corporates. It is known that around 60% of corporate deals destroy value and 50% are re-sold within 5 years. 60% to 80% materially fail to meet expectations.3 There are a number of reasons for this including simply paying too much, often to avoid competitors acquiring the target company. The rationale that it won’t become available again can drive the price up. There is often a significant disconnect between what a business is worth and what has to be paid to buy it.

Timing is also an issue as when to sell is determined by the seller to maximise proceeds. The business has usually been prepared for sale with reduced costs and deferred investment.

It is known that around 60% of corporate deals destroy value and 50% are re-sold within 5 years. 60% to 80% materially fail to meet expectations.

Integration is often problematic as it is a very inward looking and stressful process frequently resulting in lost market share and key employees. It rarely goes to plan. Plans are often rudimentary, lacking detail and produced as an afterthought late in the acquisition process when the operational people are introduced to the process (acquisitions are almost invariably dominated by financial and legal people). Synergies from integration are frequently overestimated to justify the high price necessary to win the bid. Assumptions about subsequent performance are often optimistic at best and provide little leeway for error. 

The PE Approach

In contrast, PE looks at many potential deals and chooses to run only with those able to deliver an adequate return, usually 2.5 times the original investment. This may be one in ten of those examined. The key question of who will ultimately buy the business from PE also has to be answered at the start of the process.

PE is disciplined over what the business is worth and what they will pay. They also construct a very clear strategy to add value which only occasionally involves integrating businesses. This approach avoids much execution risk. As the partners keep 20% of any gain, they treat the investment as their own money and carefully align the management to the shareholders cause by giving them a significant proportion of the equity which can be anything between 15% and 40%. In contrast, corporate management have very little real “skin in the game”. Hence, there can be a tendency to treat the money as if it belonged to someone else.

PE businesses are funded predominantly by high interest debt which provides a strong incentive to manage cash and costs carefully. This approach minimises expensive borrowings and increases equity value. Efficient cash management also leads to great care when making investments. Unless investment opportunities will be high yielding and low risk then they will not proceed. Working capital management and cost control are the real hallmarks of PE with generated cash used to reduce debt rather than invested in risky capital schemes or acquisitions. Similarly, executive pay and bonuses are tightly controlled so that the value of the equity is maximised. This allows both PE and management to share in capital gains when the business is sold. The business will be sold on a multiple of earnings so in effect, the increase in earnings through reduced bonuses and salaries is multiplied by the sale multiplier.

PE businesses are funded predominantly by high interest debt which provides a strong incentive to manage cash and costs carefully. This approach minimises expensive borrowings and increases equity value.

However, the key critical difference is that PE requires a clear and simple strategy. Whether it is expansion of a winning format, perhaps rolling out a new technology or marketing concept, major cost reduction, or entering new market segments, the strategy has to be clear.

The vast bulk of PE’s activities are “buyouts” which involve acquiring divisions and companies that corporates no longer want. This might be due to underperformance or that they are no longer categorised as core business. Either way, they are corporate off loads which PE simply runs better.

 

The Threats to PE

However, the key elements responsible for PE’s historic success are coming under stress. They are being diluted under the weight of available investment funds and the lack of opportunities which fully meet the disciplines. In effect, the net has to be spread wider to include opportunities which previously would not have made the grade. The result is lower grade acquisitions and investment strategies, higher prices, and less management equity involvement which may mean less “skin in the game” and commitment.

1. Pricing

First of all, the “wall of money” chasing opportunities have pushed up prices over the last 10 years. In the U.S., prices have increased by almost 50% since the financial crisis whilst in Europe the increase has been more modest at 10% to 15%.4 In the U.S.A., debt to Ebitda has increased from 3.5 to 5.0. The higher debt risk makes the industry much more exposed to recessions, trade downturns or higher interest rates. Higher prices make it harder to achieve historic levels of return. We know that acquisition prices tend to follow deal volumes and hence any subsequent loss in confidence or restricted liquidity will bring volumes and prices down, to which PE will have a significant exposure. 2018 is likely to reach an all-time high on deal activity (previous high was 2015 at $4.7Tn). Can the market continue going higher or is it set for a fall?

2. Management Equity

As prices push higher, the PE model is still looking to achieve a hurdle rate of return on investment. One way to maintain this return is to ascribe less equity to management. In effect, PE keeps more of the generated return.

The higher debt risk makes the industry much more exposed to recessions, trade downturns or higher interest rates. Higher prices make it harder to achieve historic levels of return.

Hence, management are being given less equity to motivate them. A consequence is that management may be more willing to go elsewhere for a better opportunity, or become more focussed on bonuses and salaries which are often not aligned with equity performance. This is a sad feature of listed corporate businesses. A consequence is likely to be reduced management focus and energy in pursuit of equity.

3. Integration Risk

Another issue is that in the earlier part of 2018, there has been a move towards “buy and build” type of strategies which are currently making up a majority of PE acquisitions.5 In effect, this is a variant of “roll up” strategies in which a number of businesses are acquired in a particular industry sector. The objective is to reduce overhead and distribution costs through integration, and increase market power through greater market share and influence. There are two problems with this approach; firstly, it drives up prices for remaining businesses in the sector as the choice of opportunity becomes limited to an industry and sector. Others in the same sector may also follow to create competing scale and scope economies and market power. Secondly, integration is necessary to create synergies which introduces significant execution risk. The loss of key staff and market share becomes much more likely.

4. Secondary Acquisitions

There has necessarily been a major move to acquiring secondary acquisitions. In effect, PE is buying businesses from other PE houses that have already been through the PE process. A consequence is that there is likely to be less potential for improvement as cash and costs will have been squeezed. Another value-adding strategy will be needed. In addition, there may be the issue of motivating management who have acquired affluence through their equity involvement in the previous deal. Secondary acquisitions have increased rapidly in recent years. It is likely that “less has been left on the table” following previous PE activity and that returns are likely to be lower.

 

Conclusions

For each of the key areas in which PE generates value, there is evidence that the modus operandi is becoming diluted with implications for the extent of future value creation. In effect, the PE model has reached capacity limited by acquisition availability and too much money chasing limited opportunities. Higher target prices is bad news for PE as it means more debt risk, and a greater likelihood that they may have to sell into a market with lower multiples in the event of a downturn in deal activity. Greater numbers of secondary deals are likely to also result in lower returns as much of the opportunity on cost reduction and cash control have already been exploited. Similarly, readily available value-adding strategies have already been applied. “Buy and build” strategy introduces execution risk which PE has done well to avoid in the past. Certainly, corporates have found this area to be a ready means of destroying value. Can PE really avoid the same fate? Reduced management alignment through more limited equity participation will also introduce greater risk in retaining and motivating key management. What we are seeing is the sheer volume of money at PE’s disposal slowly degrading the key elements of PE value generation. There seems little prospect of previous performance being achieved again in the future.

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About the Author

John Colley is Professor of Practice in Strategy and Leadership, Pro Dean, at Warwick Business School. Following an early career in Finance, John was Group Managing Director of a FTSE 100 business and then Executive Managing Director of a French CAC40 business. Currently, John chairs two businesses and advises private businesses at board level. Until recently he chaired a listed PLC.

 

Reference

1. “Private Equity Benchmarking: Where Should I Start?,”Towers Watson, 2012,  https://www.towerswatson.com/-/…/Towers-Watson-Private-Equity-Benchmarks.pdf?

2. https://www.investopedia.com/ask/answers/040615/how-do-returns-private-equity-investments-compare-returns-other-types-investments.asp

3. Martin RL (2016), “M&A: The One Thing You Need to Get Right,” Harvard Business Review, https://hbr.org/2016/06/ma-the-one-thing-you-need-to-get-right; Christensen et al (2011), “The Big Idea: The New M&A Playbook,” Harvard Business Review, https://hbr.org/2011/03/the-big-idea-the-new-ma-playbook

4. Financial Times Alphaville, 2017.

5. “Bain and Company’s Global Private Equity Report 2018,” https://www.bain.com/insights/global-private-equity-report-2018/.

U.S. – China Trade War: The Reasons Behind and its Impact on the Global Economy

Close up of one hundred Dollar and 100 Yaun banknotes with focus on portraits of Benjamin Franklin and Mao Tse-tung/USA vs China trade war concept

By Kalim Siddiqui

This article attempts to provide a deeper explanation for the United States’ trade imbalances, which U.S. President Donald Trump has cited as a pretext to impose tariffs and catastrophic retaliatory measures while ignoring the structural weakness of the U.S. economy itself. Such unilateral action has a profound impact on the global economy and institutions such as the WTO. 

Initially, Trump targeted imports of steel and aluminium from several key trade partners, including the European Union and South Korea, and just recently, he imposed another series of protectionist measures that went beyond any previously seen in the post-war period. The reasoning given for imposing such high tariff duties is the U.S.’ perception of the “unfair” trade practices currently being enacted by China. China responded to this by adopting a tit-for-tat strategy of imposing tariffs on selected U.S. products. Since August this year, both countries have together imposed tariffs on $100 billion worth of goods and which will almost certainly escalate further with increased trade retaliation (Guardian, 2018).

An ongoing trade war between the U.S. and China would adversely affect global economic growth, and their unilateral actions on trade apparently seem to be designed to bypass the rules set by the WTO, and could thus have a serious impact on global trade and governance. It seems clear that the U.S. is purely diverting attention from its own structural problems, and which are ultimately themselves responsible for imbalances in trade. President Trump, however, is attempting to establish a (probably erroneous) link between rising U.S. imports and the decline in its manufacturing industries. 

Since August this year, both countries have together imposed tariffs on $100 billion worth of goods and which will almost certainly escalate further with increased trade retaliation.

The recent increase in import tariffs by the U.S. in its steel and aluminium sectors is claimed to be an important step towards helping its domestic steel and aluminium industries. President Trump imposed import duties of 25% on steel and 10% on aluminium by invoking the Trade Expansion Act of 1962 that allows for the protection of domestic industries on the grounds of national security (Guardian, 2018). However, this act is in clear violation of the WTO’s multilateral trade rules – which the U.S. leadership itself help to negotiate – where then U.S. agreed that developing countries could reduce their import tariffs by a small proportion compared to more advanced economies worldwide (Siddiqui, 2016a).

This principle of non-reciprocity was accepted as the basis for tariff cuts at the WTO’s Doha Round negotiations (Siddiqui, 2015a). This unilateralism is seen as discriminatory against a number of countries that includes China, and which is a clear violation of WTO rules. It is inconsistent with the provisions of the WTO’s Dispute Settlement Understanding (DSU). Article 23(a) of the DSU is obligatory for every member, who is advised that rather than make a judgement on other acts, their grievances must instead be taken directly to the DSU. The WTO’s dispute settlement process has sole authority to adjudicate in, and to resolve, any dispute between members (WTO, 2015).

Ironically, it is China that seems to be most interested in restoring and saving the tattered economic order. The U.S. has witnessed a sudden reversal of its fortunes that to a large extent were brought about by a number of factors including its engagement with an open economic order, and also by giving further concessions to its own large corporations and its pursuit of the policy of deregulation, rather than providing incentives to big corporations to invest locally in more productive sectors of the economy and to create jobs.

Economic theory holds that trade surpluses are a sign of an undervalued currency (Siddiqui, 2016b; also see Siddiqui, 1998). During the Presidential election campaign, Trump repeatedly accused China of pursuing unfair trade practices through currency manipulation, subsidies and stealing intellectual property rights from U.S. companies. However, after becoming President, Trump did not speak about the fact that the Chinese yuan has risen 8.6% against the U.S. dollar since January 2017. Indeed, since Trump took over, U.S imports from China have increased from $463 billion in 2016 to $506 billion in 2017. As a result, the trade deficit has widened from $347 billion in 2016 to an all-time high of $375 billion in 2017 (McBride, 2017). That means that China accounts for nearly half (43.6%) of America’s total trade deficit with the entire world.

Concern about China’s trade policy was also apparent during the Obama administration. The U.S. has for some time been reviewing policy options as to how to deal with China’s growing economic power, and questions were raised in Congress about the need for a shift in U.S. policy towards China.

During the Presidential election campaign, Trump repeatedly accused China of pursuing unfair trade practices through currency manipulation, subsidies and stealing intellectual property rights from U.S. companies.

For instance, in 2017, the U.S. Trade Representative to Congress stated that “It seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, market-oriented trade regime”.

The present trading system began to emerge at the end the Second World War when representatives of 44 countries, largely from Europe, North America and Latin America, met in Bretton Woods in the U.S. to lay the foundation of a new international economic order suitable to the new world leader, i.e., the US. Moreover, one of the most important tasks was to create a system, which could reduce the tension between countries by increased trade and economic cooperation among capitalist countries (Siddiqui, 2018a). The governments of the developed economies then prioritised higher levels of employment, and a number of further measures were undertaken to improve the living conditions of the populace. The period between 1950 and 1972 was known as the “Golden Age of Capitalism”, when average incomes in North America, Europe and Japan grew at a faster rate than they had for over the past century.

In the 1980s and the 1990s, trade and investment policies changed radically, and in 1994 the WTO was established. Rather than regulating investment and finance towards productive investments and the creation of employment, as attempted in previous decades, they instead deregulated. Deregulation was also imposed on developing countries by IMF/World Bank-led neoliberal reforms, also known as the “Structural Adjustment Programme” (Girdner and Siddiqui, 2008).

Trade liberalisation has been very good for the United States for the last seven decades or so, but this no longer seems to be the case (Siddiqui, 2018b). The U.S. extended its full support to corporate globalisation in the hope that this would create a new era for U.S. dominance, but since 1990s free trade deals negotiated through the WTO have benefitted U.S. much less than expected, and indeed are currently shrinking. U.S. corporations, rather than investing profits from globalisation into productive and employment-generating areas of the economy, choose instead to shift their capital into speculation.

For the last three decades or more, financialisation of the economy has expanded rapidly in both the U.S. and the rest of the world. This has defined the massive and extensive accumulation of interest-bearing capital, and has profoundly transformed the organisation of economic and social reproduction. These transformations not only include the outcomes but also the structures, processes, agencies and relations through which those outcomes are determined across production and employment.

According to the World Bank, the overall investment level in the United States has fallen from 25% of GDP in 1980 to 19% in 2017. Since the 2008 financial crisis, the U.S. economy, despite some recent signs of improvement, is still far from achieving sustained economic growth.

Financialisation encapsulates the increasing role of globalised finance in ever more areas of economic and social life. In the United States and other advanced economies, Fine and Saad-Filho (2017:692) argue that: “the realisation that the operation of key neoliberal macroeconomic policies, including ‘liberalised’ trade, financial and labour markets, inflation targeting, central bank independence, floating exchange rates and tight fiscal rules, is conditional upon the provision of potentially unlimited state guarantees to the financial system, since the latter remains structurally unable to support itself despite its escalating control of social resources under neoliberalism”. However, soon after the global financial crisis of 2008, as Adam Tooze (2018) explains that in the U.S. and Europe, “The failures of banks forced “scandalous government intervention to rescue private oligopolists” (Cited in Wolf, 2018).

Ten years have passed since the global financial crisis of 2008 which nearly reduced capitalism to bankruptcy. However, it did not lead to the same kind of complete meltdown as happened in the Great Depression of 1930 for the majority of the developed economies. The 2008 crisis affected the global economy adversely, particularly developed economies, with a subsequent decade of slow growth, low investment, and low productivity which has further been marked by increased public debts and current account deficits. According to the World Bank, the overall investment level in the United States has fallen from 25% of GDP in 1980 to 19% in 2017 (McBride, 2017). Since the 2008 financial crisis, the U.S. economy, despite some recent signs of improvement, is still far from achieving sustained economic growth.

At the same time, the Chinese economy was, at least initially, adversely hit by the global financial crisis, (Siddiqui, 2015b) but the country was able to recover in only a short period; a decade later, the country had emerged as a major economic power. In China, state capitalism was seen as an important policy tool with which to assist the economy and state-owned enterprises were not abandoned, as happened in the early 1990s in Russia. As a result, since the crash China has emerged as the world’s second-largest economy and the world’s biggest manufacturer and exporter of goods (Siddiqui, 2015c). During the same period, the U.S. economy has, relatively speaking, weakened, and consequently Trump considers China to represent a serious threat U.S. trade hegemony (Wolf, 2018).

Between 2009 and 2017, the Chinese economy tripled in size, and by 2012 had overtaken Japan as world’s second largest economy. Its economic growth continued at a rate of around 10% until 2011, and thereafter by nearly 7% per annum, which is above the worlds’ average economic growth of 3.9%. China’s per capita income had risen from $3,500 in 2009 to $8,800 in 2017. In 2017, China created 11 million jobs compared to just 1 million in India.

In recent years, China has begun to move away from low-cost, export-led growth towards a gradual increase in domestic consumption and the acquisition and development of a high-tech base. As a result, the trade to GDP ratio has fallen from 37% in 2008 to 20% in 2017, while the domestic consumption of GDP has increased steadily since 2012. There is further evidence that China has been undergoing a structural change in recent years. For example, between 2011 and 2017, the share of earlier key industries such as cement, steel, coal and iron declined from 75% to 60%, while for the same period the share in other sectors such as energy, healthcare, entertainment and high-tech has risen and service sector employment has increased from 33% to 45% over the same period. Moreover, in 2017, China had 109 companies in Fortune Global 500, which has risen from 10 in 2001 to 30 in 2008 (McBride, 2017).

Between 2009 and 2017, the Chinese economy tripled in size, and by 2012 had overtaken Japan as world’s second largest economy.

The recent initiative by Chinese President Xi Jinping, “Made in China 2025”, sets out plans to develop Chinese technology in key industries such as aircrafts, robotics, pharmaceuticals and defence. This has further antagonised the U.S.; the U.S. Trade Representative described it as an attempt at “seizing economic dominance of certain advanced technology secto rs” (McBride, 2017).

Moreover, China is challenging the advanced economies monopoly in robotics and 3D printing. The Chinese government has undertaken a huge investment drive in aviation engines, electronic chips and set a target to become the largest investor in R&D in the world. Despite all these changes, the United States wants to keep the U.S. dollar as the de facto global currency, even at the expense of huge trade deficits.

The question arises as to whether the United States’ protectionism is justified. Therefore, in order to assess this, we will attempt to take a somewhat long-term view regarding the external payments situation of the U.S. Figure 1 provides a summary of the external sector of the country from just before the breakdown of the Bretton Woods System in 1971.

To understand the situation more clearly, we need to analyse the U.S. trade in goods and services and its current account situation on the basis of available statistics. Figure 1 shows the external sector payments of the US from 1970 to 2016. Apart from few exceptions, most of the time its current account was negative in goods. However, the late 1980s service sector gained a surplus and is steadily rising. Despite these changes, the rise in service export was unable to fill the gap created by the general trade imbalance in goods. Moreover, since 2014, service export has stagnated, which has thus become a real problem for the U.S. The United States trade deficit kept on rising, and has grown remarkably over the last two decades. This was coincidental with the period when China joined WTO, all of which appears to have given the U.S. the excuse to blame China for raising its trade deficits.

Figure 2, which shows the trade in goods between the U.S. and China, indicates that the U.S. had trade deficits in goods with China since the early 1990s, which has grown up sharply. For example, the deficit was only $10 billion in 1990, but by 2000 had reached $100 billion; by 2005 it had risen further to $200 billion, by 2012 it rose to $315 billion, and by 2017 it had reached $376 billion. The sharpest rise was since 2001, which also coincided with China joining the WTO. For example, China’s exports to the U.S. increased from $125 billion to $505 billion, while U.S. exports to China rose from merely $19 billion to about $130 billion for the same period.

The question arises as to the extent to which China is responsible for the U.S.’ rising trade deficit. To answer this, we need to examine the US trade performance with the other major trading partners.

Figure 3 indicates that China is an important trading partner for the U.S., but that China still has less than half of the U.S.’ overall trade deficits. For example, according to the statistics, in 2017 the U.S.’ trade deficit with China was $375 billion, however, its overall trade deficit was $775 billion. This means that even if the U.S. were to eliminate its trade deficit with China, its trade imbalance problems would still exist.

China is largely facilitating the final assembly stages of global production networks of vertically integrated high-tech industries. To explore the magnitude and patterns of trade arising from cross-border production networks, it is necessary to separate parts and components from final assembled products traded within global production networks. The U.S. trade war, if broadened, will adversely affect U.S. corporations as well.

Exports of global production network (PN) exports from China rose from $47 billion in 1993 to $1.3 trillion in 2015, where these products accounted for more than 70% of China’s total manufacturing exports as indicated in Figure 4. This pattern shows China’s dominant role as an assembly centre within global production networks. In 2015, China accounted for 27% of the total global network product exports worldwide, compared with an 18% share in total world manufacturing exports (see Figure 5). This means the shares of both final assembly and components were notably higher than the aggregate global export share.

In fact, U.S. trade imbalances are largely self-inflicted. The U.S. needs to address factors within its economy rather than blaming others, especially China. Trade deficits (i.e., imports more than export), reflects the saving-investment gap in terms of national income, which is associated with low levels of domestic saving rates (Siddiqui, 2016c). Most economists and policy makers have barely touched on this important issue, namely that consumption has risen while saving rates have declined, or otherwise remained low. For example, the U.S. domestic savings rate was never higher than 24% in the 1950–60s, but for the last two decades it has steadily declined and is now below 17% (McBride, 2017).

In conclusion, the article indicated that there are serious structural weaknesses in the U.S. economy which needs to be addressed. Blaming its trading partners might help the U.S. in the short term, but will certainly not be effective in the long term. Trump, rather than addressing structural crisis, has taken the initiative to cut corporation tax and increase tariffs, which seems to give short-term relief and will at the same time increase imports. In 2002, during the Bush administration, higher tariffs were imposed on imported steel and aluminium, but rather than helping, this adversely affected the automotive and construction industries, which are amongst the largest employers in the U.S.

The United States has witnessed a decade of slow growth, low investment, and low productivity, all of which has been further marked by increased public debts. All of these factors have contributed towards higher levels of current account deficits. Further, by raising import tariffs, the U.S. has violated the WTO’s multilateral trade rules, which ironically were negotiated earlier under the United States’ leadership.

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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. He may be reached at [email protected].

References

1. Fine, B. and A. Saad-Filho. (2017). “Thirteen Things You Need to Know about Neoliberalism”, Critical Sociology, 43(4-5): 685-706.

2. Girdner, E.J. and Kalim. Siddiqui. (2008). “Neoliberal Globalization, Poverty Creation and Environmental Degradation in Developing Countries”, International Journal of Environment and Development 5(1):1-27, January-June.

3. Guardian. (2018). “US on Brink of Trade War with EU, Canada and Mexico s tit-for-tat Tariff begins”, 31 May. https://www.theguardian.com/business/2018/may/31/us-fires-opening-salvo-in-trade-warwith-eu-canada-and-mexico.

4. McBride, J. (2017). “The US Trade Deficit: How Much Does it Matter?” Council on Foreign Relations, 17 October. https://www.cfr.org/backgrounder/us-trade-deficit-how-much–does-it-matter.

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

6. Siddiqui, Kalim. (2018b). “David Ricardo’s Comparative Advantage and Developing Countries: Myth and Reality”, International Critical Thought, 8(3): 1-28, September.

7. Siddiqui, Kalim. (2017). “Financialization and Economic Policy: The Issues of Capital Control in the Developing Countries”, World Review of Political Economy 8 (4): 564-589, winter, Pluto Journals. DOI: 10.13169/worlrevipoliecon.8.4.0564.

8. Siddiqui, Kalim. (2016a). “Will the Growth of the BRICs Cause a Shift in the Global Balance of Economic Power in the 21st Century?” International Journal of Political Economy 45(4):315-338, Routledge Taylor & Francis.

9. Siddiqui, Kalim. (2016b). “A Study of Singapore as a Developmental State” in edited by Young-Chan Kim. Chinese Global Production Networks in ASEAN, pp.157-188, London: Springer.

10. Siddiqui, Kalim. (2016c). “International Trade, WTO and Economic Development”, World Review of Political Economy, 7(4):424-450, winter, Pluto Journals.

11. Siddiqui, K. (2015a). “Economic Policy: Sate versus Market Controversy” in edited by Adam P. Balcerzak. Contemporary Issues in Economy: Market or Government, pp.39-63, Torun: European Regional Science Association, Poland.

12. Siddiqui, Kalim. (2015b). “Trade Liberalisation and Economic Development: A Critical Review”, International Journal of Political Economy 44(3):228-247.

13. Siddiqui, Kalim. (2015c). “Perils and Challenges of Chinese Economic Development”, International Journal of Social and Economic Research 5 (1): 1-56.

14. Siddiqui, Kalim. (1998). “The Export of Agricultural Commodities, Poverty and Ecological Crisis: A Case Study of Central American Countries”, Economic and Political Weekly 33(39): A128-A137, 26th September.

15. Wolf, Martin. 2018. “What Really Went Wrong in the 2008 Financial Crisis”, Financial Times, 17 July, London. (accessed on 10 September, 2018.http://www.Wolf,Martin.FT.com.

16. World Trade Organisation (WTO). 2015. Ministerial Declaration Adopted on 4 December.  https://www.southcentre.int/wp…/2015/12/AN_MC10_4_Ministerial-Declaration.pdf. Also see the dispute settlement system of the WTO – legal text.https://www.wto.org/english/tratop_e/dispu_e/dsu_e.htm

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/

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