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Three Paradoxes of Digitalisation

By Hermawan Kartajaya and Ardhi Ridwansyah

 Management has been inevitably transformed by the digital era. Hermawan Kartajaya and Ardhi Ridwansyah discuss the Three Paradoxes of Digitalisation essential to a company’s success in winning the hearts and minds of its digital consumers.

More than 20 years ago, Charles Handy in the book “The Age of Paradox” called many world events, including the development of technology, a paradox. Many of those epiphanies stand true today. Interesting example can be found in Asia’s retail industry: amid the flourishing e-commerce, a contrasting trend is also emerging.

Some e-commerce companies in Asia are beginning to realise the importance of creating offline experience for shoppers. Moving beyond conventional cash-on-delivery model, Zalora, a Singapore-based online fashion retailer, offers a unique payment method. The websites provide a cash-on-collection option, a concept that has already gained popularity in Taiwan and Japan. Collaborating with some convenience store chains, Zalora gives its customers an option of picking up and paying for their items at an outlet of their choice. They have also started erecting “popup” stores across shopping centres to educate shoppers and encourage them to use their apps.

This represents one of the paradoxes occurring as a consequence of digitalisation in Asia. For businesses, in order to win over competition in this new digital era, three paradoxes described below need to be understood and managed appropriately.

 

Three Paradoxes of Digitalisation

 

Online vs Offline

Internet technology does provide convenience and high efficiency. The interaction between the company and the customer can take place anytime and anywhere. This is what is prompting companies in Asia to flock to the online world, building their official websites, nurturing online communities and setting up special social media teams to build relationships with customers. But as a matter of fact, the online world still have limitations which means that conventional approaches of the offline world cannot be completely replaced. Despite growing internet usage and the seemingly improving tech-savviness among Asians, most consumers may not yet be fully familiar with digital services or simply not be sufficiently confident to take jump on to the digital bandwagon. In order for companies to make the most of their ambitions to go digital, there is ostensibly a growing need to put special attention on customer education on the online world and much of it cannot be accomplished only online.

In order for companies to make the most of their ambitions to go digital, there is ostensibly a growing need to put special attention on customer education on the online world and much of it cannot be accomplished only online.

An online retailer like Zalora’s initiative to go offline via cash-on-collection option and popup stores is an example of how businesses are striving to make offline and online shopping work together seamlessly. Neither option is mutually exclusive. In fact, in the near future, perhaps we would stop comparing Zalora and the likes to traditional, brick-and-mortar, offline retailers. There will just be “shopping” and it will be an integrated online and offline experience.

Commenting on this integration of online and offline interaction, Kasireddy from Fonterra in China says: “differentiating online and offline is really a false distinction. It’s much more important to get the offline and the online working together seamlessly” (The Economist Corporate Network, 2015).

Substance vs Style

The development of internet has also created new patterns of information consumption. If, in the print media, readers have conventionally been familiar with a writing style that’s more elaborate, focusing on features and in-depth stories, readers of online news sites are more accustomed to shorter, crisper write-ups. On the shorter mobile phone screens, where consumers today spend plenty of their time, too much written content is perceived not only as un-user friendly but boring too.

Visual factors – images and illustrations serve to improve the design, frequently used by content providers to develop more engaging online content. Paula Ries (2012) in the book Visual Hammer even stressed the importance of the visual aspect as a verbal positioning booster to inculcate a certain perception in the minds of customers. This is the trend in the digital world that requires producers to include “style” in the content developed.

But of course, the company can not rely solely on style aspects (visuals, audio, design, etc.) to provide information that will touch the customers, both rationally and emotionally. The substance in their digital content should also be weighted. This is what presents the need for content producers to balance both: how to create content that is concise and interesting, yet still does not lose its core substance. For example, the makers of video advertisements  on Youtube must be creative to design a message that attracts the attention of viewers within the first 5 seconds, so that they will not skip the video. It is about style. But a compelling message will still be able to convey information about an advertised product effectively, and that is substance.

But of course, the company can not rely solely on style aspects to provide information that will touch the customers, both rationally and emotionally.

Machine-to-Machine (M2M) vs Human-to-Human (H2H)

Digitalisation has enabled “interaction” between various technology products. Existing data on our handsets could be transferred to other technology products in the form of instructions that produce a specific action or output. This is what is known as the Internet of Things (IOT) Machine-to-Machine (M2M) technology. The consumer space is a significant sector within the M2M universe that a range of players, including mobile operators and hardware manufacturers, are trying to address. There is a particular focus at present on both wearable devices and the potential of “smart homes”.

A range of new wearable devices have been launched over the past years, including the Samsung Gear and the LG Lifeband. Connected devices and sensors allow customers to employ a smarter, more efficient lifestyle, with their personal devices such as smartphones and tablets connected with devices in the home to enable automation. This helps users to remotely control functions, from lighting to basic security systems. Samsung Electronics has announced that 90 percent of its products – including everything from smartphones to refrigerators – would be able to connect to the Web by 2017. And by 2020, all of its products will be internet connected (CNET, 2015).

Technology must be optimised to create a human-to-human interaction that is more flexible (not constrained by space and time), and not quite create a separate space, which ends up replacing the intimate conventional ways of interaction.

But the technology does not make man into a machine without emotions. Instead, digital technology, particularly social media, has turned customers into more emotionally expressive beings. This is why the human-to-human (H2H) touch must not be forgotten. Technology must be optimised to create a human-to-human interaction that is more flexible (not constrained by space and time), and not quite create a separate space, which ends up replacing the intimate conventional ways of interaction.

Zappos, an online retailer Amazon acquired in 2009 with a value of USD1.2 billion, has a unique way to build H2H interaction with its customers. Although Zappos actively uses social media including Twitter, Youtube and Facebook to communicate with customers, the company has not abandoned the use of the phone. Tony Hsieh, CEO of Zappos once said: “We do not really look at Twitter as a marketing vehicle, so we do not look at how it translates into the bottom line. What we care about is being able to connect with our customers on a more personal level. We do that through the telephone as well as through Twitter. Nobody writes about the telephone because it’s not an interesting news story, but we believe it’s actually one of the best branding devices out there.”

Phone allows Zappos call centre staff to be able to establish a very personal (H2H) connection with its customers. As an assessment, their performance is evaluated based on customer satisfaction on the calls they handle, without being limited by time. The longest customer service call took almost six hours. This is what makes Zappos one of the highly recommended brands by its customers.

These are the three paradoxes which can actually be managed simultaneously, without having to negate each other. That requires creativity in order to build an integrated online-offline experience, develop content that has substance with style, as well as machine-to-machine (M2M) technology supported by human-to-human (H2H) touch. The company’s success in managing these three will create a strong competitive advantage in order to win the minds and hearts of digital consumers in Asia.

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About the Authors

Hermawan Kartajaya(left) is Founder & Chairman of MarkPlus, Inc. Ardhi Ridwansyah(left) is Director of Executive MBA in Strategic Marketing, SBM-ITB/MarkPlus Institute

A Planetisation of Finance: Valuing the Planet as a Going Concern

By Joss Tantram

Valuing the planet in economic terms runs the risk of financialising, commodifying and privatising nature. The task in front of us is not to tinker with the methods, but to reverse this concept, moving from the financialisation of the planet to the planetisation of finance.

“We have statesmen and politicians who profess to guide our destinies. Whither are they guiding our destinies?” – H.G Wells

Valuing Continuing Existence

In recent decades considerable effort has been invested into describing and identifying the planet’s natural environment in terms that can be appreciated and integrated into the language of economics and finance.

From the 1997 work of Robert Constanza et al1 onwards, the TEEB coalition2 and the Natural Capital Coalition,3 to the multi capitals approaches to accounting and reporting that are forming part of efforts by organisations such as the SASB4 (Sustainability Accounting Standards Board) and the IIRC5 (International Integrated Reporting Council). Each is seeking to quantify and therefore consider the value of natural systems and their outputs in comparable financial terms.

To move beyond a critical analysis of the pros and cons of such multi-capitals approaches it seems that there is a simpler pre-existing conceptual vehicle that could be adapted to provide a forward-looking perspective on the value of the planet and its assets (natural, human, built and otherwise).

This is the concept of the going concern, the accounting approach to assessing the value of an enterprise based upon its potential for continuing existence. It is at the heart of our thought experiment to explore an IPO for the Earth;6 a finalist in the ICAEW/ Accounting for Sustainability Finance for the Future Awards 2014.

Opportunity Costs…and Benefits

Approaches to the valuation of currently under-represented/under-priced sources of capital (those which are not pure financial capital) predominantly focus upon two value aspects, of capital stocks and capital flows.7 A simple metaphor for these two categories is that of a bank account – where the stock is the money in the account and the flow is the interest that is generated by the capital.

However, beyond this categorisation of stock and flow value there is perhaps a more significant area worthy of attention – to focus upon the going concern value that the existence of healthy stocks and flows gives rise to. This is not a value of the stock or flow itself – but is derived from the opportunities that become possible because of the existence of the stocks and flows.

When viewed through this lens, natural capital becomes most powerful not when it is used to give rise to an asset value (“what would we get if we sell it?”) calculation, but a going concern value “what does the asset’s continued existence and health allow us to do and how valuable is that?”.

A distinction between asset price and the value of the opportunities that arise from the asset is partially reflected in the concept of stocks and flows. However, a going concern value goes far beyond a flow valuation. An example of these category differences for a company like Google would be as follows:

• Asset value – the market capitalisation of the company – what it would fetch if it were sold.

• Asset flow value – the yearly revenue of the company.

• Going concern value – in addition to the categories above, the value of all the things that exist because Google provides and facilitates fertile ground for a huge range of activity.

Our Planet as a Going Concern

If the motivation behind approaches to valuing natural, social and other capitals is to highlight their value to the economy rather than leave them as either economic externalities or considered as effectively free goods, shouldn’t we take a more creative approach to using the accounting techniques that already exist?

Wouldn’t it be far more productive to focus upon the value of the planet as a going concern – as a place to do sustainable business over the long term?

Luckily, there is a well-established approach to doing just that. Accountants do it all the time, all we need to do is expand its scope and scale somewhat, from the going concern value of a specific entity to the going (common) concern of the planet as a whole.

In accountancy, the going concern principle is “the assumption that an entity will remain in business for the foreseeable future”. If it can be assumed that a business will remain viable over time, it can be considered to be valuable because of its capacity to sustain economic activity “the value of an entity that is assumed to be a going concern is higher than its breakup value, since a going concern can potentially continue to earn profits.”8

Going for How Long?

While it may seem perverse to say so, in cold mechanistic terms the Earth’s value to humans lies in it providing us with the means to carry on doing stuff, not in either its inherent value (what we would pay to keep it) or in its value when broken up and traded (what we would get if we sold it).

The idea of planetary going concern value is too often ignored, partly because it asks us to project value into the future. In accounting terms, going concern assessments/judgments focus upon a consideration of “the foreseeable future” but this is only judged using one year forward time horizon (aligned to annual accounting and reporting).

At a planetary scale an annual going concern perspective wouldn’t get us very far, we need to be thinking about how to project the value of a going concern much further – say to 2050.

A going concern value “what does the asset’s continued existence and health allow us to do and how valuable is that?”.  

Such projections happen for smaller things happen all the time. The world is full of news stories and analysis saying “the market for X could be worth $10 billion by 2025” or “sales of Y set to grow by 200% over the next ten years”. All such projections assume a continuation of certain elements of business as usual (i.e. a reasonably similarly functioning market to today) and certain elements of change (e.g. increased disposable income, increased urbanisation etc.) that are interpreted from various trend analyses and forward predictions.

At the planetary scale a going concern calculation could be done for a range of scenarios, e.g. where no significant strategic response is made to evolve to meet the challenges of resources, consumption increase, reduction in soil fertility, increased pollution and climate uncertainty, as opposed to the planetary enterprise that would be possible if we made the transition to a sustainable economy fit for 9 billion interdependent citizens,9 all capable of making sovereign social and economic decisions.

It seems clear that the former would, by its nature, be less valuable than the latter.

Not Under Current Management…

Accountants judge a going concern according to a range of criteria that could easily be adapted to apply to the planet as a whole.

The Financial Reporting Council’s Statement of Auditing Standards on the issue in 1994 states that for financial audits seeking to judge whether an entity is a going concern, they should take the following into consideration:

• “Whether the period to which the directors have paid particular attention in assessing going concern is reasonable in the entity ’s circumstances and in the light of the need for the directors to consider the ability of the entity to continue in operational existence for the foreseeable future;

• The systems, or other means (formal or informal), for timely identification of warnings of future risks and uncertainties the entity might face;

• Budget and/or forecast information (cash flow information in particular) produced by the entity;

• Whether the key assumptions underlying the budgets and/or forecasts appear appropriate in the circumstances;

• The sensitivity of budgets and/or forecasts to variable factors both within the control of the directors and outside their control

• The existence, adequacy and terms of borrowing facilities, and supplier credit; and

• The directors’ plans for resolving any matters giving rise to the concern (if any) about the appropriateness of the going concern basis. In particular, the auditors may need to consider whether the plans are realistic, whether there is a reasonable expectation that the plans are likely to resolve any problems foreseen and whether the directors are likely to put the plans into practice effectively.”

The text above is mildly summarised in the interests of space, the full text is available in paragraph 23 of the Financial Reporting Council document “The going concern basis in financial statements”.10

If a planetary-scale auditor used the criteria noted above to assess the current de facto administration of the planet (our economic and market systems) would they judge the Earth to be a going concern, and if so, for how long?

Is the simple but frightening answer that the Earth is not capable of being considered as a going concern over the coming decades under current management?

Towards a Planetisation of Finance.

“The twelfth law is that such things as cannot be divided, be enjoyed in common…” – Thomas Hobbes’ 12th Law

The vast majority of approaches to bring under-priced or unpriced capitals within financial domains tend to do so by treating them as adjustments to existing prices (e.g. as carbon taxes etc.) rather than focussing upon and questioning the origination of their price in the first place.

Externalities should not be priced per se. However, price must reflect them (they shouldn’t really be externalities at all, just a fundamental aspect of costs that should be naturally recognised) if any approach to building a sustainable economy is to succeed.

At a planetary scale an annual going concern perspective wouldn’t get us very far, we need to be thinking about how to project the value of a going concern much further – say to 2050. 

The point of exploring the planetary going concern concept is to provide another driver towards the more innate consideration of sustainability as a defining aspect of financial success over the long term. The planet can only be considered as a going concern if we recognise that the environment is the ultimate source of all value. This recognition has to then be integrated into the heart of decision making rather than being considered after the fact, as most current approaches to “pricing externalities” currently require.

Without a fundamental reconsideration of what actually constitutes sustainable value, and an effort to align the origination of money (and price) against that, we are just building ever more rickety structures upon the already unsteady foundations of current economic and market processes.

Valuing the planet in economic terms runs the risk of financialising, commodifying and privatising nature. The task in front of us is not to tinker with the methods, but to reverse this concept, moving from the financialisation of the planet to the planetisation of finance.

Economics and markets based upon the value of the planet as a going concern might be a powerful and positive step towards aligning financial value with the physical facts of life on this planet – the only place we have (as yet) do to business.

Thanks

My profuse thanks go to Jane Gleeson-White11 for her feedback and comments on a draft of this piece. Any errors of logic or hyperbole are unquestionably mine. Her book Six Capitals: The revolution capitalism has to have – or can accountants save the planet?12 is a must-read for anyone keen to explore how we might meaningfully value the priceless.

This re-edited and updated article was first published on Terrafiniti LLP’s Towards 9 Billion blog  (http://www.terrafiniti.com/a-planetisation-of-finance-our-planet-as-a-going-concern/) on 29 May 2015. Joss Tantram/Terrafiniti LLP reserve the rights to the copyright of this material and grant The World Financial Review to re-publish this piece on a licence free of copyright.

 

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About the Author

Joss Tantram is a founding partner at Terrafiniti LLP, a pioneering sustainability and systems consultancy. He leads Terrafiniti’s strategic services and their Towards 9 Billion innovation initiative; producing big, hopeful, playful ideas for an equitable and sustainable future. Joss is the author of the Towards 9 Billion eBook series, available from the Amazon Kindle store.

References

1. Constanza et al (1997), “The value of the world’s ecosystem services and natural capital”. Nature 387, 253 – 260. http://www.nature.com/nature/journal/v387/n6630/abs/387253a0.html
2. The Economics of Ecosystems and Biodiversity: http://www.teebweb.org/
3. The Natural Capital Coalition: http://naturalcapitalcoalition.org/ Sustainability Accounting Standards Board (SASB) Conceptual Framework: http://www.sasb.org/wp-content/uploads/2013/10/SASB-Conceptual-Framework-Final-Formatted-10-22-13.pdf
4. International Integrated Reporting Council, Multiple Capitals Background Paper: http://integratedreporting.org/wp-content/uploads/2013/03/IR-Background-Paper-Capitals.pdf
5. Terrafiniti LLP, an IPO for the Earth: http://www.terrafiniti.com/towards-9-billion/earth-public-offering/
6. Wikipedia: stocks & flows in economics: https://en.wikipedia.org/wiki/Stock_and_flow
7. Accounting Tools, The Going Concern Principle: http://www.accountingtools.com/going-concern-principle
8. Terrafiniti’s Towards 9 Billion Blog, Infinite economy on a finite planet – Part 1: http://www.terrafiniti.com/towards-9-billion-infinite-economy-finite-planet/
9. Financial Reporting Council (FRC), The going concern basis in financial statements: https://www.frc.org.uk/Our-Work/Publications/APB/SAS-130-The-Going-Concern-Basis-in-Financial-State.pdf
10. Jane Gleeson-White: https://janegleesonwhite.com/
11. Jane Gleeson-White: (2015) Six Capitals: The revolution capitalism has to have – or can accountants save the planet?. W.W. Norton & Co Inc and Allen & Unwin:
12. https://bookishgirl.com.au/six-capitals-the-revolution-capitalism-has-to-have-or-can-accountants-save-the-planet/ 

Dynamic Mechanism of “Social Modernisation” with Chinese Characteristics

 By Bao Zonghao, Xiang Kun and Zhang Shuangshuang

While the classic concept of “modernisation” and its logical extension are dedicated to “economic modernisation”，we argue that real modernisation should be “social modernisation”; “social modernisation” with Chinese characteristics is “modernisation of society” based on the economic and social reality and having a strong sense of future consciousness, comprehensiveness, interdisciplinarity and sustainable development, representing the trend of human civilisation’s development.

“Social Modernisation”: Discarding the Shortcomings of “Economic Modernisation”

The Original Meaning of “Modernisation” Is Not “Economic Modernisation”

Though in “industrialisation” and modernisation from the “takeoff” to “maturely propelling” the core content of “modernisation” was still economic modernisation, almost all farsighted scholars realised the multiple meanings of “modernisation” itself. In 1966, C. E. Black emphasised in The Dynamics of Modernization that modernisation should include profound changes not only in economy, but also in science and technology, culture and interpersonal relations; in 1966, Shmuel Eisenstadt discussed comprehensive revolutionary features of modernisation from the aspects of systems, politics, economy, ecology and culture in Modernization: Protest and Change; in 1968, Samuel P. Huntington specially demonstrated political responses to and consequences of modernisation from the perspectives of political participation, power structures and change in political authoritativeness in Political Order in Changing Societies; in 1974, Alex Inkeles analysed in Becoming Modern: Individual Change in Six Developing Countries the modern outlooks on family, money, religion, child-bearing and consumption and their behavioural models, and deemed that the core of modernisation should be modernisation of individuals; in 1982, Gilbert Rozman described the course of modernisation as multiple variables including the national work division system, the proportion of non-agricultural production, population quality, income distribution, organisational change, bureaucracy and popular culture in The Modernization of China.

Meanwhile, reflections on modernisation were made by the thinkers like Bell, Drucker, Toffler, Naisbitt, Carson and Giddens, and they proposed some new ideas, such as post-industrial society, knowledge society, post-modern society, risk society, sustainable development and reflexive society, not only enriching the modernisation theory and practice, but also highlighting the deepening of “modernisation”: whether in theoretical research or in practical action, modernisation should not be limited to “economic modernisation”.

Social Modernisation Is the Most Drastic and Profoundly Influential Social Change

Social modernisation is an innovation and correction of traditional “defects of modernisation”. It is a new thought on modernisation encompassing many aspects such as the economy, politics, culture, science and technology, education and environmental governance and giving more emphasis to systematic social projects, comprehensive social innovation and all-round social development. However, limitation to theory shows the theory itself is immature. A truly good “modernisation” theory should be practice-oriented and contribute to the people’s practice of social modernisation. Many Chinese scholars have realised the numerous problems and drawbacks of Western modernisation process, but in the practice of modernisation in the regions or country, they generally lack the idea of social modernisation, proceeding from “economic fields” consciously or unconsciously and then touching social, political and cultural fields. Therefore, some regions repeatedly showed the feature of “one-sided modernisation” that emerged in the early period of Western capitalist society, triggering the phenomena of environmental pollution, ecological crisis, energy crisis, alienation of man, social diseases, urban diseases and unfair social classes and structures.

In 1966, C. E. Black emphasised that modernisation should include profound changes not only in economy, but also in science and technology, culture and interpersonal relations.

The questions then deserve attention. Why can “economic modernisation” hardly go towards “social modernisation”? Why is “social modernisation” often “marginalised”? The reasons vary, but in view of “capital” as a dynamic mechanism driving “modernisation” and “economic modernisation”, it tends to realise its appreciation through “economic modernisation”. Therefore, as long as “capital” is not “restrained” and the various disadvantages of “uncivilised” “capital” are not rejected, “social modernisation” is certainly laid aside or “marginalised”.

In the above sense, in order not to be laid aside or marginalised, “social modernisation” must also take “capital” as a dynamic mechanism. However, to take “civilisation” of capital as a dynamic mechanism, social modernisation should embed economic “modernisation” into social functioning mechanisms and the whole course of social functioning in an all-round way, attaching importance to the harmony of social classes and structures, emphasising harmonious relations that should exist between people and nature, among people and between people and society.

“Civilisation” of Capital: Driving Force Behind Social Modernisation

Social modernisation driven by “civilisation” of “capital” should not be limited to numerous criticisms of “capital logic” while ignoring the effect of “capital” as a dynamic mechanism to social modernisation, especially the fact that capital is gradually “civilised” in the face of numerous social challenges and pressures. Under the premise that “elimination of capital” is impossible, “modernisation” of capital discards the numerous disadvantages of “uncivilised” capital and plays a positive role in promoting “social modernisation” with Chinese characteristics.

Capital: From its “Barbarisation” to “Civilisation”

 As we know, “capital” is not a pure economic concept or economic logic at any time but directly associated with politics, culture, ideology and prevailing customs of the whole society. Just as Marx said, though in actual production, “capital is rather the means of production transformed from capital”, “capital is not an object, but rather a definite social production relation, belonging to a definite historical formation of society.”1 To attain economic independence, the European bourgeoisie born in the Middle Ages must obtain “independent personality” and get rid of “religious control” and “imperial control” and highlight the new idea of “individualism” instead of the faith of the church and Pope in God. This was also the bourgeois spirit of Calvin’s Protestant Reformation. Such independent and free “religious personality” is an important aspect of the “spirit of capitalism” advocated by Max Weber. In other words, from the perspective of the history of human civilisation development, “capital came to the world dripping with blood and dirt” on the one hand, but on the other hand, “capital” was an objective product of abandonment of the shortcomings of the medieval civilisation’s heritage pushing forward the renewal and leap of the “European civilisation”. Besides, seen from the perspective of ideological revolutions, in the “Glorious Revolution” of Britain, the “Revolution” of France or the “Revolution for Independence” of the United States, the “revolutionary idea” advocated by the whole bourgeoisie was dedication to a free, democratic and equal modern society instead of a single “capitalist country”, which was obviously great historical progress compared with the previous capitalist society.

But the problem is that in the early stage of capitalism, especially the stage of primitive capital accumulation of the civilisation that dedicated to free, democratic and equal human civilisation and society, “barbarisation” of capital became a typical form of social development driven by “capital”. Here we will not repeat More’s words about “sheep devouring men” quoted by Marx or quote Marx’s indignant words about black slave trade and plundering of colonies’ gold and silver. Just in terms of the course of production, Marx believed that greedy desire and pursuit of surplus value had integrated with the whole capitalist system, leading to longer work time, higher labour intensity and unlimited exploitation of labourers. Anybody with conscience must stand out to denounce such situation. However, though there were various moral denunciations of “uncivilised” capital at that time, the whole society was under “barbaric” capital’s control due to lack of legal restraint.

Capital’s “barbarism” not only existed in the course of production, but also was prominently manifested as “capital war”, which includes competition between capitalists causing an anarchic state of the overall social production and huge waste of social production resources. It was also manifested as “national war” among national monopoly capital of different countries vying for capital profits. World War I that broke out then was essentially a “capital war”, showing the great “barbarism” of capital itself. Besides, people’s general discontent with capitalism due to such “barbarism” triggered the whole world’s socialist movement and gave rise to the first socialist country.

The Possibility of Capital’s “Civilised” Integration into Social Modernisation

Though many signs of “barbarisation” of capital could still be seen after entering the 21st century, it is an undeniable fact that the degree of capital “civilisation” is higher and higher: today’s capital is far from what capital looked like in the 19th and 20th centuries and capital power is under multiple supervision of politics, laws, morals and public opinion; the global corporate social responsibility movement has changed from the field of “corporate public relations” to an internal link of growth in “corporate value”; “in the marketplace, this means it is essential to balance the needs of customers, employees, suppliers, the environment and community and social groups”. 2

Nevertheless, within the framework of the capitalist system, “civilisation” of capital is always ruled by “absolute power” of capital. Responsibilities, obligations and morals “beyond capital” look pale and weak under many circumstances, therefore the United States is still the country that consumes the most energy and discharges the most pollutants in the world. To cater to enterprises’ need for “capital” appreciation, the Bush Administration lowered the standards of energy conservation and emission reduction, and refused to sign Kyoto Protocol. This indicated that under capitalist conditions, there are many restrictions that “civilisation” of capital cannot overcome. Only under the condition that goes for social modernisation can mechanisms for capital “civilisation” be built and real regulation of “capital” be possible. Thus, capital can push forward social modernisation in the course of “civilisation”.

Today, integration of capital “civilisation” into social modernisation with Chinese characteristics also needs to undergo the process of compliance with the national conditions of China’s social modernisation and adaptation to growth and development of China’s social needs. Divorce from social needs will also bring about many problems and hinder social development. Summarisation of lessons from the drastic change in the Soviet Union and East Europe, the Latin American model and the “Arab Spring” shows that social modernisation requires freedom, democracy, equality, fairness, justice and openness. However, if we carry out all-round liberalisation and deregulation and promote “free policies” that Western developed countries have “demonstrated” in the primary development stage of social modernisation, then the so-called “subject status” of modernisation will be under so much pressure that the initiative in social modernisation will be finally lost, national industry will become abnormal and “internal ability” of social modernisation will be ultimately harmed.

Social modernisation is more concerned with improvement of people’s social welfare level, including various kinds of social insurance such as education, medical care, employment and housing. The social welfare level is a basic requirement of socialist common prosperity, an implication of “social modernisation” and all people’s social need. In light of the fact that China is still in the primary stage of socialism, we cannot realise “high welfare” because this will weaken the dynamic mechanism of social competition, cut social accumulation and undermine the comprehensive driving force behind social modernisation. We should advocate a moderate “outlook on welfare” and an outlook on consumption and consumption model that can develop with social civilisation harmoniously and orderly to drive social modernisation with Chinese characteristics.

Paths of Building the Dynamic Mechanism of “Social Modernisation” with Chinese Characteristics

China, as a developing country, should make active efforts for construction of socialist “civilisation” of capital with Chinese characteristics and find a road of conscious “social modernisation” by using capital and going beyond capital suitable for China’s national conditions. If civilisation of “capital” in a capitalist society is “unconscious civilisation” lacking “restraint”, “control” and “governance”, then demand for and use of capital in social modernisation with Chinese characteristics should get capital out of the “barbaric” state, “adjust” to make “capital” go towards the state of “conscious civilisation” through orderly and effective “restraint” towards capital, and really turn capital into a tool beneficial to the people. Here, three paths for building the dynamic mechanism of social modernisation with Chinese characteristics are put forward mainly within the framework of the rule of law.

Regulating and Promoting “Civilisation” of Capital Based on the Socialist Market Economy

The socialist market economy addresses the efficiency of the market economy and the problem of social fairness. The market economy has never meant allocation of resources in a purely economic sense but shaped the life consciousness of primacy of “market interests”. Once such real “market interests” become the law of the whole society’s functioning, they will naturally form a social mechanism and everybody is concerned about fair “exchange value”. “Exchange value” in the market economy directly points to every participant in the market economy. This is the most direct and realistic soil for awakening of “individual consciousness”. The market economy mechanism shapes an objective choice attaching importance to real interests, making everybody pay attention to real life and abandon various kinds of “Utopian” life.3 In other words, the “market economy” departs from Utopia in any sense in the first place, and shapes a down-to-earth universally realistic life scene. Because of such reality, freedom, democracy and equality under the conditions of the market economy are most realistically “practical”. Any freedom, democracy or equality that cannot generate interests through the market economy is regarded as “non-freedom”, “non-democracy” or “non-equality”.

Social modernisation driven by “civilisation” of “capital” should not be limited to numerous criticisms of “capital logic” while ignoring the effect of “capital” as a dynamic mechanism to social modernisation, especially the fact that capital is gradually “civilised” in the face of numerous social challenges and pressures.

Such complicated features possessed by the “market economy” itself make us more resolutely believe that we must limit the disadvantages brought by “the market economy’s malfunction” through socialist public ownership and the power of national market regulation and be good at bringing the dual advantages of socialism and the market economy into full play. Then how to make people directly feel the dual advantages of the micro-mechanisms of market economy and the government’s macroeconomic market regulation interacting with each other? It is believed that the most direct and realistic path of realisation is regulating and promoting “civilisation” of capital according to law (e.g. building of the national credit system, the credibility system of “red and black lists”, etc.) to enable “capital” to go beyond narrow egoism in “capital logic” and internalise external costs while giving full play to market competitiveness instead of shirking the social responsibilities that should be shouldered by “capital”; abandoning various “uncivilised” means of “capital” and making “civilisation” of capital an important mechanism for pushing forward social modernisation with Chinese characteristics.

Orderly Pushing Forward New Urbanisation and Leading “Civilisation” of Capital

In today’s China, the construction of “civilisation” of “capital” under the conditions of the market economy focuses on the demand for “civilisation” of “capital” in the course of China’s new-type urbanisation. This is put forward on the basis of reflecting on traffic jams, environmental pollution, ecological crisis, social conflict, etc. caused by various phenomena of “uncivilised” “capital” in the course of China’s rapid urbanisation in the past more than 30 years. New-type urbanisation is the biggest “characteristic” of China’s social modernisation. New urbanisation will influence the effect of social modernisation with Chinese characteristics to some extent. The numerous phenomena of “uncivilised” “capital” emerged in the course of China’s rapid urbanisation today are fundamentally caused by “land capitalisation” operations.

With the deepening of urbanisation, cities driven by “capitalisation” with “land finance” as the core revealed four paradoxes of “uncivilised” capital. First, it caused the “purpose paradox” of sustainable urbanisation. Second, it caused the “economic paradox” of sustainable urbanisation. Third, it caused the “social paradox” of sustainable urbanisation. Fourth, it caused the “ecological paradox” of sustainable urbanisation.

An important path of solving the problem of new urbanisation driven by “land capital” (land finance) is: establishing the “state-owned land capital administration”, reforming the administrative system integrating land management and land use, separating the government’s function of land use, and effectively evaluating and monitoring standardised functioning of “land capitalisation”; meanwhile allowing farmers’ “collective land” and “private land” to enter the urban land market, so the relevant incomes can be used to ensure the long-term livelihood of farmer-turned citizens and ensure farmers’ obtainment of real benefits through the function of market mechanisms. At the same time, this is also conducive to restraining the one-sided growth of land finance, solving social conflict and promoting sustainable urbanisation at the source.

Ensuring “Civilisation” of Capital with Reform of State-owned Enterprises as Example

State-owned enterprises naturally tied to Chinese society play a leading role in social modernisation with Chinese characteristics. Therefore, to realise “civilisation” of capital, state-owned enterprises must be main players. Socialist state-owned enterprises with “state-owned capital” as the essential feature are different from the logic of general “capital” operations in that they “must not mercenarily” pursue economic efficiency, must turn in more profit (not tax in the general sense) than non-state-owned enterprises while promoting capital accumulation, and shoulder ultimate “bottom-line responsibilities” for the cause of socialist reform and opening up. In this sense, judging state-owned enterprises from the perspective of Western mainstream economics is obviously one-sided with ideological bias.

The purpose of restructuring state-owned enterprises is to change state-run enterprises’ shortcomings of low efficiency and weak driving force for innovation and bring the competition mechanism of the market economy into state-owned enterprises through introducing the “mixed economy” model. In the age of “capital” globalisation, we should make state-owned capital stronger and make Chinese state-owned enterprises’ “capital” go out to the world with a “civilised” attitude.

 

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About the Authors

Bao Zonghao (left)is Professor at the East China University of Science and Technology, China,and Research Fellow at Urban Culture Research Center, Shanghai Normal University in China. Xiang Kun (middle)is Deputy Director at the Shanghai Academy of Huaxia Social Development Research in China. Zhang Shuangshuang (right)is in an Undergraduate at the College of Arts and Science, Boston University in the US.

References

1. Marx/Engels Collected Works, Volume 7, Page 922, People’s Publishing House, 2009.

2. Schwerin: Conscious Capitalism, Social Sciences Abroad, 1999(6):3.

3. We should oppose two “Utopian” thoughts and models. The first one is going beyond the primary stage of socialism to realize communism featuring “a larger scale and a higher level of socialist ownership”; the second one is that the “pure market economy” itself is also a utopia and does not exist in real life.

The Futures of Southeast Asia and the US Intertwine

By Vannarith Chheang   

The important role of ASEAN in regional security has already been realised by the world, particularly by the United States. Vannarith Chheang emphasises that more than regional security, the US must recognise ASEAN’s crucial role in the economic realm.

ASEAN member countries are concerned about US’s commitment in Asia amid changing global geopolitics. The US is reorienting its foreign policy by focusing more narrowly on the American interest under the motto “America First”– which is characterised by transactionalism, unilateralism, and bilateralism.

The US’s decision to withdraw from the Trans-Pacific Partnership (TPP) creates a wave of economic and strategic uncertainty across Asia. This also largely affects strategic credibility and moral legitimacy of the US.

Without clear strategy and concrete action plans towards Asia, particularly ASEAN, the US will lose its strategic leverage and influence in the region, which in turn will hurt the US’s core regional interests.

There are signs of relief after the visit by Vice-President Mike Pence to Indonesia and the ASEAN Secretariat to reassure ASEAN that the US remains committed to the region. Pence also confirmed that President Donald Trump will attend East Asia Summit (EAS) and ASEAN-US Summit in November.

Trump called the Philippine President in capacity as the chair of ASEAN after the 30th ASEAN Summit in Manila on April 30 to seek diplomatic support from this regional body in pressuring North Korea to give up its nuclear weapons peacefully. 

ASEAN took an unprecedented approach on North Korea by strongly condemning the nuclear tests by Kim Jong-un, and collectively urging North Korea to “immediately comply fully with its obligations arising from all relevant United Nations Security Council (UNSC) resolutions”.

ASEAN’s response to North Korea got a strong diplomatic point from the US. ASEAN needs to strengthen its diplomatic leverage and security role beyond Southeast Asia. ASEAN’s collective voice does matter on a wider multilateral forum. 

The US started realising the relevant role of ASEAN in regional security issue but not yet in economic realm. There would be a mistake if the US does not pay close attention to the economic role of ASEAN in Asia.

The US needs to recognise that ASEAN matters for the US in both economic and security sectors. ASEAN is the third largest economy in Asia and seventh largest economy in the world. ASEAN is America’s fourth-largest trading partner. The US is the largest source of foreign direct investment to ASEAN.

Along with East Asia, the fast-growing economies of ASEAN have become linchpins of global production networks and supply chains.

Now 50 years old, the Association of Southeast Asian Nations (ASEAN) is today a dynamic actor and a crucial partner in Southeast Asia, a region increasingly important to the world’s prosperity and security. Along with East Asia, the fast-growing economies of ASEAN have become linchpins of global production networks and supply chains.

ASEAN’s regional architecture, fostered by the cultivation of comprehensive, strategic partnerships with international dialogue partners, is critical to peace and stability in Southeast Asia, and ASEAN’s participation in important global forums and governance bodies have attracted growing international attention and engagement.

As a party to free trade agreements in the greater Asia-Pacific, ASEAN is assuming an important role in shaping regional economic governance in Southeast Asia. The ASEAN-led Regional Comprehensive Economic Partnership (RCEP) comprises 30 percent of global GDP – it is going to be a game changer in Asia’s multilateral trade arrangements.

ASEAN has played significant security role through promoting trust and confidence among states, facilitating dialogues and mutual understanding, and preventing conflicts. ASEAN is a role model of an inclusive and open regionalism and a relevant global actor.

To maintain its resident power in the Asia-Pacific, the US, in addition to strengthening the alliance system, needs to proactively and robustly engage ASEAN, which is the most important inter-governmental regional body in the Asia Pacific.

With its future increasingly intertwined with ASEAN, the United States must maintain the momentum of its rebalance towards the Asia-Pacific, focusing on three pillars: comprehensive and inclusive security networks, economic integration and connectivity, and soft power and people-to-people ties.

ASEAN member countries generally acknowledge the pre-eminence of the United States in maintaining regional peace and stability. The United States remains the Pacific power that has provided security in the Asia-Pacific region for the last seven decades.

Winning the hearts of the ASEAN people best serves the long-term interests of the United States in the region.

ASEAN welcomes the active engagement of all major powers in the region, but the continued presence of US military, economic, and soft power is paramount to future regional stability and prosperity. Nevertheless, strategic rivalry and competition between the United States and China have created a security dilemma for ASEAN member countries.

ASEAN member states are not interested in taking sides or being pulled into either camp. A stable and healthy US-China relationship must be the foundation of regional peace and stability. The United States should treat ASEAN as a regional entity independent of its own China strategy.

ASEAN member states dene their national interests primarily in terms of economic development. They want an inclusive and open regionalism in which all countries can benefit from regional cooperation and integration. Therefore, America’s Asia-Pacific rebalance should emphasise economic opportunities for the people of ASEAN. Winning the hearts of the ASEAN people best serves the long-term interests of the United States in the region.

Seven Engagement Policies that the US Should Implement Relating to ASEAN.

First, the needs to concretise the Sunnylands Declaration adopted at the special US-ASEAN Leaders’ Summit in 2016. Out of seventeenth points, the US and ASEAN commit to firmly adhering to a rules-based regional and international order that upholds and protects the rights and privileges of all states.

Second, the US must continue strengthening both security and economic multilateralism by supporting the ASEAN-led regional institutions such as ASEAN Regional Forum (ARF), ASEAN Defence Ministers Meeting Plus (ADMM Plus), and East Asia Summit (EAS).

Third, the United States should develop a more concrete action plan to assist ASEAN in realising its Vision 2025, particularly by strengthening the ASEAN-based regional architecture and promoting a rules-based international order.

Fourth, the US must continue strengthening its soft power in the region through implementing the existing initiatives such as Young Southeast Asian Leaders Initiatives (YSEALI) and the US-ASEAN Connect which focuses on business, energy, innovation, and policy.

Fifth, the United States should give more emphasis to the Lower Mekong Initiative by providing more technical assistance to the members of the Mekong River Commission, conducting scientific research on the impacts of climate change and hydropower dams, and developing measures to help people adapt when their livelihoods are threatened.

Sixth, the United States should continue to support civil society groups in Southeast Asia that promote the values of democracy and human rights, rule of law, inclusive development, and social justice. Civil society plays a significant role in promoting a people-centred ASEAN, which is the ideal goal of the ASEAN community-building process.

Seventh, education is the main bridge linking the people of ASEAN and the United States. The establishment of Fulbright University in Vietnam is an effective way to strengthen these people-to-people ties. The United States should consider establishing similar institutions in other ASEAN member countries, particularly those with the least developed economies – Cambodia, Laos, and Myanmar.

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About the Author

Vannarith Chheang is a Visiting Fellow at ISEAS-Yusof Ishak Institute in Singapore. He is also a Co-Founder and Chairman of the Advisory Board of the Cambodian Institute for Strategic Studies (CISS) based in Phnom Penh. His research interest focuses on International Relations in the Asia Pacific region.

Investing in the Philippines: What to Expect in 2017

Makati City Skyline. Makati City is one of the most developed business district of Metro Manila and the entire Philippines.

By Alexander Chipman Koty

The Philippines garnered substantial international attention in 2016, owing largely to President Rodrigo Duterte’s controversies. Lost in the Philippines’ political drama, however, was the country’s strong economic performance. This article examines the Philippines’ business climate in 2017, and its leadership prospects and priorities as chair of ASEAN.

The Philippines garnered substantial international attention in 2016, owing largely to President Rodrigo Duterte’s rise to power, his litany of controversial remarks, and contentious war on drugs campaign. Lost in the Philippines’ political drama, however, was the country’s strong economic performance.

The Philippines posted a robust 6.8 percent GDP growth rate in 2016, outperforming popular investment spots such as China (6.7 percent) and Vietnam (6.2 percent). This follows years of sturdy growth under the previous Aquino administration, where growth averaged 6.2 percent per year.

FDI into the Philippines also increased in 2016, reaching US$6.2 billion in net inflows through the first 10 months of the year – a 22.2 percent increase over the US$5.1 billion accumulated over the same period the previous year. In 2015, total FDI amounted to US$5.7 billion. Intercompany borrowings accounted for almost two thirds of net FDI inflows (US$3.9 billion) in 2016, up 34.9 percent from US$2.9 billion in 2015. Despite improved FDI, the Philippines continues to lag behind fellow ASEAN countries such as Indonesia, Malaysia, and Thailand in this regard.

The Philippines may be better positioned than its more export-reliant neighbours to weather 2017’s uncertain global economic climate.

The Philippines’ strong economic performance is projected to continue into 2017, primarily on the back of healthy domestic spending, infrastructure development, and remittances. As opposed to many emerging Asian economies that are reliant on affordable exports, the Philippine economy is primarily bolstered by consumer spending, which accounts for about 70 percent of GDP and grew by seven percent year-on-year.

Consequently, the Philippines may be better positioned than its more export-reliant neighbours to weather 2017’s uncertain global economic climate.

Standard Chartered projects the Philippines’ economy to grow by 6.7 percent in 2017, while HSBC projects 6.5 percent growth. Meanwhile, the Philippine government is targeting growth between 6.5 and 7.5 percent in 2017 and to grow between 7-8 percent per year in the medium term, while aiming to attract US$7 billion in FDI over the coming year.

Tax Reform

One of the Duterte administration’s main initiatives in 2017 will be rolling out the Comprehensive Tax Reform Program (CTRP). The reform will see the highest personal income tax bracket rate reduced from 32 percent to 25 percent and corporate income tax lowered from 30 to 25 percent. The initiative aims to make the Philippines’ tax environment more competitive with its ASEAN peers, as the region as a whole has been gradually harmonising and lowering tax rates.

To offset losses from lowered personal income and corporate income tax rates, the government will expand the value-added tax (VAT) base by reducing exemptions, and add taxes on automobiles and fuel excise, among other measures.

Additionally, the government has announced that it will expand the tax collection powers of the Bureau of Internal Revenue (BIR), which will resume conducting field audits, and is also debating a tax amnesty to raise revenues and bring more companies into the formal tax regime.

Tax forms will also be simplified to encourage tax compliance and make the process more approachable for small taxpayers. Complicated and burdensome administrative measures, both in time and cost, often deter small taxpayers from participating in the official tax system.

Also to this end, Project Repeal: The Philippine Red Tape Challenge aims to improve the country’s inefficient bureaucracy – the Philippines is ranked 106th in the World Bank’s Ease of Doing Business index – by streamlining administrative and regulatory procedures and to remove unnecessary laws.

The tax reforms are projected to add an additional PHP 206.8 billion to government coffers, and the BIR is aiming to collect a record PHP 1.829 trillion in 2017. From January to November 2016, the BIR collected PHP 1.45 trillion in taxes.

Development Initiatives

The Philippine Development Plan covering the years 2017-2022 is set to be unveiled in the coming months, which will be a 10-point plan outlining measures and goals to raise the country’s standard of living. While more details will be released when the plan is officially announced, its central aim is to cut poverty incidence from 21.6 percent in 2016 to 14 percent by 2020.

The previous plan, which covered the years 2011-2016, sought to reduce multidimensional poverty from 2008’s levels of 28.2 percent to 16-18 percent by 2016. The plan calls for inclusive growth, fostering a trust-based society, and developing a knowledge-driven economy.

President Duterte’s pledge for economic growth to be more inclusive and tangibly raise the standards of living of the Philippines’ most vulnerable citizens ties into the goals of the Philippine Development Plan. Notably, point zero of the plan sets to achieve peace and order, which falls in line with Duterte’s drug eradication and crime reduction campaign and ties into a number of his economic and social policies.

In 2016, Duterte also signed an executive order that officially adopted the broader AmBisyon Natin 2040 project as the country’s long-term development vision. AmBisyon Natin 2040 envisions the Philippines tripling GDP per capita to US$11,000 and becoming a high-income country by 2040 by maintaining GDP growth of at least 6.5 percent per year.

ASEAN Integration

The Philippines will chair ASEAN for 2017, meaning that it will host a series of summits and events concerning the regional bloc’s integration and political, economic, and social issues, and will be expected to champion particular initiatives.

Areas of focus for the Philippines will be to reduce the cost of doing business across ASEAN, harmonise safety codes for products and services throughout the region, and support the creation of innovation-driven economies. Beginning in April, the government will host a series of nine conferences geared towards multinational small and mediums sized enterprises (MSMEs), startups, and attracting investment.

Areas of focus for the Philippines will be to reduce the cost of doing business across ASEAN, harmonise safety codes for products and services throughout the region, and support the creation of innovation-driven economies.

As has been the case in recent years, 2017’s ASEAN summits will be notable for how the regional bloc approaches an increasingly aggressive China. Duterte shocked the political world when he renounced the US in favour of China despite the contentious land disputes in which they are engaged in the South China Sea, and ASEAN as a unit has growing divisions over how they view China and its rise.

Industry Opportunities

Property, infrastructure, and consumption have all been important elements of the Philippines’ growth in recent years, and this should remain the case in 2017. The Philippines has long had a substantial infrastructure deficit, and Duterte seeks to address this by incrementally raising spending on hard infrastructure from five percent of GDP to seven percent by 2022.

For 2017, infrastructure spending is earmarked at PHP 850 billion – 5.3 percent of GDP. The Philippines has a wide variety of infrastructure needs, from the construction of new ports, airports, bridges, and expressways to electricity generation and telecommunications infrastructure.

The China-led Asian Infrastructure Investment Bank is already involved in two new projects in the Metro Manila region targetting flood prevention and mass rapid transport, and the government hopes to attract foreign funds, expertise, and technology to bridge its various infrastructure shortages. It is hoped that improved infrastructure will benefit multiple facets of the economy, including tourism, access to energy, and reducing the country’s infamous congestion.

Other sectors of the economy will benefit from the Philippines’ well-equipped workforce and sizeable service industry. Only three percent of employers in the Philippines cite inadequate skills in the workforce – the lowest rate in ASEAN. The Philippines is known for its Information Technology and Business Process Outsourcing (IT-BPO) industry, which will continue to be a key growth area in 2017.

As reflected in the Philippines’ development goals, the government hopes to parlay this area of expertise into higher value-added services, emphasising innovation, research and development, and the establishment of a knowledge-driven economy. The government also aims to expand its industry and manufacturing sector by leveraging the Philippines’ innovative capabilities in order to produce more highly value-added products than regional rivals skilled in mass-producing cheap exports.

Outlook

The Philippines’ economy appears well positioned for another year of steady growth in 2017 despite significant global political and economic uncertainty. However, the Philippines itself may contribute to this uncertainty under the unpredictable leadership of Duterte and his controversial anti-drug campaign and bold pivot to China.

That being said, increased investment from China would help mitigate any losses that may be incurred as a result of new US president Donald Trump’s protectionist tendencies, and Duterte has been building upon his predecessor’s macroeconomic reforms. There is also potential for a rapprochement between the Philippines and the US, as there appears to be more goodwill between Duterte and Trump than there was between Duterte and Obama.

Despite the focus on China and the US in the Philippines’ political and economic relationships, Japan is consistently the biggest provider of FDI into the Philippines – providing 28 percent of the total in 2015 – and Duterte paid a state visit to the country in late 2016, securing more investments in the process.

While the Philippines has traditionally lagged behind its Southeast Asian neighbours in attracting FDI, it is making steady progress to close the gap, and its economy as a whole looks quietly set for another year of potent growth.

This original post was released by the ASEAN Briefing last February 3, 2017.

Image Courtesy of KING RODRIGUEZ/PPD

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About the Author

Alexander Koty contributes to Editorial and Research operations for Asia Briefing in Shanghai, China. He specialises in political and economic analysis, advising companies entering China and Southeast Asia’s rapidly changing business environments. His work as an editor and analyst includes producing business intelligence and commentary for Asia Briefing websites, magazines, business and tax guides, and special issue reports.

Hedge Funds: Past, Present, and Future

By H. Kent Baker and Greg Filbeck

“Hedge funds, private equity and venture capital funds have played an important role in providing liquidity to our financial system and improving the efficiency of capital markets. But as their role has grown, so have the risks they pose.” Jack Reed

During the past few decades, hedge funds have evolved from obscure investment vehicles to highly popular investments in the global market. Institutional investors including pension funds, endowments, insurance companies, private banks, and high-net-worth individuals and families are attracted to hedge funds. Not surprisingly, hedge funds have drawn considerable attention from investors, practitioners, and academics. The period after the financial crisis of 2007-2008, also called the Global Financial Crisis (GFC), was tumultuous for hedge funds and resulted in startling headlines. Today, hedge funds have become, and are likely to remain, an essential part of the financial landscape. After taking a brief historical look at hedge funds, we discuss current hedge fund debates and controversies, and take a glimpse into their future prospects.

A hedge fund is a pooled investment vehicle that uses various strategies to invest in different asset classes. Professional investment managers administer these privately offered funds. Hedge funds attempt to produce above-average investment returns using many strategies and tools ranging from traditional stock-picking to complex derivative and arbitrage plays.

Characteristics of Hedge Funds

Several key characteristics differentiate hedge funds from other types of pooled investments such as mutual funds as well as other alternative investments including private equity. First, not all investors have access to hedge funds. In the United States, for example, hedge funds are only open to “accredited” or qualified investors. Until recently, being qualified as an accredited investor simply involved having or making a sufficient amount of money. As of February 1, 2016, the US requirements changed. The Financial Services Committee and the US House of Representatives passed HR 2187, known as the Fair Investment Opportunities for Professional Experts Act. Now individuals can qualify as accredited investors based on measures of sophistication such as having a minimum amount of investments, certain professional credentials, and experience investing in exempt offerings, being knowledgeable employees of private funds, or by passing a qualifying accredited investor examination. The expanded definition of an accredited investor still continues to exclude many, if not most, investors.

Second, hedge funds have wider investment latitude than many other types of pooled investments. For example, hedge funds are highly flexible in their investment options because they can use financial instruments generally beyond the reach of mutual funds. Hence, they can engage in more aggressive strategies and positions, such as short selling, trading in derivative instruments including options, and using leverage (borrowing) to enhance the risk/reward profile of their bets.  However, a hedge fund does not necessarily use hedging techniques given that the classification scheme for hedge funds has broadened considerably over time. The only limitation to a hedge fund’s investment universe is its mandate. Thus, some hedge funds can invest in anything including stocks, derivatives, land, real estate, and currencies. By contrast, most mutual funds follow the traditional “long only” model of investing in that they mainly stick to investing in stocks or bonds. Few mutual funds short-sell stocks because they face some restrictions and the higher costs of operating a long-short portfolio.

Hedge funds are highly flexible in their investment options because they can use financial instruments generally beyond the reach of mutual funds. Hence, they can engage in more aggressive strategies and positions, such as short selling, trading in derivative instruments including options, and using leverage (borrowing) to enhance the risk/reward profile of their bets.

Third, hedge funds often use leverage. That is, they can borrow funds to potentially increase their returns. However, leverage can destroy hedge fund returns as seen during the GFC.

Fourth, the compensation or fee structure differs for hedge funds. Besides charging various fees, which are associated with more traditional pooled investments such as mutual funds, hedge funds also have a performance or incentive fee. For example, a once common fee structure called “2 and 20” enabled hedge fund managers to charge a flat 2 percent of total asset value as a management fee and an additional 20 percent of any profits earned. However, these fees have trended lower in recent years.

Finally, hedge funds are lightly regulated. Yet, as a result of the GFC, hedge funds have come under increased regulatory scrutiny. For example, as of July 2010, the Dodd-Frank Wall Street Reform Act requires hedge funds with more than $150 million in assets to register with the Securities and Exchange Commission (SEC). Further, under the “Volcker Rule”, banks are now restricted in their ability to sponsor hedge funds and are prohibited from proprietary trading of them.

Benefits and Risks

Hedge funds offer some notable benefits over traditional investment funds. For example, the investment strategies used by hedge funds can potentially generate positive returns in both rising and falling markets. Given that hedge funds may have low correlations with a traditional portfolio of stocks and bonds, including hedge funds in a portfolio offers potential diversification benefits. That is, adding hedge funds to a balanced portfolio might reduce overall portfolio risk and volatility and increase returns. The large number of strategies available to hedge fund managers can help them meet their investment objectives. Hedge funds offer a long-term investment solution that eliminates or at least reduces the need to correctly time entry to and exit from markets. Finally, hedge funds have some of the most talented investment managers. Not surprisingly, hedge fund investors have high expectations about the potential risk/return contributions that hedge funds can provide relative to more traditional portfolios.

Despite these potential benefits, hedge funds have structural disadvantages that subject investors to certain risks. For example, hedge funds are not only subject to less regulation than many other structures but also offer limited transparency. For example, hedge funds are not required to detail redemptions publicly. Consequently, managers often closely guard those numbers to avoid any trace of loss of confidence. The lack of investment constraints poses a greater risk of strategy and style drift. Some funds use investment strategies that expose investors to potentially large losses, such as using leverage. Hedge funds typically require investors to lock up money for a period of years resulting in a lack of liquidity. They often have a gate provision that gives managers the right to limit the amount of withdrawals on any withdrawal date to not more than a stated percentage of a fund’s net assets. Finally, hedge funds are subject to high fees and complex incentive structures, which can induce excessive risk-taking to exceed previous fund high water marks or attempt to generate greater performance fees. A high-water mark refers to the highest peak in value that an investment fund/account has reached. Typically, managers are eligible for performance fees if the value of their funds exceeds their previous high-water marks. Thus, hedge funds are not for everyone but they can meet the specific investment goals and needs of some investors.

Brief History of Hedge Funds

Although the origins of hedge funds can be traced to the 1920s, Alfred W. Jones introduced the term “hedged fund” and subsequently created the first hedge fund in 1949. Jones inspired a new investment model by incorporating technical analysis methods into forecasting to create the first long/short strategy. Long/short strategies incorporate both long positions in securities that are deemed to be underpriced and short positions on securities that are considered overpriced. Jones is also credited for the incentive fee structure used by hedge funds today. The incentive fee structure was initially established at 20 percent of realised profit.

By 2008, the hedge fund industry claimed almost $1.93 trillion in assets under management (AUM). Overall investments decreased in the aftermath of the GFC, but increased to a record $3.02 trillion during the fourth quarter of 2016, excluding $360.4 billion in funds of funds. According to data from Hedge Fund Research (HFR), which tracks performance and flows at global hedge funds, hedge fund liquidations in 2016 hit the highest number since the GFC. For 2016, liquidations totalled 1,057, surpassing the 1,023 liquidations from 2009, though falling well short of the record of 1,471 liquidations from 2008. The number of new launches totalled 729 in 2016, which represents a steep decline from the 968 launches in 2015 (HFR 2017). As a result of more liquidations and fewer launches, the number of hedge funds globally fell below 10,000 for the first time since 2014.

Current Issues, Debates, and Controversies

Several major debates and concerns surround hedge funds. According to a recent survey by Preqin (2017), performance (73 percent) and fees (64 percent) are the two key issues facing the industry. This debate tends to resurface especially when hedge fund performance is weak relative to other investment alternatives. Investors pay two types of fees: a management fee and an incentive or performance-based fee. Evidence suggests a slight trend for declining fees. According to HFR, at the end of 2016, average management fees had slipped to 1.48 percent, while the average performance fee dropped to 17.4 percent. For new launches in 2016, the average management fee for funds fell to 1.33 percent, declining from 1.6 percent for 2015 launches, while the average incentive fee for funds declined to 17.71 percent, down 4 basis points from 2015 fund launches. As Kenneth J. Heinz, President of HFR, notes, “The hedge fund industry fee structure continues the process of evolving to meet increased investor demands, as well as persistently low, albeit increasing, level of interest rate” (HFR 2017). Despite declining fees, hedge fund fees still remain high. Moreover, no regulatory limits exist on the fees hedge funds can charge.

According to a recent survey by Preqin (2017), performance (73 percent) and fees (64 percent) are the two key issues facing the industry.

After the GFC, high fees have not necessarily resulted in high returns. Beginning with the early 2009 bull market, hedge fund returns, on average, have lagged traditional asset returns (Martin and Copeland 2016). For example, the Barclay Hedge Fund Index shows returns of 2.88 percent, 0.04 percent, and 6.10 percent in 2014, 2015, and 2016, respectively. This index measures the average return of all hedge funds, excepting funds of funds, in the Barclay database (Barclay Hedge 2017).

Not surprisingly, performance results differ between different indexes because hedge funds are not required to report returns. For example, the HFRI Fund Weighted Composite Index® gained 5.5 percent in 2016 versus 6.10 using the Barclay Hedge Fund Index. Performance differs dramatically among hedge funds. For 2016, the top HFRI decile averaged a 32.7 percent return, while the bottom decile fell an average of – 15.5 percent. Dispersion between the top and bottom HFRI deciles was 48.2 percent in 2016 (HFR 2017). By comparison, the annual total return on the S&P 500 Index during 2014, 2015, and 2016 were 13.69 percent, 1.38 percent, and 11.96 percent, respectively (YCharts 2017).

Given high fees coupled with poor returns, frustrated hedge fund investors in 2016 continued to withdraw capital. In fact, investor dissatisfaction with hedge funds has not been this high since the GFC when they withdrew $154 billion in assets in 2008 and $131 billion in assets in 2009, according to HFR. In 2016, hedge fund liquidations increased, bringing the number of closed funds to the highest level since 2008. Nonetheless, the AUM of hedge funds increased each year since 2008.

Besides fees and performance, Preece (2017) notes other debates and controversies surround hedge funds. For example, one issue is whether reported hedge fund returns are overstated due to biases inherent in their reporting. Several factors, including serial correlation of returns, smoothed returns, survivorship bias, selection bias, and infrequent sampling, can affect reported returns. Other issues focus on the relative lack of regulatory oversight and transparency for hedge funds as well as the use of leverage and hedge fund malfeasance including accusations of fraud ranging from misstating results, engaging in bribery, and failing to disclose conflicts of interest. Finally, some question the role of hedge funds in society.

The Future of Hedge Funds

According to a survey by Ernst & Young (EY) (2016), the primary objective for the hedge fund industry going forward is the ability for it to adapt to evolving demands. EY’s analysis reveals four key metrics necessary for hedge funds to thrive going forward: (1) the need for continued asset growth (56 percent), (2) the ability to effectively manage talent (23 percent), (3) successful cost management and operational efficiency (11 percent), and (4) successful technological transformation (4 percent). To remain competitive, hedge funds must offer greater diversity in nontraditional hedge fund products as investors continue the trend of shifting assets toward investment strategies not easily replicated in the traditional space. Additionally, the average management fee rates continue to decline requiring hedge funds to seek new ways to reduce costs. Growth remains as the top strategic priority in achieving economies of scale, which are predicated on the ability to recruit and retain successful managers.

To remain competitive, hedge funds must offer greater diversity in nontraditional hedge fund products as investors continue the trend of shifting assets toward investment strategies not easily replicated in the traditional space.

In its annual survey, Preqin (2017) notes that 84 percent of investors had avoided hedge fund investments due to terms and conditions of hedge funds with two-thirds of investors indicating that hedge funds had not met their performance expectations. Yet investors plan to increase their hedge fund exposure to those using relative value, macro, event driven, and equity strategies. In total, Preqin reports that 51 percent of institutional investors allocate at least a portion of their portfolio to hedge funds and about 90 percent of these investors have a hedge fund target allocation of 5 percent or more.

Despite challenges, some experts predict that AUM for the hedge fund industry will grow faster than the market. For instance, Citi Investor Services (2014) predicts that the hedge fund industry is likely to nearly double from $2.63 trillion AUM in 2013 to $4.81 trillion AUM in 2018 with almost three fourths (74 percent) of those assets coming from institutional investors. 

Such investors as pension plans, endowments and foundations remain key investors going forward. Citi Investor Services predicts that endowments and foundations are likely to maintain a steady allocation of around 18 percent to hedge funds through 2018. Sovereign wealth funds are also likely to increase their weight in hedge funds by about 150 percent from around 8 percent in 2013 to 12 percent by 2018. According to Preqin (2017), 54 percent of institutional investors plan to maintain their current hedge fund allocation with 15 percent planning to increase allocation and 31 percent planning to decrease allocation. Hedge funds face increased competition with capital inflows into the alternative investment arena. Compared to hedge funds, Preqin reports that institutional investors are far more interested in increasing their long-term allocations in many other alternative asset classes such as private debt (62 percent), infrastructure (53 percent), private equity (48 percent), and real estate (36 percent).

Looking into the early 2020s, some subtle good and bad signs are present for market growth. On the upside, about 60 percent of hedge fund managers plan to expand their current array of investment strategies. On the downside, only 37 percent plan to broaden their global presence.

The key to sustained growth going forward appears to be in changing institutional investors’ perceptions of hedge funds. According to Preqin (2017), about 20 percent of institutional investors perceive hedge funds as a positive alternative asset class. By comparison, most of these investors have a positive view of several other alternative asset classes: private equity (about 80 percent), private debt (about 70 percent), and real estate (about 50 percent). Looking into the early 2020s, some subtle good and bad signs are present for market growth. On the upside, about 60 percent of hedge fund managers plan to expand their current array of investment strategies. On the downside, only 37 percent plan to broaden their global presence. Moreover, 17 percent plan to narrow their focus by repositioning their fund within a particular niche. Only 10 percent plan to acquire another firm, which suggests that most managers plan to grow internally with little consolidation from these activities (State Street 2014). The largest hedge fund managers are responding to current trends by moving toward multi-product asset managers (71 percent, up from 59 percent in the previous year survey) with fewer managers planning to offer only one core strategy (EY 2016).

Conclusions

Holzhauer (2017) notes that hedge funds are operating in a rapidly changing landscape. Because of lower returns generated since the GFC, the hedge fund industry faces growing pressure to lower fees while shoring up operational efficiencies. Thus, managers need to quickly adapt to new technology, especially in areas where it can decrease operating costs. In the future, managers must do a better job of convincing investors that their funds are worth the higher costs. The hedge fund industry has historically been quick to make changes. If managers can continue to find ways to meet investors’ increasing demands net of fees, the long-term future looks bright for the industry.

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About the Authors

H. Kent Baker (DBA, PhD, CFA, CMA) is University Professor of Finance at American University’s Kogod School of Business in Washington, DC. He is the Author or Editor of 28 books and more than 165 refereed journal articles. The Journal of Finance Literature recognised him as among the top 1 percent of the most prolific authors in finance during the past 50 years. Professor Baker has consulting and training experience with more than 100 organisations. He has received many research, teaching and service awards including Teacher/Scholar of the Year at American University.

Greg Filbeck (DBA, CFA, FRM, CAIA, CIPM, PRM) holds the Samuel P. Black III Professor of Finance and Risk Management at Penn State Erie, the Behrend College and serves as the Interim Director for the Black School of Business. He formerly served as Senior Vice-President of Kaplan Schweser and held academic appointments at Miami University and the University of Toledo, where he served as the Associate Director of the Center for Family Business. Professor Filbeck is an author or editor of five books and has published more than 90 refereed academic journal articles.

References

1. Barclay Hedge. (2017). “Barclay Hedge Fund Index.” Available at https://www.barclayhedge.com/research/indices/ghs/Hedge_Fund_Index.html.
2. Citi Investor Services. (2014). “Opportunities and Challenges for Hedge Funds in the Coming Era of Optimization – Part 1: Changes Driven by the Investor Audience.” Citibank. Available at http://www.citibank.com/icg/global_markets/prime_finance/docs/Opportunities_and_ Challenges_for_Hedge_Funds_in_the_Coming_Era_of_Optimization.pdf.
3. Ernst & Young. (2016). “2016 Global Hedge Fund and Investor Survey.” November 15. Available at http://www.ey.com/Publication/vwLUAssets/ey-2016-globa-hf-survey/$FILE/ey-2016-globa-hf-survey.pdf.
4. HFR. (2017). “Hedge Funds Lower Fees as Fed Raises Rates.” March 17. Available at https://www.hedgefundresearch.com/news/hedge-funds-lower-fees-as-fed-raises-rates.
5. Holzhauer, Hunter. (2017). “Current Hedge Fund Debates and Controversies.” In. H. Kent Baker and Greg Filbeck (eds.), Hedge Funds: Structure, Strategies, and Performance. New York: Oxford University Press.
6. Martin, Timothy, and Rob Copeland. (2016). “Investors Pull Cash from Hedge Funds as Returns Lag Markets.” The Wall Street Journal, March 30. Available at http://www.wsj.com/articles/investors-message-to-hedge-funds-we-are-replacing-you-with-clones-1459348497.
7. Preece, Dianna. (2017). “Current Hedge Fund Debates and Controversies.” In. H. Kent Baker and Greg Filbeck (eds.), Hedge Funds: Structure, Strategies, and Performance. New York: Oxford University Press.
8. Preqin. (2017). “Preqin Investor Outlook: Alternative Assets – H1 2017.” Available at https://www.preqin.com/docs/reports/Preqin-Investor-Outlook-Alternative-Assets-H1-2017.pdf.
9. State Street. (2014). “The Alpha Game: Hedge Funds Step Up Operations to Capture New Growth.” Available at http://www.statestreet.com/content/dam/statestreet/documents/Articles/HedgeFunds_AltsReport_FIN.pdf.
10. YCharts. (2017). “S&P 500 Annual Total Return.” Available at https://ycharts.com/indicators/sandp_500_total_return_annual. 

Islamic Finance in Kazakhstan – The Future Hub of Islamic Finance in the Central Asia

By Mamunur Rashid

 According to Malaysia Islamic Finance Marketplace, Zawya Islamic and Thomson Reuters, Islamic finance has been growing at a double-digit rate since the start of the new millennium.  In this article the author discusses the potential of Islamic Finance in Kazakhstan, and its role in the success of Islamic Finance in Central Asia.

Islamic Finance is considered as an alternative financial system that is based on Islamic shari’ah promoting a superior form of ethical and social financial transformation mechanism, shared values and sustainable development. The system prohibits the use of traditional interest rates, promotes profit and loss sharing in investment and financing, and, more importantly, considers the customers as “partners” in business. Financial instruments are designed to fit the above-mentioned goals for the shorter- and longer-terms. Multiple authorities including internal and centralised shari’ah advisory boards monitor the innovation in financial instruments and their performance. Countries in the Middle East, Southeast Asia, North Africa, and South Asia are leading in development of comprehensive halal ecosystems for the users of Islamic finance. Islamic finance has received much attention after the recent global financial crisis while the system has been extraordinarily resilient to risk. Experts have given credits to Islamic finance systems for an embedded risk management system as such the Islamic financial managers have carefully screened investment based on risk adjusted benefits. More countries are gradually registering their interest towards Islamic financial system, and the system has experienced tremendous development from several fronts including banking, equities investment, Islamic bonds (sukuk), mutual funds, microfinance, and insurance (takaful).

 

Source: Compiled by the writer from various sources 

Figure 1 & 2: Timelines of Development of IF in Kazakhstan

Kazakhstan has been in the frontier leading Islamic finance development in the Central Asian region. Above timelines are self-explanatory. There has been a rapid progression since 2009, the year of the first established legislation for Islamic finance industry, to become the Islamic hub of Central Asia. By 2020, Kazakhstan wants its Islamic banking industry to reach 3-5% of its total banking assets. To achieve this vision, the country has already laid down rigorous plans combining regulatory initiatives for Islamic banking, insurance, leasing, sukuk, and microfinance, and has set-up supporting institutions to shift to the next gear of development and enhancement. Astana has given a clear signal to that direction in 2015 by bringing meaningful amendments to the existing regulations. Capital requirements for chartering a new bank has been brought down by 50%, conversion from conventional to Islamic mode of financing has been streamlined, and a centralised Shari’ah board (Council for Islamic Financing Principles) has been activated. Initiatives are taken by National Bank of Kazakhstan to develop halal ecosystems that combine prudential regulations, financial institutions, consumers, and cross-border relations. Positive outcomes have started appearing as well: Thomson Reuters investment outlook (2015) ranked the country in the 5th position out of 57 OIC member countries as a top tiered Islamic investment destination, and a similar survey was conducted in 2014 that ranked Astana 5th on the regulatory initiatives and integration. At present, the country has seen an Islamic bank, Al Hilal Bank, a Sukuk issuance, an Islamic microfinance mostly for the agricultural financing, Islamic leasing firm, and an Islamic insurance (Takaful) firm. Internationally active banks such as the Al Baraka Group and MayBank Group have shown interests to be active in Islamic finance markets in Kazakhstan. With a 17.5 million Muslim population, which is almost untapped, Astana can expect some positive changes in the coming future.

 

Source: Kulchmanov et al. (2016)

Figure 3: Preparation for Future (based on survey on bank managers)

Note: MY, IND – Islamic banks in Malaysia, Indonesia, IB – Islamic Bank in Kazakhstan, LCB & SCB – Large and Small Conventional Bank in Kazakhstan.

Three major challenges have been identified so far. In an interview with Thomson Reuters, the Deputy Governor of the National Bank of Kazakhstan has identified a shortage of knowledge base, lower level awareness, and limited but gradually developing legislative initiatives as the major challenges. Similar findings are reported by a recent full pledged study done on risk management of Islamic Bank in Kazakhstan by Kulchmanov et al. (2016). Their study has reported that technical and Shari’ah related know-how, limited regulatory assistance, and unavailability of markets for Islamic institutions are the key challenges. This study has found that industry wide development is more important than the firm specific development as future strategies. The study concluded that size of the overall market is a serious contingent variable, meaning that the challenges will gradually disappear with a greater number of institutions, instruments and growth in consumer base. Figure 3 shows that the Islamic Bank is better prepared than overall industry readiness since the Islamic Bank is owned by already established Islamic finance service providers.

The study concluded that size of the overall market is a serious contingent variable, meaning that the challenges will gradually disappear with a greater number of institutions, instruments and growth in consumer base.

More insights are gathered when I analyse the most recent published income statement and balance sheet information for the only Islamic bank in Kazakhstan. Al Hilal Bank’s profit has increased three times from 2014 to 2015. Around 90% of their income from Islamic finance activities is earned using Ijara and similar methods. The bank has paid only 3.5% of its income (from IF activities) as expenses for Islamic finance activities. Total assets are doubled between 2014 and 2015; however, the major portion (42% of total assets) is kept as cash and equivalents. 54% of the assets in 2015 have been invested in Islamic financial alternatives such as Islamic derivatives (7%), commodity Murabaha agreements (38%), Wakala investment deposits (7%) and Ijara (2%). Notably, Ijara and Wakala investment deposits have decreased in 2015 when compared to the value in 2014. An excessive amount of cash holding indicates that the bank is looking for profitable investment, which is unavailable at this moment.

Al Hilal Bank has reported an equally distributed capital structure in 2015 with 49% of the funds from equity and 51% in debt. This is quite a contrast to the figures in 2014 while the bank has sourced 85% of the funds from equity and only 15% from debt. Among many, consumer deposit has increased by 2.5 times from 2014 to 2015, even though in overall financing the percentage of consumer deposits is only 17% (of total assets in 2015). With a massive size of equity capital, it is expected that the bank has much higher capital adequacy than expected. The bank has not reported the portion of the bank’s owners’ Zakah, which the bank expects the shareholders to calculate on their own. Finally, there has been no reporting on profit-and-loss-sharing instruments and Qard Hasan that are more socially responsible and Shari’ah-centric.

Based on the operating outlook of the Al Hilal Bank, we can look at a larger set of challenges for Islamic finance development in Kazakhstan. Interestingly, none of these are new, as such these challenges have been common for any nation with a plan to become the Islamic finance service providers. We will, however, have a look at these challenges from a critical and market-oriented approach.

 

  

Figure 4: Islamic finance ecosystems for Kazakhstan

By 2020, Astana is planning to reach an adequate stage of Islamic financial legislative development that will help attract new investment in this area. It is easily understandable that the components of Islamic finance should be integrated in a chain to work efficiently. For instance, Islamic banking should be seamlessly supported by Islamic capital markets, insurance and other allied services. Similarly, being in a multi-racial environment, authorities should take extra care while opening opportunities for Islamic entrepreneurship, which is the largest demand side stakeholder of the Islamic financial services. The ecosystems cannot work unless the financial systems and the business environment are not equally Shari’ah compliant. Thirdly, Islamic banks would eventually compete with their conventional counterparts. Hence, it is partly their responsibility to help increase the financial literacy at the various consumption levels to achieve a superior growth of adoption. Government should tie up with financial institutions and educational institutions in reaching a higher level of financial literacy. These developments in human capital must also be supported by adequate incentives.

Thirdly, Islamic banks would eventually compete with their conventional counterparts. Hence, it is partly their responsibility to help increase the financial literacy at the various consumption levels to achieve a superior growth of adoption.

Islamic financial institutions should gradually move towards a socially responsible financial model that is more sustainable and covers a greater proportion of population. Some of the recent day socio-economic development agendas, such as the SDGs and MDGs, can be accomplished easily if Astana can target a higher level of inclusion alongside existing legislative and performance-related indicators. Moreover, Islamic financial institutions are expected to enhance their capabilities to handle profit and loss sharing contracts for an efficient socio-economic transformation. If PLS is ignored any further, Islamic banks will eventually turn to conventional institutions having no soulless efforts to maximise value of a limited number of shareholders. Finally, a successful Islamic ecosystem should uphold relationships with other likeminded institutions and authorities across border. Learning from the best practices from other Islamic financial institutions will help reaching the Astana Islamic finance vision-2020.      

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About the Author

Mamunur Rashid holds a PhD in Behavioural Finance, and currently is an Assistant Professor of Finance, and the Deputy Director of the Centre for Islamic Business and Finance Research (CIBFR), at the University of Nottingham Malaysia Campus. He has been teaching International Finance, Financial Economics, Islamic Capital Markets, and Corporate Finance for the last twelve years in different countries. An active researcher, Dr Mamunur publishes widely in financial economics, Islamic economics, investor behavior, and corporate social responsibility, and has presented papers in 25 international conferences. In 2016-17, Dr Rashid has co-edited a special issue for International Journal of Mamunur has worked on several corporate and government projects. Mamunur Rashid can be contacted at: [email protected].

References:

1. Annual report of Al Hilal Bank Islamic Bank JSC (2015)
2. A new frontier of Islamic Finance – Thomson Reuters Islamic Finance country report of Kazakhstan.
3. Kulchmanov, A., Hassan, M.K. & Rashid, M. (2016). Contingency theory approach to risk management practices in Islamic banks: A case study on Kazakhstan, International Journal of Islamic Business, 1(2), 35-67.

Regime Change in the Trump White House?

By Dan Steinbock                                        

No US postwar president has managed to reset relations with Russia. Now the Trump administration must cope with a special counsel’s investigation. In the past, US efforts at regime change targetted foreign countries; today, the White House. How will it impact Trump’s stalled policy agenda?

As I argued in spring 2016 (TWFR, April 25, 2016),1 US election is a global risk and it would continue to be fought after the Trump election win. But recently, these political struggles moved to an entirely new phase.

First, the Department of Justice (DOJ) dismissed James Comey, Director of the Federal Bureau of Investigation (FBI), reportedly only days after his request for increased resources to investigate Russia’s alleged interference in the election. Barely a week later, DOJ appointed Robert Mueller, former director of the FBI (2001-13) as special counsel overseeing the investigation into alleged Russian interference in the 2016 election.

In order to assess the probable impact of the investigation on Trump’s stalled policy agenda, it is important to understand what is actually new in his trade, political and military stances.

There is little doubt about the political outcome of the Mueller investigation. Just as he loyally served under President George W. Bush, along with Defense Secretary Donald Rumsfeld and Vice President Dick Cheney’s neoconservatives, he is unlikely to treat any Russian initiative – whether planned, unintended, alleged, or misrepresented – with silk gloves. So from the White House’s perspective, the end result is known. Consequently, it is the process that has potential to undermine the effective presidency.

In order to assess the probable impact of the investigation on Trump’s stalled policy agenda, it is important to understand what is actually new in his trade, political and military stances.

Obama-Bernanke Origins of Trump’s Anti-EU Rhetoric

During a bruising series of meetings in the NATO summit in Belgium and at the G-7 gathering in Italy, President Trump was quoted as calling Germany “very, very bad” on trade, which the White House denied, however. That was followed by German Chancellor Angela Merkel’s speech, which was perceived as historical in Europe, and in which she said that “the times in which we can fully count on others are somewhat over”. 

While Merkel’s Atlanticist supporters saw the speech as signalling the end of the postwar Western consensus, it was also geared to Merkel’s domestic constituencies to pave way for victory in the German federal election in September 2017. Also, Trump’s accusations of excessive German trade deficits and Western Europe’s free-ride at NATO are hardly new. He has made them repeatedly in the past two years. And truth to be told, so did President Obama.

Trump is neither first nor unique in his criticism of Europe. Following the end of the Cold War, every US president, in one way or another, has engaged in similar criticism. The notion that Europeans are “free riders”, enjoying the benefits of an international order safeguarded by the US without contributing much to it, is an old one in Washington. Soon after he received his Nobel Peace Prize, Obama began to complain about those NATO members who do not pay their “fair share” in global affairs. In particular, he launched an “anti-free rider campaign” in which, among other things, he pushed his European allies to lead the NATO intervention in Libya in 2011 – “to prevent the Europeans and the Arab states from holding our coats while we did all the fighting”.

While Trump’s policy agenda is not entirely new, it is tougher, broader and less politically correct than its precursors in decades. However, Mueller’s investigation will cast a dark shadow over the White House’s policy agenda.

What about deficit criticism? That’s not unique to Trump either. Following the global financial crisis, both Obama and former Fed chief Ben Bernanke often argued that “Germany’s trade surplus is a problem.” Unlike China, which has been working to reduce its dependence on exports since the early 2010s, Germany has not. As a result, Obama and Bernanke often pleased Chancellor Merkel to launch Keynesian investment initiatives and promote German consumption so that European recovery could happen faster, but without success. To Obama and Bernanke, that was frustrating; to Trump, hypocrisy.

What’s new in the current Atlanticist friction, however, is Trump’s willingness to push both NATO payments and trade distortions in parallel, as well as Chancellor Merkel’s shrewd timing in using anti-Trump sentiments to foster pan-European unity. Until recently, her centre-right Christian-Democrats (CDU) were struggling against Social-Democrats (SDP) and the radical right (Alternative for Germany AfD). But when Trump began his efforts to divide Europe before election season, Merkel started her attempt to rally Germans behind CDU and united Europe, taking advantage of anti-Trump sentiments in the Old Continent. Thereafter CDU’s polls began to rise again.

While Trump’s policy agenda is not entirely new, it is tougher, broader and less politically correct than its precursors in decades. However, Mueller’s investigation will cast a dark shadow over the White House’s policy agenda.

Deferred Trade Friction

During the 2016 campaign, Trump threatened to use high import tariffs against nations that have a significant trade surplus with the US. In 2016, the deficit list was topped by China ($347 billion), Japan ($69 billion), Germany ($65 billion), Mexico ($63 billion), and Canada ($11 billion). On a per capita basis, Germany is the leading “deficit offender”.

In his campaign, President Trump promised to renegotiate America’s key free trade agreements, including the North American Free Trade Agreement (NAFTA). Right after his inauguration, he used executive order to pull out of the Trans-Pacific Partnership (TPP), which was seen as President Obama’s legacy deal. In turn, NAFTA renegotiations are set to start soon. However, according to the positive spin of US Trade Representative Robert Lighthize the Trump administration will seek to “expand” NAFTA trade rather than to “overturn” it.

As the talks are to begin after mid-August, they will be followed closely by other bilateral trade talks (South Korea, Japan, Taiwan), including allegations on “currency manipulation”. Since these negotiations are likely to endure through the fall, major trade friction may not be likely until 2018.

With reduced rates and one-time repatriation tax rate stashed, the White House hopes that US companies’ overseas profits and corporate operations would return home. In reality, such expectations are inflated.

The Trump administration’s tone about China has also softened following an internal struggle between Trump’s trade hawks (head of the National Trade Council Peter Navarro, and trade advisor and former CEO of steel giant Nuctor, Dan DiMicco), and their more moderate opponents (Treasury Secretary Steve Mnuchin, and chief of National Economic Council Gary Cohn). After the two-day summit at Mar-a-Lago, President Trump and President Xi Jinping announced a 100-day plan to improve strained trade ties and boost cooperation between two nations.

However, unless the plan can offer major breakthroughs after the summer, trade hawks may return later and deficit rhetoric may escalate toward the year-end.

Since sanctions fall under executive actions, Trump tends to have more strategic manoeuverability in these areas. Then again, both Republican neoconservatives and Democratic liberal internationalists support sanctions against North Korea, Russia and, with some qualifications, Iran.

 

Headwinds Against Tax Reforms

Until recently, progressive taxation has played a critical role in all advanced economies. In America, that model has been under a siege since the Reagan years. Today, US personal income tax rate is one of the lowest among the G20 economies, whereas US corporate tax rates are high internationally. As a result, US companies have parked more than $1 trillion worth of cash abroad.

Nevertheless, Mueller’s investigation is likely to overshadow Trump efforts at tax overhaul, which depends on legislative support for success.

The Trump administration hopes to simplify the number of individual income tax brackets. It would like to reduce the tax rate on capital gains, non-corporate business taxes and those in the highest bracket, repeal the alternative minimum tax and the Affordable Care Act (the “Obamacare”) surtax, and the estate tax. Critics expect the total costs of the plan to soar to $5 trillion over a decade. While Republicans are ready to move ahead with a repeal bill, it has been diluted but still divides Republicans in the Senate and House of Representatives. Senate Majority Leader Mitch McConnell suspects that the new bill will not pass through the Senate.

The Trump corporate tax plan is seen as even more controversial. In 2016, these rates were around 30-35% in major advanced economies (France, Japan, Germany), except for the UK (19%). The US rate (39%) is the highest among all G20 economies. Trump’s plan would almost halve rates to just 15 percent, which would put America ahead even of low-tax city paradises, Singapore (17%) and Hong Kong (16.5%). With reduced rates and one-time repatriation tax rate stashed, the White House hopes that US companies’ overseas profits and corporate operations would return home. In reality, such expectations are inflated.

There has been no major outflux of foreign firms from large emerging economies, which offer growth that is 3-4 times faster than in the US or Europe. Since the 1970s, US trade deficits have been a regional issue mainly with Asia. As costs are rising in China, emerging Asia will take the mantle but US trade deficits will prevail. And even when relocation offers some benefits, US and other multinationals may prove reluctant to move their core operations because an increasing number of these companies rely on emerging-economy middle classes and new innovation hubs for their profitability.

While the Trump administration will try to push its stalled policy agenda, it must now do so with the White House in shackles. Intriguingly, despite their global might, all US postwar presidents have failed to reset relations with Russia.

Four Presidents, Four Russia Resets, Four Failures

After the dissolution of the Soviet Union in 1991, relations between Russia and the US remained generally warm between the Bush and Clinton administrations, and President Boris Yeltsin until the US-inspired “shock therapy” caused Russia an economic nightmare that proved far worse than the Great Depression in the US. That is when three former Soviet satellites – Poland, Hungary and the Czech Republic – were invited to join the NATO. By mid-90s, Poland, Hungary, the Czech Republic, and the Baltic states were also ushered into NATO – against the angry but ultimately futile protests by presidents Yeltsin and Mikhail Gorbachev.

In 2001, President George W. Bush wanted to reset US Russia relations. But after the White House was swept by 9/11 and neoconservatives’ increasingly unilateral foreign policy, it began incursions into Afghanistan, withdrew from the Anti-Ballistic Missile Treaty, and invaded Iraq. As NATO began looking even further eastward to Ukraine and Georgia, Russian protests turned angrier and more aggressive. Most Russians saw the Rose Revolution in Georgia 2003, and US effort to build an anti-ballistic missile defense installation in Poland with a radar station in the Czech Republic, as intrusions into its sphere of interest, along with US efforts to gain access to Central Asian oil and natural gas.

Like Clinton and Bush initially, President Obama wanted to reset US-Russia relations and by March 2010 both countries agreed to reduce their nuclear arsenals. Yet, the reset was not supported by Obama’s Secretary of State Hillary Clinton, Secretary of Defense Robert Gates and US ambassador to Russia John Beyrle. Subsequently, rising tensions in Crimea were seized to bury the effort.

In the campaign trail, Trump lauded President Putin as a strong leader, arguing in favour of friendlier relations. Meanwhile, FBI began investigating alleged connections between Donald Trump’s former campaign manager Paul Manafort, foreign policy adviser Carter Page and pro-Russian interests. In January 2017, Trump and President Putin began phone conferences as the White House still mulled lifting economic sanctions to reset relations with Russia. But in February, Trump’s security adviser Michael Flynn was forced to resign. As the Empire stroke back, Secretary of State Rex Tillerson said only two months later that US-Russia relations were at a new low point. And by May, Mueller was appointed to head the investigation into alleged Russian interference in the 2016 US elections. The Wolfowitz doctrine had prevailed – against four US presidents.

 

Who’s Afraid of the Big Bad Wolf-owitz Doctrine

Historically Washington has been involved in dozens of overt and covert actions aimed at regime change in other countries. The postwar list of covert involvement alone features some two dozen overseas attempts at regime change in overseas. Ironically, the list begins and ends with Syria (See Figure 1).

 

Source: Creative Commons

Figure 1: Covert United States Involvement in Postwar Regime Change

Now a regime effort is targeting the White House, say the Trump supporters. That effort relies on the Wolfowitz Doctrine, a highly controversial policy blueprint developed amid the end of the Cold War by Undersecretary of Defense for Policy Paul Wolfowitz, the prophet of the Bush neoconservatives, and his deputy Scooter Libby, later an adviser to Vice President Cheney until his indictment for leaking the covert identity of a major CIA officer.

The Doctrine announced the US’s status as the world’s only remaining superpower and proclaimed its main objective to be retaining that status. Its first objective thus was “to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere that poses a threat on the order of that posed formerly by the Soviet Union”.

In December 1989, Soviet President Gorbachev and US President George H. W. Bush declared the Cold War over at the Malta Summit. In February 1990, then-Secretary of State James Baker suggested that, in exchange for cooperation on Germany, US could make “iron-clad guarantees” that NATO would not expand “one inch eastward”. Gorbachev acceded to Germany’s Western alignment on the condition that the US would limit NATO’s expansion. But behind the façade, Baker’s own top officials and Wolfowitz at the Pentagon began to push Eastern Europe in the US orbit inspiring “a call for 21st century American imperialism that no other nation can or should accept”, as Senator Edward M. Kennedy once put it.

The Wolfowitz Doctrine announced the US’s status as the world’s only remaining superpower and proclaimed its main objective to be retaining that status. Its first objective thus was “to prevent the re-emergence of a new rival, either on the territory of the former Soviet Union or elsewhere that poses a threat on the order of that posed formerly by the Soviet Union”.

It was the same Wolfowitz Doctrine that inspired the neoconservatives to initiate multiple wars in the Middle East following September 11, 2001; and that undermined the efforts of four post-Cold War presidents to reset relations with Russia. In each case, the “military-industrial complex” – about which President Eisenhower, a five-star general, had warned already in 1961 – played a critical but low-profile role behind the scenes. President Clinton did not oppose the military interests, as long as they supported US economic interests; Bush’s inner circle comprised Pentagon’s ultimate insiders; Obama talked against the military and security complex but became its cheerleader. In contrast, Trump fought efforts to kill the reset of Russia relations – until Mueller’s appointment.

The Mueller investigation does not indicate that the role of the US as the major global risk has now faded away. These investigations can lead anywhere, as President Clinton discovered after his affair with Monica Lewinsky. In the process, they can create great collateral damage, both at home and abroad.

The role of the US as a global risk is only about to begin.

Photo courtesy: Ethan Miller/Getty Images

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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 Institutes for International Studies (China) and the EU Centre (Singapore). For more, see http://www.differencegroup.net

Reference

1. http://www.worldfinancialreview.com/?p=5439

When Waqf meets Banks

By Ebi Junaidi

Global economy has been leaning toward innovations focussed in achieving sustainability. Ebi Junaidi promotes the age-old Waqf “movement” established by the Muslims. The Waqf system, with its philanthropic nature, does not only motivate sustainability but more importantly promises to enable financial institutions that goes beyond corporate social responsibility.

 

Currently there is a new trend in Islamic Economics and Finance that is “revitalising the original institution/instruments” once practiced in early and medieval Islam. One of the very authentic institution/instrument is waqf. Waqf (plural: awqaf) is perpetual charitable trust established by Muslim. Waqf has been in the centre of attention in the latest World Bank-IRTI IDB’s Global Report in Islamic Finance 2016 by putting it in many aspects of Islamic Finance potential development in an effort to create a shared prosperity and reaching the Sustainable Development Goals (SDG).

In a national and local level, the trend has succeeded creating the new regulations, emerging some new institutions, empowering existing ones, as well as enabling cooperation among institutions once perceived to be “in different part of world”. This “movement” has been so massive, to the extent that Nagaoka of Kyoto University considered it as the New Horizon 2.0. in Islamic Economics and Finance.1

The support that has come from the Islamic Scholar, government, regulator, existing waqf institution, academics and common people (who act as the waqif, the giver of waqf and the beneficiaries of waqf) has not come without justifiable reasons. The existing dormant assets of waqf are enormous, its possible collection in the future is highly potential, as well. At the same time, religious-wise, contribution to waqf is highly recommended as it is believed that the perpetual nature of the instrument equals to continuous never-ending benefit received by the giver surpassing his life time. Modern historian, such as Hodgson affirmed that waqf is the key for the success of the Muslim world economy.2

Modern historian, Hodgson (1974) affirmed that waqf is the key for the success of the Muslim world economy.

The question now is, how to actually realise this potential? What model to be initiate to enable an efficient waqf management? Effort has been done in modelling waqf management. Some has come up with independent waqf-based charity organisations, microfinance institutions, a joint cooperation between waqf institution and (Islamic) banks creating a banking model of corporate waqf, joint cooperation between waqf institution and insurance companies,a stand-alone corporate waqf, etc.

Looking at current share of Islamic finance, which is still dominated by Islamic banks, it is easy to conclude that integrating waqf with Islamic banking institution will be one of the option that might create more impactful result. Estimate from the Islamic Financial Services Board (IFSB 2015) mentioned that almost 79% of the $1.87 trillion Islamic Finance industry belongs to Islamic Bank. This article, thus, focusses on what waqf could offer to the banking sector and how banking corporate governance will benefit from it. Other word, it aims to integrate the waqf into the mainstream of (Islamic) financial industry.

As waqf is a philanthropy in nature, the usage of the funding should have socio-economics dimension. Therefore the idea of financial inclusion looks appeal as it is now been mainstreamed in both developed and developing countries through financial institution and banking. For Islamic banking, these ideas are even more relevant as Islamic financial system stems from the main goals of Islam, those are: eradication of poverty, promotion of socio-economic justice and equitable distribution of income.

“The history of awqaf is very rich with prominent achievements in serving the poor in particular and in enhancing the welfare in general.”

In the past Waqf has played a tremendous role both as commercial and public institutions, even before the existence of bank and financial institution.3,4 During The Ottoman empire, for example, it is depicted that throughout the entire life of a citizen, waqf functions in “making his/her life possible” to the extent that it can be depicted as follow: “Thanks to the prodigious development of waqf institutions, a person could be born in a house belonging to a waqf, sleep in a cradle of that waqf and fill up on its food, receive instructions through waqf-owned books, become a teacher in a waqf schools, draw a waqf-financed salary, and at his death be placed in a waqf provided coffin for burial in waqf cemetery. In short, it was possible to meet all one’s need through goods and services immobilised as waqf.”5

Indeed, “The history of awqaf is very rich with prominent achievements in serving the poor in particular and in enhancing the welfare in general.”6

Integrating Waqf and Bank

Waqf can be created by both mobile (e.g. transportation devices, cash, etc) and immobile assets (such as land, building, etc). While integrating immobile waqf with bank is difficult in nature of banking business, cash waqf can be integrated with less problem. Historically, cash waqf has been practiced since the first century of Islamic calendar or sixteen centuries ago.7 The form of its practice can be divided into two.

Firstly, the waqf corpus is directly allocated for free lending to the beneficiaries of waqf. This requires a strong portfolio management by the bank as it is required to reserve the waqf corpus. Thus, making sure that diversification yields a “manageable risk” is essential.

Secondly, Cash is invested (in fixed assets such as properties, government’s Islamic investment instrument such as sukuk, etc.) and the net return are allocated to the waqf beneficiaries. The practice of cash waqf during the Ottoman empire can be a source of inspiration for this. Cizakca elaborated that, during that time, the investment return was distributed for three purposes that are administration costs, charity and additional funds for the endowment to keep up with inflation.8

It is important to note that financing given to the borrowers were fully protected during the Ottoman empire. This is achieved by putting the borrowers’ houses as collateral in a manner that the ownership of the housed are transferred into the bank. While the borrowers still stay in the house, they need to pay the rent that become the source of the bank’s income. This indeed overcome the adverse selection and moral hazard problems. Ahmed suggested using different reserves such as: Takaful/insurance reserves, Profit equating reserves and Reserves/Economic capital.9 Also, allocation of low risk asset should be done in a way that expected loss of risky funding activities can be covered.

 

Benefits for the Bank

Integrating waqf fund in the liabilities side of banks bring benefits to the bank in several ways. Firstly, As the waqf-funds are philanthropic in nature, their financing is not expected to gain any return. At the same time this will also enable Islamic banks to cover the untapped market of religiously-motivated self-exclusion individuals. These are individuals commonly found in many Organisation of Islamic Cooperation (OIC) countries. The term “waqf” is not only strong in conveying the charitable feature of its nature but more than that create a strong message of the shariah-compliant of the institution as well as allowing the usage of the fund to be return-free. It is widely known that for some, any form of additional fee charged over borrowing as well as additional return over lending are still perceived to be “un-Islamic” for this prospective market segment.

Secondly, the moral hazard problems can be solved by implementing Islamic financing mode which link the transaction to real transactions which both reduce the possibility of diversions of funds for other purposes and create collateral which can be redeem in case of defaults.

Thirdly, Islamic bank practice has been criticised by many as leaving its very profound objective of eradicating poverty, promoting equitable distribution of income or inclusive prosperity. Many of this critics were based on the fact that the nature of contracts used are not idealised contracts suggested in the early of Islamic Finance movement namely mudharabah and musyarakah. Islamic banks argue that the asymmetric information problems embedded in the contracts are not able to be mitigated within the nature of banking system. Our experimental research that we held in Durham and Jakarta found that borrowing from social-funding encourage not only higher compliance rate to contracts but also initiating giving behaviour of the borrower. Thus, integrating social-financing within the existing commercial model allows not only to embed the social expectation over the institution but also reduce the information problems of the bank.

Lastly, under current operation, providing funds for microfinance from existing channelling offices will not cause any extra fixed costs such as building rent, as well as additional banks officers in running it. Indeed, “the waqf component of the funds will significantly reduce the financial cost and improve financial viability of the institution”.10

Integrating commercial, profit-oriented business financial institutions with charitable projects beyond corporate social responsibility could be our next trend.

Sources of waqf funds can be generated from establishing waqf certificate, giving options to current customer for direct-debit the waqf on monthly basis, any late-payment penalties and non-halal operation income. This also can be achieved by introducing new products that allow current and future customer to structure its very own purpose of waqf. The example of Mudaraba cash waqf deposit by Exim Bank of Bangladesh can be a model to be adopted. This product was marketed by offering the professional attribute that the bank has in managing both the fund investment and the waqf-giver proposed charitable projects.

Integrating commercial, profit-oriented business financial institutions with charitable projects beyond corporate social responsibility could be our next trend. This is not only to achieve a more inclusive prosperity, but also enable financial institutions to realise a social role that has been heavily criticised before.

Featured Image: Courtesy of The Times of India

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About the Author

Ebi Junaidi is School of Economics Lecturer at Universitas Indonesia. He is currently pursuing his PhD in Islamic Finance at Durham University Business School. His research area are Waqf, Trust, Venture Capital, Risk Attitude and Financial Decision. He is now the Chairman for Indonesia Islamic Economics Society-United Kingdom Representative. 

References

1. Nagaoka, S. (2014). Resuscitation of the Antique Economic System or Novel Sustainable System?: Revitalization of the Traditional Islamic Economic Institutions (Waqf and Zakat) in the Postmodern Era (Special Feature: Socio-Economic Role of Islamic Finance and its Potential in the Post-Capitalist Era). イスラーム世界研究, 7, 3-19.
2. Hodgson, M. G. (1974). The Venture of Islam: Conscience and History in a World Civilization (éd. 2). Chicago: University of Chicago Press.
3. Kuran, T. (2001). The Provision of Public Goods under Islamic Law:Origins, Impact, and Limitations of the Waqf Law and Society Review, 35(4), 841-898.
4. Yediyildiz, 1990:5, as cited in Kuran, 2001:815
5. Ahmed, Habib (2011). “Waqf-Based Microfinance: Realizing the Social Role of Islamic Finance” in Essential Readings in Contemporary Waqf Issues. Monzer Kahf & Siti Mashitoh Mahamood CERT, Kuala Lumpur.
6. Cizakca, M (2004). Incorporated cash waqfs and mudaraba, Islamic non-bank financial instrument from the past to the future,” MPRA Paper 25336, University Library of Munich, Germany.<
7. See Ahmed, 2014.
8. See Ahmed, 2007.

Executives on the Brink: The Taboo of Mental Health in the City of London

By Ben Laker

The World Health Organisation believes that mental health affects one in four people in their lifetime. This  article discusses how companies can help employees who work in demanding jobs take mental health well-being more seriously.

 

Long hours and unsupportive cultures in the City can lead to “unmanageable stress” writes Ben Laker. This is one conclusion from his latest research The Sales Persons Secret Code, which suggests more than one in five employees face stress, depression or anxiety. Why is this the case? After interviewing 1000 of the world’s most iconic salespeople from organisations including Adidas, Apple, Cisco, Deloitte, GSK, JP Morgan, Microsoft, Oracle, Steinway & Co. and Vodafone his research team began to understand why.

One executive interviewed was Justin Stone, a Vice President at JP Morgan who lead the UK Field Sales Executives in Asset Management. Justin was a highly successful operator, and yet on boxing day 2015, he decided to end his life. This is Justin’s story…

I have worked in Financial Sales for the past 20 years and this time last year I was suffering with a horrible illness which is called “depression”. The World Health Organisation believes that mental health affects one in four people in their lifetime which is quite staggering considering how little from my experience the subject is discussed at work in financial services in the City of London. The recent increased media coverage on anxiety, depression and suicide in men has given me the courage to share my story because I hope my few words can help someone avoid my dark, lonely and frightening experience.

So this time 12 months ago I knew something was very wrong as I felt like my head was being crushed, struggling to sleep and I was no longer looking forward to anything. My experience of the anxiety at the beginning of my illness is when you feel everything but your senses are amplified, then the depression is when the feelings are replaced with a new feeling of loss, desperate and alone. This had been gradually getting worse over approximately six months, but due to the stigma of mental health at my firm and in the industry trying to tell someone who would listen “I’m falling fast” was incredibly difficult. I was too scared to let my dirty dark secret out of the bag because it’s simply never discussed in a sales environment (It must just be me feeling like this, so keep quiet or look very weak). I told one or two closest colleagues that I didn’t feel great but I simply didn’t feel like I could share the full truth – I was embarrassed and also determined I would just get-over it, like I have done with many other things in my life.

The culture didn’t allow weakness so I kept silent and now my secret was even darker than ever before.

I even reached out to HR at one point at the end of the summer of 2015, but after delays in setting up a meeting I decided to cancel the meeting. I also attempted to meet with my MD who was my acting line manager at the time due to my manager leaving the business in the Autumn, but again trying to set up this meeting was slow and again I cancelled the meeting because I felt this isn’t the place to hang out my dirty washing. What is odd on reflection, is that during the months building up to my ultimate low point I pushed harder and harder at work to get results as it was my way of “pushing through” hoping it would pass like a bad cold – but it didn’t.

Eventually a few months later I did have a meeting with my acting line manager on my last day at work before the Christmas break (December is a very challenging month for depression as its the most social of months, but you feel like crying rather than wearing a party hat). This meeting was my annual appraisal and lets say that it didn’t go very well. I felt sick even thinking about this meeting beforehand because I was then very tired, anxious and desperate to tell someone I needed help but this meeting was not the place for such a display of weakness.

Four days later on boxing day at my lowest point my fuse eventually went BANG! I decided I was going to take my own life because I had calculated that I was no longer valuable to society and I couldn’t take the pain anymore. My plan that morning involved visiting some open water with a very heavy rucksack attached to me.

For whatever reason I wasn’t meant to leave the world that day, but it was a hugely traumatic event for my wife and I which has completely changed our outlook on life forever. I received professional medical treatment during the Christmas and New Year break which steadied the ship, but I still went back to work as scheduled a week later which now sounds crazy! When I returned to work in the New Year I told one of my closest colleagues that Christmas was “difficult” and I didn’t feel great, but again the culture didn’t allow weakness so I kept silent and now my secret was even darker than ever before.

With the support of my wife, one close friend and medical help, with huge determination I slowly started to feel an improvement in my mood in the coming months but I did have big blips of anxiety/depression (its not a nice straight line of recovery). On one occasion my new and much more supportive line manager commented that something seemed different with me and my performance at work and I explained that I did have a recent episode of anxiety, but no help was offered – just a “sorry” you have been feeling down was the response. So my initial views on showing any vulnerability in a sales role at a large American Bank were then reinforced even more. I was left with the choice of me accepting this or moving to an employer who might promote a better understanding of mental health by removing the stigma attached to it. With my employer’s unemotional help I chose the latter later that year.

How do I think companies can help employees who work in demanding financial services jobs take mental health well-being more seriously:

1. Make sure people are not isolated. In my case I had very little clear guidance on how I was performing “objectively” which created massive anxiety in what was a very scrutinised role in the company.

2. Test and check that your managers are conducting regular, documented and planned one to one meetings which discuss “clear objectives” and also have a permanent agenda point which is: how are you coping with the pressures of work” and “how can I help support you”.

3. Don’t keep making people feel afraid by creating a culture of uncertainty. For example telling people “one of you in this team “will not” be getting a bonus in the January”. Its a cocktail for disaster from my experience.

4. If you are a manager and feel uncomfortable in understanding how to support employees with mental health issues “ask for training” from your HR team – don’t put it off as it could save someone’s life. On reflection there were clear indications I had problems to the “trained eye” but people need to be aware of the signs of mental health.

5. HR and Senior Leaders – start creating dialogue on the subject with your people “now”! Allow informal conversations on the issue with specially trained staff. As the financial crisis clearly displayed in 2008, if you keep chasing a number without consideration of real people’s lives, nature always finds a way of re-balancing things and its normally quite dramatic.

If “you” think you are suffering with Mental Health issues remember that “you are not alone” and from my own experience you are stronger than you think! Don’t blame yourself and make sure you stand up proud and ask for help and know that getting better is a real option which can “start today”!

Only 40% of employees are “comfortable” speaking with their manager about their own mental health issues. When I asked people how often does your manager coach you towards your objectives the results were that 43% of the time meetings were “sporadic” with no clear action plan or agenda (meetings less frequent than every 12 weeks). When I asked how often does your manager “ask for feedback” the response was 46% of the time they only ask at the annual appraisals or never ask at all.

If “you” think you are suffering with Mental Health issues remember that “you are not alone” and from my own experience you are stronger than you think!

One year later I’m humble and grateful to be in a much better state of mind and now in the “light” which is a wonderful thing to “deeply” appreciate again. I hold no bad feelings towards anyone and just hope that someone “acts” upon my feedback.  I strongly believe we can attract good things in life by looking for them and believing anything is possible.

This article includes insights from The Sales Persons Secret Code (LID, 2017), a global study into how salespeople behave and driven, which reveals the secret code behind consistent and high-level success. Based on 20,000 hours of research, this book is for any sales professional, or indeed anyone involved in the sales process of their company, who wants to learn the secrets of successful selling. www.salespersons-secret-code.com

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About the Author

Dr. Ben Laker is a Partner at Transform Performance International who Co-Founded The Centre of High Performance, a collaboration between Oxford and Kingston University, London Business School and Duke CE Senior Faculty. He has worked with Apple, NASA, and the New Zealand All-Blacks among others, and has published three Harvard Business Review articles on organisational improvement. His research is described as “Phenomenal” by BBC Newsnight and “Influential” by Thinkers50.

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