Blue Prism and the rise of robotic process automation

One company that caught my attention recently is Blue Prism (LON: PRSM). Listed on the Alternative Investment Market (AIM), it creates robotic process automation (RPA) software. This essentially automates manual data entry, which is both low return and high risk to a firm. I invested in the company (on a virtual portfolio) at 877p a share, and since then it’s returned around 80%, with (in my opinion, at least) further potential to grow. Much of this return has come over the past two days, where the share price has gone up around 30% off the back of impressive FY2019 results. Major highlights include 83% higher revenue, allaying concerns that the business could not scale significantly enough to justify its valuation.

RPA is of course an industry that is in vogue, however beyond the media hype there is a significant reason why the sector, including companies such as UiPath and Automation Anywhere, is so highly touted. The market for RPA is set to reach $3.11bn by 2025, at a CAGR of 31.1%. Businesses from small shops to the largest multinationals could see significant efficiency gains from implementing such technology, and moreso save on the salaries of individuals employed for such a function. It fills a gaping lacuna in the centre of firms’ back office functions, doing so in a way that is both cost effective and that minimises errors.

It comes as no surprise, then, that PRSM’s revenues would see an uptick. However, in addition to this, I find a number of green flags in its most recent report. In addition to customers rising by more than two thirds to 1,677, its customer retention rate sat at 96%. This implies to me that a large proportion of revenue is “sticky”, and the products offered are clearly satisfying clients. Hence the fact that losses more than trebled to £80.7m, from £26m the previous financial year, is not a significant factor given the investment undertaken through the year.

Initially, I invested in Blue Prism as it traded on around 10 times the year’s expected revenue. Compared to its peers UiPath and Automation Anywhere in the same industry (based on estimates as these companies are private and venture-capital backed), their sales multiples are 25 to 30-times, a massive premium to Blue Prism. Analysts at Shore Capital, having done similar calculations, came to an even bolder conclusion: ‘Taking the average of the recent private equity valuations for UiPath and Automation Anywhere implies a short-term fair value for Blue Prism of $2.4bn (or £27 per share).” I see no reason for this to have changed in light of the recent rise in share price (although am eager to hear opinions to the contrary!)

Given that the business assuages a fundamental need across industries, the company should definitely continue to increase revenues (and, eventually, profits), with contained variation due to the business cycle. If I am right (hopefully!) then over a number of years revenue will continue to grow at a fast clip as the company matures and ventures into profitability.

An interesting question, however, is the impact of RPA on the economy in general. There is no doubt in my mind that the technology has the potential to make redundant the most vulnerable in society. With the continuing trend of automation this threat was always going to get larger as we move into the 20s. Hence, for policymakers, a challenge is faced on a level not really seen since the Industrial Revolution. To me, the solution lies in state-funded re-training programs to make the labour market more flexible. In addition, a universal basic income as proposed by Andrew Yang in the Democratic primaries makes a great deal of sense to me as automation progresses, because primarily it gives workers the flexibility to retrain and prepare themselves for the long-term.

Overall, then, to me Blue Prism is a solid investment in a truly exciting growth company. Robotic process automation is a great example of creative destruction, however in a broader sense policymakers need to consider certain impacts of this technology. Questioning themselves on how to avoid a sustained rise in the unemployment rate may lead to some off-the-beaten-track initiatives, which have the potential to safeguard the most vulnerable while ensuring firms continue to increase efficiency and the economy continues to grow.

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This article does not constitute financial advice in any way, shape or form.

I currently hold shares in Blue Prism (LON: PRSM).

For the Fed, where’s the worry?

Featured Image Credits: Dan Smith and “Dontworry” on Wikimedia Commons.

The past month or so, US equities have been zealously barreling towards past highs, buoyed by the most exceptional and exquisite of all financial drugs: forward guidance.

Mostly, however, the markets’ high originated far abroad in Europe; Portugal, to be precise. Mario Draghi’s dovish tone convinced investors of the ECB’s ability to use both the rates and quantitative easing mechanism to bolster growth. Given in the past decade or so that global developed-market rates tend to move synchronously with each other, the march upward of US equities wasn’t exactly surprising either.

Nothing in this saga after Draghi’s recent speech has come as all too unexpected, including Jerome Powell’s warnings on the global economic outlook. The proverbial sea of central bank governors is teeming with doves, eager to cut interest rates as soon as the slightest threat of a slowdown or (God forbid!) a recession rears its ugly head. It seems to make sense; who wants the music to stop?

Until you realise what the current US federal funds rate is.

2.5%.

One question springs up instantly from this: where’s the wiggle room? If things do go topsy turvy and then some, what can Powell do? You could say he could use quantitative easing. When you’re one of the biggest global players, though, and your best maneuver is a policy that’s efficacy is doubtful at best, you might indeed find yourself asking how you put yourself in that position.

Is it really worth exhausting your best shot on somewhat reduced growth from a large boom in the economic cycle? Yes, there are the fears of a trade war with China. Yes, concerns regarding Iran persist. And yes, we have no idea what Trump’s fellifluous self could conjure up at any moment. There are a lot of tailwind risks to the US and global economy right now, but my take is they don’t necessitate cutting interest rates by the expected 0.5%. Especially not when in the first quarter of 2019, the US grew at a more than healthy clip of 3.1% annualised.

We’re about a decade on from the Great Recession, a time where an investment banking behemoth collapsed, credit froze over and consumer confidence sunk faster than Rory Stewart’s hope of being Prime Minister. That (or at least something close to that) is when you suck the last drops of juice from the interest rate mechanism. In my opinion, a time where economic stimulus in the form of, for example, cuts in corporation tax have (perhaps unsustainably) bolstered growth is not a good time.

Recent dovishness has led the US two-year yield to drop to as low as 1.82%, and cuts in interest rate could potentially inflate further already huge equity valuations. A dollar of an American company’s earnings has gone from setting you back around $15 to setting you back $22 or $31, depending on the data which you use. When Netflix shares dropped significantly on the back of decreased US subscribers, it may have indeed been a sign that valuations are becoming increasingly optimistic (and perhaps superfluous). Not to preempt any sort of bubbles which may be occurring in equity and broader asset markets, but signs such as this don’t really point towards much else. As any five-year-old child will tell you, inflate too much and the bubble goes “pop!”. And when the bubble affects millions of people’s livelihoods and could pose a huge threat to pensions everywhere, you really don’t want to inflate too much.

While Powell brings about legitimate concerns regarding slowing global trade and inflation, I question the need for any substantive change in policy at the present moment. Growth was frequently demeaned as laggard in the years following the 2008 recession, and it seems when economic growth finally picked up meaningfully, he thought it would continue for far longer than it did. Moreso, forward guidance can backfire, in signalling to investors that there’s some sort of grave boogeyman ready to jolt the US economy any time soon. In fact, this is simply not the case. Powell should save his best for when we’re far nearer to the trough of an economic cycle, when growth is closer to 0% than 3%, and the US labour market isn’t adding nearly as many as 224,000 jobs in June. Otherwise, he might find himself out of ammo, just when he needs it the most.

 

Why the Dow’s rise isn’t a sign of President Trump’s great policy for me

The featured photo is licensed under the Creative Commons Attribution-Share Alike 2.0 International license, and was taken by Gage Skidmore.

Characteristically, President Trump has recently been all about showing off how well he’s performed in his first year as one of the most powerful people on Earth. While for myself and some others his first year has been unsuccessful (to put it mildly), Trump is dead set on proving us naysayers wrong largely by using the sustained rise in the Dow Jones Industrial Average (an index showing how shares in 30 of the US’ largest companies have traded over periods of time) during his presidency. While at first glance well-performing large companies may seem to indicate that the economy as a whole is performing well (which it is currently), in this article I will make and support two propositions: firstly that the current US economic boom is unsustainable (assuming the Dow is a good measure of current economic performance), and secondly that the Dow, either way, isn’t a very good reflection of how the economy is doing.

Looking more in depth at our first strand of argument, while business spending increases have allowed the US economy greater than 3% economic growth over the past two quarters, the Trumpian tax cuts for corporations and the wealthy run the risk of actually increasing the American budget deficit (exactly the opposite of what many Republican deficit hawks campaigned for). Politically, this becomes very difficult for the Republicans to justify, but more than that, the fact that that according to the Tax Policy Centre Trump’s plan actually would hurt the lower 50% of income earners represents a decrease in future consumption and thus a decrease in US short run (and long run if firms then stop investing) economic growth arising from this set of policies. Essentially, then, the point I’m trying to make here is that hurting the little guy may boost growth in the short term, but in the long term when real after-tax incomes and consumption fall, the economy might not be doing so great. This is because the rich consume less than the poor for an equal addition to income, so even though the rich get richer, it might not actually boost consumption and growth all that much. So Trump can be happy with the buoyant Dow and economy for now, but he should know it may not last long.

Taking the issue from another perspective weakens Trump’s Dow-focused point further. If we look at who the Dow Jones’ rise actually helps, we see that it serves to increase income inequality further. A NYU report in 2013 showed that the richest 20% of Americans owned 92% of stocks, indicating that the benefits from the Dow’s rise are not equally distributed. Even if we look at the Dow’s rise in isolation as a sign that the economy is doing well, we still see numerous faults with the theory. By seeing what the Dow actually is, and how it may have been affected by recent news, we can see that it may have been buoyed by Trump’s plans to cut business taxes and not actually an improving economy. Within this plan, Trump has also presented changes to the individual tax code that disproportionately benefit the wealthy, but although the American middle and lower economic classes may not actually benefit from his plans, the Dow is rising. This one example shows the divorce that may exist between the performance of large companies and the economy in general; income inequality worsens the economy through decreasing growth, but tax cuts boost large corporations’ after-tax profits. Hence, through this example we can see that the Dow Jones may not be able to accurately gauge US economic performance, putting another dent in the logic behind some of Trump’s recent tweets.

To summarise and conclude, I have established in this piece why I think that President Trump using the Dow Jones Industrial Average to cement his claim to doing well in his new job is flawed. This is both for reasons relating to economic unsustainability, and also because the Dow doesn’t actually tell us how the economy performs all that well. On another, slightly related note, this sort of issue is why I think that the backlash against experts these days is so unhelpful. The things I’m saying here would be much more credible if an actual expert was saying it, but without experts there are no credible voices to inform people that their President may not actually be doing the wonders for the economy that they think he is. I sincerely hope that in the future we can arrive in a world where experts are given the respect they deserve, and are able to call out any figure for saying something potentially wrong without being disregarded because they can’t predict a world that is fundamentally unpredictable. Without it, well, we’ll have lost one crucial, perhaps vital, check on people in positions of great power.

Microfinance and its challenges

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Photo Credits: Jaimoen87 on WikiCommons License: Creative Commons Attribution-Share Alike 3.0 Unported

Microfinance in recent years has been touted as one of the most potentially effective poverty alleviation programs in the developing world. From the humid paddy fields of Bangladesh to the cluttered squalor of rural India, the bottom-up approach to economic development has indeed proved both efficient and successful in combating the wide variety of issues faced by those living in absolute poverty. Essentially, what this global game-changer is is an access path to financial services for those in poverty who lack many of the things that make people (or businesses) successful debtors (such as a verifiable credit history). This could help them lift themselves out of the poverty trap, for example by providing the funds to help them start start successful businesses. When Muhammad Yunus came up with the idea during a 1970s Bangladeshi famine, however, he had, by his own admission, never thought that the greed of man could turn his brainchild into just another failed poverty alleviation plan. Of course, in addition to this, there’s a variety of reasons why the programme doesn’t work perfectly, the most important of which I’ll go through in this article. Despite this though, it has to be said that despite its flaws, microfinance has “changed the game”, so to speak, and is by far one of the greatest ideas, in my opinion, in recent economic thought. With the right economic agents involved, it could still be a major warrior in the fight against absolute poverty in the developing world, however, it will need to surmount some obstacles first.

To provide some context, let’s take the perspective of Afghanistan, one of the poorest countries in the world. In Bamiyan, about 240 km northwest of the Afghan capital, Kabul, a field study microcredit initiative was put in place, whereby low-interest small-scale loans were provided to impoverished Afghans in the hope that they would spend the money in such a way that they were pulled out of the clutches of the poverty trap. Alas, even though a strong potato crop within the area would provide a promising source of growth for any business set up using microcredit funds, the funds were disappointingly used partly by the Afghans to finance consumption. While you might think of this as simply a strange Afghanism, such phenomena have been witnessed all across the developing world, and when one thinks about it, it makes quite a bit of sense. When you’re in that type of situation with barely enough funds to ensure your next meal, it’s natural that any injection  of cash would be used to ensure that you’re able to fund consumption of all your necessities. In addition to this, not everyone is an entrepreneur; not everyone possesses the set of skills to turn a theoretical business plan into a workable business model and not everyone is willing to take the risks that an entrepreneur takes. Hence, the notion of microcredit, and microfinance in general that everyone can become an entrepreneur is slightly flawed and something which has a large negative impact on the potential effectiveness of microfinance to pull people out of the poverty trap by facilitating entrepreneurship.

While the microfinance initiative aforementioned in Afghanistan was only a pilot study, another significant drawback of microfinance is its potential inability to secure the low interest rate loans that are so critical to its success. This is because many of the areas which microfinance targets are rural and therefore hard to reach. Actually reaching these areas both to administer loans and enforce their repayment would take a large investment in both physical and human capital, something which raises the cost of making loans and therefore (assuming microfinance firms are profit minded as well as socially conscious) increases the interest rate which these firms have to charge in order to generate their target return on investment. The loan sharks who charge exorbitant interest rates to impoverished rural dwellers suddenly now look not too different from the microfinance institutions themselves, with the two now differing in intention only (and perhaps a few percentage points on the sky-high interest rates offered). Although the economies of scale generated through lending to a group of people at once go some way towards mitigating this, even slightly lower interest rates than aforementioned would be hard to repay for individuals who often have irregular income flows and don’t earn all that much in the first place.

Even though the previous two points are entirely valid when looking at the viability of microfinance to meet its end objectives, the idea definitely still has some merit. Alas, when implemented in real life, it fell flat due to economic agents (namely firms) acting in their own self-interest. Of course, the firms I’m talking about are the large banks that to a large extent caused and amplified the huge negative impact of the 2008 financial crisis on the global economy. Banks have taken over the microfinance scene in recent years and charge rates of 100 percent or more to impoverished borrowers who obviously don’t have any chance of repaying loans at these huge interest rates. The idea that the majority of institutions offering microfinance facilities could be both socially and profit driven has therefore been shown to be untrue in reality, as these large banks seem to only desire profit above the social and economic betterment of their poor debtors. While regulation in disadvantaged areas remains tenuous at best and extremely difficult to implement, profit-driven institutions take advantage and reap massive profits at the expense of clients. Therefore, they represent a massive blockage to the road which microfinance could have taken to drastically reduce global poverty rates. It is hence my opinion that only once banks’ motives change, or banks are purged from the microfinance system altogether can microfinance continue to transform lives at the breakneck pace it once did.

This’ll be difficult, but it’s worth it – ideas like this one don’t come about all too often.

Why, for me, the euro has and will continue to fail

Photo Credits: Ottmar Hörl License: CC BY-SA 3.0

Whatever your views on the euro, it’s clear to see that it isn’t in the best of places right now.

Really, it’s a culmination of a number of things that have led to its current malaise, starting from when the concept was first introduced, all the way back in 1993. Six long years and stern British and Danish opposition followed, but on New Year’s Day in 1999, the single currency went from a theoretical concept to a practical reality. It was even used by every country in the then EU apart from the UK and Denmark, who still now have a fixed exchange rate with it. Under the control of the Frankfurt-based European Central Bank, the euro has grown to become the world’s second largest reserve currency, and ECB decisions affect directly 340 million people across the globe. Given all this, the fortunes of the euro take on that much greater global significance worldwide, which is why it’s crucial that it finds its way out of the doldrums or ceases to exist altogether. Draghi and his team have tried to find a way to accomplish the former, however their measures haven’t gone nearly far enough to soothe the economic pain of oh so many. For me, this is because the euro in its current state is fundamentally unworkable; it cannot exist without imposing massive economic damage to a large proportion of its users. Here’s why.

Firstly, what the euro is trying to do is apply uniform monetary policy to a number of different states with different economies and different concerns that need to be assuaged. What this, of course, means, is that some policies will definitely not fit the needs of what some countries desire. As the former Bank of England governor Mervyn King claimed in his first book The End of Alchemy, the discontent caused by some nations having to bail out others (such as Greece recently) for what could be plain fiscal irresponsibility “may become too great to remain consistent with political stability”. I would argue strongly for this, extending on King’s point that this monetary union creates conflict between a “centralised elite” on one side and the “forces of democracy” on the other. Furthermore, I am of the belief that to stop King’s suggested wave of discontent, the only long-term sustainable option available to European policymakers is to bring together these countries in a fiscal union, and thus let the centralised elite coordinate the synergy of fiscal and monetary policy to what they believe to be the best interests of all parties involved. Obviously, there exists a problem with this: the backlash of the masses against what they perceive to be a moneyed elite. We’ve seen this with the famous Brexit and Trump’s election, so even this option presents substantial political risk that could, in my opinion, bring down this monetary union altogether. As we’ve seen here, there really isn’t a path which the EU can go down with this that doesn’t lead to some sort of political backlash or economic hardship: both of which could prove treacherous for the European establishment.

This point also becomes important when you have exogenous shocks affecting economies that cannot use their monetary policy tools to combat them. For example, the European Central Bank has set an interest rate of -0.40% on reserves, which in theory, should stimulate investment and economic growth within member economies. Setting aside the fact that the interest rate channel has proved relatively ineffectual in Europe till date, if it does indeed stimulate growth in a Eurozone economy, what happens if this economy overheats? The natural response would be to encourage saving by raising interest rates, however who now has the power to do this? That’s right: the European Central Bank. This also happens to be an institution who has to take into account the needs of the other tens of countries that happen to be at its monetary mercy, and when you have such an arrangement, be sure that the ECB’s decisions won’t always be what you need. This just makes a potentially negative situation that affects Europe worse, not just for the directly affected country, but for the Europe as a whole. This is because worsening economic conditions within a country could reduce consumer spending and aggregate demand for goods and services within that country and hence worsen export markets for other European countries. The excessive interconnectedness shown here acts as an amplifier that could shave down both European growth and that of the wider world.

However, it’s still possible that through some economic masterstroke, European policies largely benefit a majority of EU states. That’s one route of salvation for the EU, right? Unfortunately, as so occurs when one contrasts theory with reality, it doesn’t seem like this is anywhere close to a reality. Independent research has time and again proven that European austerity breaks the backs of Eurozone countries and further dampens private spending and investment. It seems that senior European policymakers do not see eye-to-eye with many academic experts (such as the famous Stiglitz) on the issue, and hence European growth continues to stagnate. While this is due in part to demographic decline, the lack of jobs in these advanced economies have led to youth unemployment being more than 50% in countries like Spain. When you combine European incompetence with the fundamental unworkability of uniform mass monetary policy, what you get is a concoction that proves so toxic for European economies.

That’s why, for me, the euro can’t work.

 

Price discrimination: the bane of consumers everywhere

Photo by James Petts. This file is licensed under the Creative Commons Attribution-Share Alike 2.0 Generic license.

If you’ve been to two different branches of the same retailer, one in the heart of London and one in a less central area, chances are you’ve been a victim of price discrimination. The “discrimination” part of this phrase is probably ringing a few alarm bells with you already, but in the end, price discrimination is just another (relatively harmless) way of firms’ seeking to maximise profits, as basic economic theory states that they do. But what is price discrimination? Essentially, what this is is when firms charge different prices to different buyers for the same good or service. This manifests itself in many forms in our daily lives, from our taking advantage of age discounts to the annoyance we feel when paying large amounts for coffee in Leicester Square. Whilst often denounced by many as simply a discrete form of consumer exploitation, I see it as an ingenious tactic employed by firms to yet again slip under the watchful eye of the average buyer; however, the reason you don’t see price discrimination employed in the real world as often as you thought it might have been is because there are a certain set of criteria that need to be fulfilled in order for price discrimination to take place, the first of which relates to price elasticity of demand.

Intuitively, one of the only reasons that price discrimination works in the first place is because different groups of people will think differently about changing their quantity demanded in response to the change in price of a good or service. Hence, a prerequisite for price discrimination to be viable is that the price elasticity of demand (the responsiveness of demand after a change in a product’s own price) by different consumer groups is different. If the price elasticity of demand for a product were to be similar for two different consumer groups, they would both, ceteris paribus, reduce their quantity demanded by around the same amount for an equivalent increase in price, therefore rendering this pricing strategy ineffective. The firm will also need substantial information about consumer preferences to be able to confidently change the prices for the same good for different consumers, which may prove difficult for a number of firms that are strapped for cash and cannot easily carry out the essential market research. The firm must also not be operating within a perfectly competitive market (otherwise any attempt at price discrimination would simply result in the firm’s getting priced out of the market), and with this, there cannot be a great deal of market seepage (whereby consumers buy the good/service where there is a high price elasticity of demand and sell where demand is comparatively inelastic).

As with many business strategies, price discrimination can take many different forms, with their severity denoted by the “degree” suffix, with first being most severe, and third being the least severe. First degree discrimination is when a particular firm produces products for the same marginal cost, but then sells each product at a different price, depending on the consumer. For example, if I were to want to buy a packet of crisps at a Tesco in Harrow, I’d find that the price of a packet would be quite comparatively cheap. Why? Because I’m surrounded by other retailers that could potentially take my money as opposed to Tesco, and more importantly, I, like many others buying a packet of crisps in Harrow, am likely not in any sort of hurry to buy one. If I’m in bustling central London, however, and am running late to meet my friends, then I’d want to buy a packet of crisps as quickly as I possibly can. Here’s where firms can exploit you. Because you’re less willing to look for alternatives in central London than Harrow, firms can charge you a higher price here, due to the price elasticity of demand for this consumer group being lower than it would be in Harrow. This reduces consumer surplus for the consumers in central London, while giving firms higher revenues. Clever, isn’t it?

Let’s now move on to second-degree price discrimination. Basically, this is when the average cost per item decreases when you buy the items in bulk. This can be used by companies who are not able to pick apart consumer groups as well as the ones carrying out first-degree price discrimination, for example. When companies want to shift excess supply due to changing consumer preferences, for example, they could potentially use this form of price discrimination as although profit margins will be hit, they get the double benefit of at least making some profit on the items and also shifting the excess stock that they needed to shift. This is quite frequently also employed in major retailers such as Tesco and Asda and also at restaurants such as McDonalds and Burger King in order to shift stock of items that just aren’t selling very well any more. Second-degree price discrimination is not exclusively limited to these scenarios, however, and could be used in a wide variety of other contexts, although it has to be said that this form of discrimination is probably quite ineffective in general when compared with the former.

Finally, we move on to third degree price discrimination, which is perhaps the most widely employed in everyday life. Unlike the previous version of price discrimination, this relies heavily on differentiation between different consumer groups. Normally, what happens is that a firm (for example a company offering trips to the cinema) splits ticket prices (broadly) into adults, seniors and children, due to the latter two having a higher price elasticity of demand than adults, for whom the cost of a cinema fare is a comparatively small proportion of their income. The firm attempt this only if if they feel that P1Q1 + P2Q2 + P3Q3 > P0Q0, where P1 and Q1 are the price and quantity demanded for adult tickets respectively, P2 and Q2 are the price and quantity demanded for senior tickets respectively, P3 and Q3 are the price and quantity demanded for child tickets respectively, and P0 and Q0 are the price and quantity demanded had there been a uniform ticket price for all ages of people. Given that first-degree price discrimination occurs quite rarely, and second degree price discrimination is comparatively ineffective, this form of price discrimination is the most lucrative for a potential firm to engage in.

So now we come to the question: is price discrimination ethical? Well, it depends. The profit motive is always going to encourage firms to try to maximise their revenues while minimising their potential costs, and this obviously means that some consumers will lose out; however, the fact remains that price discrimination strategies are employed by firms only because they work, plain and simple; they generate more profit than they would have done without these price discrimination strategies, meaning that the targeted consumers are, by and large, still willing to buy goods for which the strategies are employed, even if they don’t know exactly what firms are doing behind the scenes. Simply, this is just another development in the cat-and-mouse game that is firms’ trying to maximise profits and consumers trying to maximise potential utility, and the fact that firms are finding this worthwhile to do shows that we as a society don’t really have an objection to this happening, even when it’s happening right in front of our eyes (as shown in the third degree price discrimination example above). As firms continue to become more and more savvy to make profits, it’s down to consumers to ensure they’re not being continually one-upped by price discrimination.

So consumers, the ball is in your court.

Could globalisation bring developing countries and their financial systems to their knees?

PHOTO CREDITS: Dieu-Donné GameliPhoto licensed under the Creative Commons Attribution-Share Alike 3.0 Unported license.

If one was to rank recent economic issues by the division and depth of debate they cause, globalisation would surely be up there at the top. Whilst the Republican presidential nominee Donald Trump, amongst others, has spearheaded efforts to thwart the rise of globalisation, liberals around the world argue that the increasing interconnectedness and interdependence of our world today can only be a good thing. However, the actual answer to the question of the impacts of globalisation is not so clear-cut; if any answer exists at all, it would lie firmly in the grey area. But what is globalisation? In essence, globalisation is the process by which economies around the world become more closely and deeply integrated with one another. In a way, it can be thought of as a border-killer, bringing countries that are physically thousands of miles apart firmly together,. Is this desirable, though? A point frequently made is that the effects of the 2008 financial crisis in developing markets were magnified to a great degree by the increased integration between the financial systems of different countries, and without this, the effects would have been far more localised to developed markets. Is this true? Perhaps, although it has to be said that those who use this point as a catch-all of sorts are perhaps not thinking broadly enough. In this article, we can begin by analysing the effect globalisation has on the financial system of developing economies in the context of regulation.

One way in which globalisation has impacted the global economy is an increase in the velocity of international capital flows. While this can entail an increase in money put in to financial markets in developing countries, what it can also do is facilitate an increase in capital flows out of these developing markets, resulting in an increase in uncertainty and volatility in their financial markets. A direct impact of this is that a shock in one country that, at first glance, wouldn’t affect the developing market too much, could result in irrational behaviour and herd mentality driving money out of developing capital markets in bucketloads. The control that these countries so desperately need over their own destiny, is as a result forfeited to a degree due to globalised economic activity; a small shock in the United States could result in large percentage swings in some African markets, for example. This drives away the certainty needed for a long-term sustainable financial system to develop; in this way, it could be argued that the increase in the velocity of cross-country cash flows could actually serve to the detriment of developing economies.

However, a positive impact of the aforementioned variability in foreign direct investment (FDI) is also that the pressure of foreign buyers acts as an economic incentive for the governments of developing countries to solidify their financial system in order to attract and keep foreign capital. The threat of financial contagion should a global shock take place would, in theory, incentivise key individuals within developing countries to make sure that their underlying fundamentals are solid enough to withstand a global depression without too much long-term damage. If key markets are solidified soon enough, a virtuous cycle of investment and further growth could potentially be triggered, blurring the lines between these developing countries and their developed counterparts. Whilst the element of uncertainty and doubt will still be present, if the country is foresighted enough to secure their future prospects, the risk from this should be offset by the potential influx of foreign direct investment that could occur. Even if it does not work out, the meritocratic aspect of this scenario is still something to be commended and looked upon as a positive; countries will gain foreign direct investment if they see it as a rational economic decision to strengthen their financial system.

With the increase in available capital for corporations operating within developing countries to use, it is also important for regulation to be put in place such that the prevalence of moral hazard with regards to the risk/reward ratios of banks reduces. In a developing country, with arguably less financial infrastructure present than a developed one, it is somewhat easier to sign legislation that ensures that banks cannot operate in an unreasonably risky manner. As shown by the political lobbying of banks in the UK, USA and elsewhere, once a massive financial system has been built up, it is extremely hard to get major financial institutions to change their ways. Hence, if government puts its foot down quickly enough, it is possible that the developing countries of today could potentially have less of a glasshouse of a financial system than even the developed countries of today possess. The question of this article initially was “Could globalisation bring developing countries to their knees?”, and the answer to that is a resounding yes. Replace the “could” with a “will”, and you have an answer which depends on a multitude of factors, including primarily the quality of the country’s governance. If government manages itself correctly, globalisation could bring about rapid economic development and the bolstering of financial systems across the developing world. If not? Well then, we’ve all got ample reason to worry.

 

Shinzo Abe’s “Abenomics” has failed. But why?

Who would have thought that it would be in the Land of the Rising Sun that three arrows could miss their target so wildly?

Of course, I’m talking about the Prime Minister of Japan, Shinzo Abe’s, three arrows of fiscal stimulus, monetary easing and structural reform that were intended to claw Japan out of a dangerous cycle of recession and deflation. At the time, it seemed like the perfect policy, with fiscal stimulus intended to increase demand for goods and services and monetary easing by the Bank of Japan intended to generate the 2% inflation that Japan has so longed for, increasing aggregate demand and therefore triggering a virtuous cycle of economic growth. In addition to this, the structural reform intended to increase the competitiveness of Japanese industry with regards to the world as a whole should have ideally bolstered and healed Japanese companies’ future prospects, after years of sluggishness. Yet as so often turns out, while Abe’s plans seemed to be worth their weight in gold on paper, they have failed to revitalise Japan and return it to the supreme economic status which it once had. Amongst a whole host of other indicators, Japan’s inflation rate fell to -0.4% in July 2016, lowering the proverbial coffin into the ground of another seemingly great set of economic policies. But why has it failed when it looked so good on paper? How has Abe fallen flat yet again? Could external factors be preventing the three arrows from working their magic?

Well, when you take into account Japan’s rapidly changing demographic, the answer to the latter question would be resoundingly in the affirmative. Since 2010, Japan’s population growth has been negative and birth rates have steadily declined while life expectancy continues to rise. On the health side of things, this is a massive breakthrough for the country, but economically, what it means is that Japan now is faced with the problem of a gradually dwindling labour force. Hence, although Abe is injecting billions upon billions of fiscal stimulus into the economy, the decline in labour force has resulted in a decrease in consumer demand in spite of his policies, due to less people having the money in their pockets to actually spend in the first place. In this regard, what Abe could further focus on is spearhead a further push for immigration to bolster aggregate demand and consumer spending, in turn boosting growth before the arduous and potentially unfruitful wait for Japanese societal norms regarding children to change (he has made great strides towards this with his Abenomics 2.0 programme). Perhaps in the case of Japan, this policy would be far more beneficial to her than any fiscal package that Abe could come up with; it would certainly at least be worth a try.

One side effect of recent Japanese economic policy (in particular the monetary policy of setting negative interest rates) has also been a devaluation of the Japanese yen, allowing Japanese firms to become complacent in the face of high profits. Due to the weak yen increasing Japanese firms’ revenues from abroad, the result is a lack of incentives for these firms to innovate and increase productivity. Due to this, the economy’s productive capacity has stagnated, hindering its potential for long run economic growth. Recent reports indicate that distinguished figures such as former chairman of the Federal Reserve, Ben Bernanke, declaring that “monetary policy is reaching its limits” in many developed countries. Due to this, it is feasible that the cut in interest rates to negative levels, while effective on paper, has not worked so well in reality because it disincentives innovation within Japan, and without innovation, it is extremely difficult for a capitalist framework to thrive and prosper. Therefore, perhaps an appreciation of the yen against the dollar would not be as disastrous as many pundits claim, and instead, may indeed provide a route by which Japanese firms can finally move forward.

Social attitudes in Japan currently are also not exactly conducive to economic progress. Due to many of the current Japanese young generation having known nothing but economic stagnation, deflation (or very low inflation), and failed government policy, these young people, traditionally some of the big spenders in a modern economy, have failed to provide the Japanese machine with a much needed boost. It has gotten so bad that one individual said to the Financial Times that she feels as if she is “more conservative than [her] grandmother.”, such is the backwards direction which Japan has gone in with regards to spending. The solution to this is much less science than it is alchemy, and the only way which Japan can really try and fix this problem is a bottom-up approach to incentivise spending amongst young people. In my opinion, this could be achieved by portraying spending on goods and services as some sort of natural duty, invoking patriotic sentiment and therefore triggering spending to lurch from its slumber. However, Japan’s problems are both deep and wide ranging, and will take years, or perhaps even decades of consistently successful government policy to solve. While Abenomics is well-intentioned, it simply has and will not work in practice, and perhaps what Abe and his fellow policymakers need to do is to think a little bit outside of the box.

How will Obama be remembered?

This image is licensed under the Creative Commons Attribution 2.0 Generic license – The photographer is Will White.

On January 20, 2009, the United States of America finally turned its back on George Bush and appointed Barack Hussein Obama as their 44th President. At the time, it was looked at as a landmark occasion; the first African-American President in the history of the most powerful country in the world. Many now say that this victory for equality has been overshadowed by backwards, regressive policy that has gone against the very agenda of progressivism that Obama stood for election for. However, others instead espouse the idea that Obama has laid the proverbial stepping stones for future progressives to unite America through economic policy. Regardless of whichever side you take, it’s undoubtable that the Obama administration has divided opinion like almost no other in contemporary politics and economics. Obama’s tax cuts for the wealthiest in society are something which have been campaigned for by many in the past, but some on the left side of the spectrum still regard him as far too business-friendly to be in any way compatible with the vision of equality for all Americans. In this regard, many of his policies have not necessarily been the most popular, yet it is still important to take into account the economic climate which the 55-year-old inherited from his Republican predecessor; the images of widespread depression and angst certainly add context to the debate, context that is needed when analysing any presidency from an economic perspective.

Today, in a global economic environment of stagnation and extraordinarily low interest rates, many are justified in claiming that we have never really escaped the proverbial wreckage of the Great Depression. Yet more economists than not claim that Obama’s Keynesian fiscal stimulus package to the tune of $787 billion, largely in the form of tax cuts to families, was instrumental in making sure that America did not stuck in a period of prolonged economic stagnation, amidst an environment of lesser trust in the prospects of the economy, and therefore less investment. According to James Feyrer and Bruce Sacerdote of Dartmouth College, the multiplier effect (the increase in final income arising from any new injection of spending) was between 1.96 to 2.31 for low-income spending, 1.85 for infrastructure spending, and finally in the range of 0.47 to 1.06 for stimulus as a whole. While this was not the only study carried out on Obama’s fiscal stimulus package, the methodology of the survey the two economists used is significant because they not only compared employment growth at state and county level, but they also compared month-by-month data to see how employment figures were changed at the point when the stimulus was injected into the economy. The significant upward trend generated by the stimulus here is thereby significant as it supports heavily the claim that the package was needed in order to usher America out of the stagnation that it previously endured; so Obama doesn’t seem to have done too badly so far.

The Dodd-Frank Financial Reform Bill also was a significant piece of legislation that Obama signed during his presidency. Described by the Washington Post as “the most ambitious overhaul of financial regulation in generations”, there’s no denying that the Bill has had and will continue to have significant effects on the way financial firms think about their operations going forward. However, it does not ameliorate the problem of the massive moral hazard which banks are allowed to possess when analysing whether to cut down on their portfolio risk or not. In the former Governor of the Bank of England, Mervyn King’s book “The End of Alchemy: Banking, the Global Economy and the Future of Money”, King argues that this is precisely what could lead to another catastrophic recession, and argues instead for a “pawnbroker for all situations” solution, one in which banks have to take significant measures before having any chance of being bailed out. Whilst I would suggest that one reads King’s book for more insight into this claim, the fundamental underlying principle is that banks will take risks if you allow them to, putting taxpayers at risk of having to bail them out once again, and for this reason, I argue that the legislation Obama approved has not gone anywhere near far enough.

And now we come to perhaps the most contentious issue of all: Obamacare. Although the program still has its glaring faults and areas where it should really be improved in order to improve the accessibility of healthcare for every American, it has to be said that the healthcare program has had overwhelmingly positive effect. For example, businesses with over 50 employees are required to have a health insurance program, with tax credits for these businesses also being put in place to help them finance this program. In my opinion, this strikes a near-perfect balance between stamping the need for increased healthcare coverage for the most vulnerable members of society and easing financial constraints on business, allowing these firms to flourish and expand their operations. If I had to summarise Obama’s economic policy in a few words, I’d use the phrase “getting there”. Whilst the African-American has made key policy moves that have steered America in the right direction, there are still large gaps that need to be filled and policy moves that need to be implemented to progress America’s economy further. He hasn’t done it all, but he’s definitely laid the foundations.

Shrey Srivastava, 16

On obstacles to poverty alleviation in India

Step foot (carefully) on the streets of the Delhi megalopolis and you’ll find an explosion of colour and a cacophony of all sorts of weird and wonderful noises. In some ways, it’s the archetypal developing city, with disorganised shops lying around in wide, bending alleyways that look almost as if they’re the fruits of a child’s imagination. In others, however, Delhi has its own unique aura, the quintessential, all-encompassing Indian tinge that has had foreigners from the Mughals to the British flocking like flies to its soil throughout history. Despite this, however, there is an elephant in the room, lying wearily beneath the glitz and glamour of a hugely unequal and somewhat segregated Indian society. You probably already know what it is: poverty. 2012 Indian government projections suggest that 21.9% of the Indian population are below its official poverty limit – to put that into context, it means that almost 1 in 4 Indians are affected by the scourge of poverty. Despite substantial amounts of aid being given to the Asian country to help solve the problem, it’s not even remotely close to going away at all. This is because of deep and wide-ranging problems in the framework of poverty alleviation projects in India, one of which is information failure in the microfinance sector leading to excessively high interest rate loans.

Primarily in Indian rural communities, a large problem with regards to supplying loans to low-income  households is that loans are advertised at lower interest rates than they are in reality. Given the relative lack of education in these areas, exploitative moneylenders can easily demand money unlawfully from families, citing a higher interest rate than the borrowing family had initially thought. Hence, this asymmetric information between lenders and borrowers, combined with the high operational costs of face-to-face lending to these communities in the first place, results in interest rates that frequently reach levels above 50%. To combat this, it’s logical that the government could introduce subsidies for microfinance institutions to reduce overall costs, thereby resulting in the pushing down of interest rates through the competition of the free market mechanism (the sheer numbers of microfinance institutions involved makes this method viable for application). Furthermore, the Indian government could make efforts to introduce a database of sorts for each rural community, spearheaded by a government-appointed official, detailing each microfinance institution and the details of the loans that they are providing to people in these communities, decreasing the potential for exploitation of borrowers. Given that corruption is such a prevalent problem within almost every Indian institution that exists, deterrents such as substantial jail sentences should be given to anyone exploiting the system, along with many avenues for which people to complain about unjustly high interest rates without fear. Obviously, this wouldn’t solve the problem entirely, but it would go a long way to decrease interest rates and therefore provide a more sustainable alternative revenue stream for families starting businesses on the back of this loan.

Moreover, while children going to school and sitting in classes matters, the end goal of all of this is for them to have an education, gaining transferable skills which they can take to work, boosting the standard of living for themselves, their families, and the wider community. In India, however, while the number of children going to school has been increasing, the number of people getting an education is a greatly different story. In 2009, India ranked 73rd out of 74 countries sampled with regards to the extent of the children’s knowledge regarding various subject matters, indicating that although children are going to school, they are actually not learning very much at all. This is in part because teachers believe that they can get away with not working as hard as possible to educate their students, due to no system of rewards or punishments being in place to provide either positive or negative incentives to teach. Therefore, what I propose is as follows: establish a more rigorous, practical system of testing for Indian children by an independent organisation to each class in schools, with positive incentives in the form of bonuses being paid to teachers whose class performs significantly well. Due to negative incentives promoting negativity and eventual apathy in the school environment, it would be unnecessary to include them with the same frequency as positive incentives, however if a teacher’s class has been doing badly for a sustained period of time, they should take a compulsory training class and be forced to accept a decrease in wages, or leave the school entirely. To make the whole system fair, classes should be allocated based on a test conducted to determine each student’s aptitude when they enter the school, making sure that the aptitude levels of each class are relatively similar. Whilst there is no suggestion here regarding how to make more children go to school, this is because it is already happening in India on a large scale, and so therefore we now must focus on how to maximise learning from going to school itself, in order to pull more and more families out of poverty.

Infrastructure has developed hugely in India since the pro-market reforms of 1991; nowadays in India, people have more opportunities than ever before due to more alternative routes to success. However, despite this, the lack of aspiration shown by some of the poorest people in India has continued on from previous years; they feel that high profile, white collar jobs that can pull their family out of poverty are out of their reach. This is because if the poor’s attempts to find a source of income do not work out, the loss that they could have faced both in time and monetary value could cripple them further than they already have been. While there is no silver bullet to fix this problem, the only way in which it could be somewhat ameliorated is through exposing the poor in these communities to people who have succeeded in the past. There is the potential that the effects of supplying information through media to these communities could have little to no effect, as the potential consequences of failing are so crippling. Hence, it is important to focus on other reforms so that people are more and more exposed to others who have succeeded, and the idea is that the allure of success would eventually drive some people to take risks, catapulting them out of the poverty trap. The most difficult thing about this process is the start; once we have a start, there will be a virtuous cycle, hence the burning need to focus on other ways in which to overcome the Indian obstacles to growth.

While growth continues in India at a breakneck pace, the most important thing now for the country is to increase the quality of living of the poorest within society. That can only be done through overcoming inherent obstacles; maybe, just maybe, once we’ve beaten these, growth and prosperity will increase like never before.

What do you think? Please leave a comment below with your thoughts, whether you’ve been attracted or repulsed by my propositions.