Inequality

While most attention focuses on the implications of Brexit, the Labour Party's Marxian hard leftism should cause us equal, if not more, concern.

Andres Manuel Lopez Obrador will likely become Mexico’s next president at a time of mounting concern over corruption and violence, but his reform plans are hazy.

Tyler McBrien is a research associate for education at the Council on Foreign Relations. The land reform debate in South Africa has recently reached a fever pitch following parliament’s passage of a motion that opens the door for land expropriation without compensation through a constitutional amendment. Much of the country’s right wing, notably Afrikaans-speaking white descendants of early Dutch settlers known as Afrikaners, have mobilized against the February motion.  Parliament's actions come on the heels of growing discontent over the extreme disparity in wealth between white and black South Africans, which remains virtually unchanged two decades after apartheid. Land ownership, though only part of the poverty story, has emerged as a potent symbol of this racial inequality. Called South Africa’s “original sin” by President Cyril Ramaphosa, the dispossession of black-owned land and continued disproportionate white ownership features prominently in policy agendas and newspapers alike. AfriForum, a self-described Afrikaner rights group, has positioned itself as an especially vocal critic of land expropriation, which the group views as an existential threat to white South Africans. In their campaign against expropriation without compensation, AfriForum has launched appeals abroad, raising the specter of the murder of white farmers and stoking fears of “white genocide” among American, European, and Australian leaders and media outlets.  AfriForum can be convincing. On their trip to Washington, DC, in May, AfriForum heads Kallie Kriel and Ernst Roets visited, among other people and places, the Cato Institute, a conservative think tank. Following their visit, one senior policy analyst concluded that the “explicitly racist” policies of the current South African government echoed those under apartheid. Thousands have petitioned President Donald Trump to accept white South Africans as refugees to the United States. Australia’s home affairs minister urged his government to issue emergency visas to white farmers who needed protection from a “civilized country.” AfriForum’s activism has led to headlines like Newsweek’s “A White Farmer is Killed Every Five Days in South Africa and Authorities Do Nothing About It, Activists Say” and a Fox News segment that was accompanied by “White farmers are being brutally murdered in South Africa for their land. And no one is brave enough to talk about it.”  Due to unreliable or unavailable data, calculating the farm murder rate is a tricky business, and ascribing a racial motivation even trickier. Nevertheless, AfriForum regularly presents a misleading narrative and ignores data that undermines their claims. Numerous fact-checkers have explained in detail why their numbers do not tell the whole story. Caveats to the data notwithstanding, and though horrific farm murders do happen, a recent report based on police statistics, original research, and media reports from AgriSA, a South African agricultural industry association, found that farm murders are at a twenty-year low. Even beyond their spread of questionable statistics, AfriForum members routinely engage in apparent apartheid revisionism. Its leaders have argued apartheid was not a crime against humanity and have defended apartheid symbols. Despite AfriForum’s almost three-hundred-thousand-strong membership and self-portrayal as a civil rights organization, U.S. policymakers and foreign governments in general would do well to be cautious of AfriForum’s characterization of the “plight” of white South Africans.

Following its series of articles on corruption within South Africa’s governing African National Congress (ANC), the New York Times published an editorial on April 23 accusing the party of “a betrayal” of its ideals. That being said, the Times acknowledges that corruption elsewhere in Africa and the world is worse than it is in South Africa, and that corruption was heavily associated with ex-president Jacob Zuma. However, the Times points out that the new party leader and state president, Cyril Ramaphosa, became rich partly through his party connections. It therefore questions whether he is capable of using “the democratic tools to combat the blight of corruption,” but nevertheless acknowledges that those tools exist and provide a means of overcoming it. The ouster of Zuma was an important first step in that regard. The Times correctly points out that since independence, little has been done to address the gross inequality of South African society, in which most white South Africans enjoy a high standard of living while most black South Africans—eighty percent of the population—have social and economic statistics characteristic of the developing world. Indeed, the white minority is wealthier compared to the black majority now than it was in 1994 when Mandela was inaugurated president, notwithstanding a tiny black elite that has grown rich largely through government connections.   The Times goes on to associate enduring black poverty with Nelson Mandela’s “grand bargain” with “the white minority.” However, it inadequately acknowledges the circumstances surrounding the transition to non-racial democracy. It is true that while the deal gave the black majority control over politics, the economy—and wealth—remained in the hands of whites. But Mandela had little choice. The ANC and other liberation movements had far from defeated the apartheid state; they could render ungovernable some of the townships some of the time, but never seriously threatened to overthrow the entire system. For the ruling-white minority, the economy was stagnating, the intellectual underpinnings of apartheid had been destroyed, and they felt acutely their international pariah status. Hence, the 1994 coming of “non-racial democracy” was not a liberation movement victory over apartheid; instead, it was a bargain in which whites yielded political power to predominately-black liberation movements in return for the preservation of their economic privileges and an end to international condemnation—and sanctions. (That is not to say that the liberation movements did not earn their spot at the table or to diminish their role.) The apartheid state, led by President F. W. de Klerk, together with the liberation movements, led in part by Nelson Mandela, concluded that neither could prevail outright and that continuation of the status quo raised the specter of a race war. So, for better or worse, they made a deal that prioritized the expansion of civil rights and democracy rather than the equitable distribution of wealth and economic opportunity.   

America-first rhetoric omits two important causes of middle America's economic woes: technology and automation. Democrats could use this to their advantage in the 2020 presidential election.  

This post is co-authored by Karen Karniol-Tambour, Head of Investment Research at Bridgewater Associates. Several positive macroeconomic trends suggest that the global economy could finally be in a position to achieve sustained and inclusive growth. But whether that happens will depend on whether governments can muster a more forceful response to changing economic and technological conditions. MILAN/NEW YORK—Most of the global economy is now subject to positive economic trends: unemployment is falling, output gaps are closing, growth is picking up, and, for reasons that are not yet clear, inflation remains below the major central banks’ targets. On the other hand, productivity growth remains weak, income inequality is increasing, and less educated workers are struggling to find attractive employment opportunities. After eight years of aggressive stimulus, developed economies are emerging from an extended deleveraging phase that naturally suppressed growth from the demand side. As the level and composition of debt has been shifted, deleveraging pressures have been reduced, allowing for a synchronized global expansion. Still, in time, the primary determinant of GDP growth—and the inclusivity of growth patterns—will be gains in productivity. Yet, as things stand, there is ample reason to doubt that productivity will pick up on its own. There are several important items missing from the policy mix that cast a shadow over the realization of both full-scale productivity growth and a shift to more inclusive growth patterns. First, growth potential cannot be realized without sufficient human capital. This lesson is apparent in the experience of developing countries, but it applies to developed economies, too. Unfortunately, across most economies, skills and capabilities do not seem to be keeping pace with rapid structural shifts in labor markets. Governments have proved either unwilling or unable to act aggressively in terms of education and skills retraining or in redistributing income. And in countries like the United States, the distribution of income and wealth is so skewed that lower-income households cannot afford to invest in measures to adapt to rapidly changing employment conditions. Second, most job markets have a large information gap that will need to be closed. Workers know that change is coming, but they do not know how skills requirements are evolving, and thus cannot base their choices on concrete data. Governments, educational institutions, and businesses have not come anywhere close to providing adequate guidance on this front. Third, firms and individuals tend to go where opportunities are expanding, the costs of doing business are low, prospects for recruiting workers are good, and the quality of life is high. Environmental factors and infrastructure are critical for creating such dynamic, competitive conditions. Infrastructure, for example, lowers the cost and improves the quality of connectivity. Most arguments in favor of infrastructure investment focus on the negative: collapsing bridges, congested highways, second-rate air travel, and so forth. But policymakers should look beyond the need to catch up on deferred maintenance. The aspiration should be to invest in infrastructure that will create entirely new opportunities for private-sector investment and innovation. Fourth, publicly funded research in science, technology, and biomedicine is vital for driving innovation over the long-term. By contributing to public knowledge, basic research opens up new areas for private-sector innovation. And wherever research is conducted, it produces spillover effects within the surrounding local economy. Almost none of these four considerations is a significant feature of the policy framework that currently prevails in most developed countries. In the United States, for example, Congress has passed a tax-reform package that may produce an additional increment in private investment, but will do little to reduce inequality, restore and redeploy human capital, improve infrastructure, or expand scientific and technological knowledge. In other words, the package ignores the very ingredients needed to lay the groundwork for balanced and sustainable future growth patterns, characterized by high economic and social productivity trajectories supported by both the supply side and the demand side (including investment). Ray Dalio describes a path featuring investment in human capital, infrastructure, and the scientific base of the economy as path A. The alternative is path B, characterized by a lack of investment in areas that will directly boost productivity, such as infrastructure and education. Though economies are currently favoring path B, it is path A that would produce higher, more inclusive, and more sustainable growth, while also ameliorating the lingering debt overhangs associated with large sovereign debt and non-debt liabilities in areas like pensions, social security, and publicly funded health care. It may be wishful thinking, but our hope for the new year is that governments will make a more concerted effort to chart a new course from Dalio’s path B to path A. This article originally appeared on project-syndicate.org.

Population growth and aging are fueling a spectacular rise in noncommunicable diseases, such as cancers and cardiovascular diseases, in poor countries that are ill-prepared to handle them. 

This post features a conversation with Georgia Levenson Keohane, executive director of the Pershing Square Foundation, adjunct professor of social enterprise at Columbia Business School, and author of Capital and the Common Good: How Innovative Finance is Tackling the World’s Most Urgent Problems. She talks about what innovative finance means and how it works, addressing its successes and limitations in putting private and public capital to work for the common good.   1) Can you explain what innovative finance is (and what it is not) and how you came to work on it? Innovative finance is about creative ways to finance and pay for unmet needs and public goods—about integrating government, financial, and philanthropic resources to invest in solutions to global challenges and promote inclusive, shared prosperity. It is not the same as “financial innovation”—feats of engingeering designed to improve market efficiency, but not always a valuable end in themselves (as we saw in the 2008 financal crisis). Instead innovative finance, by design, is intended to solve problems, overcome market and political failures, and meet the needs of the poor and underserved. The innovation often comes in a new application, pressing time-tested tools like lending, insurance, and credit enhancements into the service of global health, financial inclusion, disaster relief, and battling climate change. Which is to say, virtual currencies, speed trading, subprime mortgages, or even payday lending might be considered financial innovation. Micro agriculture insurance for poor farmers, low income loans or equity for higher education, pay-as-you-go financing for solar electricity in Kenya, or discounted Metro Cards in New York City are innovative finance. In the fall of 2012, I had just finished a book on social entrepreneurship and public-private partnerships, when Hurricane Sandy hit—and I started to consider innovation in a different light. Sandy’s surging waves caused more than $5 billion in damage to New York City’s mass transit systems and the Metropolitan Transit Authority (MTA) emerged from the wreckage uninsurable. This was a huge challenge: no insurance, no subway, and the city shuts down. In a municipal finance first, the MTA went to the catastrophe (cat) bond market for coverage against future Sandys. (With cat bonds, insurers transfer risk to capital market investors who bet against catastrophe: that a hurricane will not hit in a particular place, time, or intensity.  If that proves true, investors are repaid principal plus a high rate of interest). I thought this was an entrepreneurial use of finance, and went on to explore others: vaccine bonds, green bonds, social impact bonds, new kinds of financing facilities and emerging insurance entities large and small. The work took on greater urgency last year when the United Nations adopted the global Sustainable Development Goals—and with them a multi-trillion funding gap to meet the goals. Many see innovative finance as a way to harness more and particularly private capital to fill this gap. But, in fact, innovative finance is also about smarter capital: finance as an instrument that encourages behavior change, motivating governments to respond faster to disasters like drought or pandemic, or to invest in cost-effective preventions like vaccines or maternal health. 2) What are some successful examples of innovative finance? Many involve technology. For example, Kenya’s M-Pesa, a mobile payments platform that allows people to send and receive money from their phones, has been an extraordinary success. Ten years ago, for all practical purposes, mobile phones did not exist in Kenya, and most of the country was unbanked. Today 80 percent of Kenyans own a mobile phone, and 70 percent have mobile money accounts. By some estimates nearly 40 percent of Kenya’s GDP flows through the M-Pesa platform. Yet as interesting as what people pay for (just about everything—remittances, taxes, school fees, etc.) is how they pay for it. The mobile money platform has created new kinds of consumer finance, as it allows people to save, insure, and to pay for things over time. Consider the case of solar. Eighty perecent of the country may now use mobile money, but they still live far from the electric grid, reliant for light on things like kerosene—an expensive and noxious source of energy that poisons, burns, and contributes to global warming. For Kenyan families who pay over $200 a year for kerosene, a one-time investment in a $199 solar panel would make sense, but they lack the upfront cash to make this purchase. That is where companies such as M-Kopa or Angaza come in; they use the M-Pesa platform to allow households to pay for solar panels in small installments. By some estimates, pay-as-you-go finance has accelerated the rate of solar adoption fourfold. A company called Alice Financial is using the same approach to public transportation in New York City, where a one-way subway or bus ride costs $2.75. This is no small expense for a daily commuter, who makes 500 of those trips a year. For many New Yorkers, the substantial discount of a thirty-day metrocard is out of reach, since it costs $116 upfront each month. (New Yorkers overpay $500,000 a day because they can’t afford the discount). Alice offers instead a pay-as-you go weekly installment plan, made possible via its socially-motivated, innovative finance arbitrage. 3) What are the limits of innovative finance? Unfortunately, technological innovation alone is not going to solve all of our financial inclusion needs and aspirations. Technology might make more financial services and products available or affordable, but that does not necessarily mean people use them. Just as innovative financial service organizations across the globe have recognized that they need to offer more than just credit to move people out of poverty, so too do they realize that simply having a broader set of product offerings—savings, pensions, insurance—may not be enough. Adoption often requires an important relationship, a human interaction. For example, IFMR Trust in India now employs local wealth managers who are trusted members of the community to work with poor, rural families by collecting their basic financial information on a tablet, and then walking them through the product or service recommendations generated by the company’s algorithms. The combination of technology and a trusted agent translates into greater use of beneficial financial service products.  Neighborhood Trust Financial Partners (NTFP) in Upper Manhattan illustrates the same principle. In recent years, NTFP has developed a range of new products for their their low-income customers: a socially-responsible credit card to pay down debt, an app to encourage savings, and payroll innovations for lending or retirement needs. Yet their success depends on the work of local financial advisors who educate, translate, and earn the trust of their clients. 4) What are some areas that market-based solutions cannot, or perhaps should not, address? Innovative finance is not a panacea. It is particularly well suited to challenges that can be measured, and benefits or savings that can be achieved—and monetized—in a relatively short time frame. Cap and trade, for example, allows us to put a price on carbon, which is not as simple for problems such as government corruption or racial injustice. In many cases, there will never be a viable market solution. Serving the very poorest, working in particularly challenging geographies or conditions—or areas where a constellation of problems is particularly complex (and solutions hard to isolate)—might never be profitable, and will always require substantial philanthropic or government support or subsidy. However, even on issues that don’t lend themselves to these kinds of tools or instruments, the innovative finance lens helps us think differently about the costs of delay and inaction, and the benefits of prevention. Vaccines are cheaper than treating full-blown disease (and cheaper still than pandemic); early childhood education and job training costs a whole lot less than mass incarceration. Innovative finance reminds us that an ounce of prevention is worth a pound of cure. 5) How can government policy help innovative finance succeed? There are a number of ways policy can encourage greater use of innovative finance. For example, last fall the U.S. Department of Labor repealed restrictive rules that had previously prevented U.S. pension funds from considering social, environmental, and good governance factors when making in investment decisions. This “ERISA” (Employee Retirement Income Security Act) reform has the potential to catalyze greater investment in innovative financial products by pension funds that must follow the guidelines. While there is more work to do on norms and guidance related to fiduciary responsibility, this is an important first step. Under the Obama administration, the Treasury Department, USAID, the White House Office of Social Innovation, and even Congress promoted various forms of innovative finance activity. The hope is that the next U.S. administration has the same openness to this approach. Perhaps more important, many of the most successful innovative finance examples are those that involve cost-effective investments in prevention, made possible through new kinds of public-private partnerships. The International Finance Facility for Immunization (IFFIm), for example, has raised over $5 billion since 2006 in “vaccine bonds” to fund large-scale immunizations. Bondholders are repaid out of future government aid pledges, front loading that future aid for investment in vaccines today. Closer to home, social impact bonds (SIBs) are a new breed of pay-for-success contracts between local governments, social service providers, and private investors that finance preventive social services like early childhood education, maternal health support to families to keep children out of foster care, or programs to keep former prisoners from re-offending. Investors, who loan working capital to service providers, are only repaid by the government if interventions work—with payments coming out of the social savings. Today there are more than sixty SIBs in action across the globe, and much of the innovation occurs at the local level. This willingness to partner across sectors is critical for innovative finance in the years ahead.    

This post features a conversation with Audrey Choi, chief executive officer of Morgan Stanley’s Institute for Sustainable Investing and managing director of its Global Sustainable Finance Group. Choi talks about the evolving $20 trillion sector, including important U.S. policy changes and her thoughts on where sustainable investing is headed. 1) What does sustainable investing mean, and how has it evolved in recent years? There has been an evolution in sustainable investing over the past five to ten years in both definition and practice. Investors have moved away from predominately avoiding—or divesting from—industries and companies considered harmful toward taking a more proactive approach as well. They are pursuing positive social and environmental impact while also expecting competitive financial returns. Traditionally, there was a tendency to divide investing and philanthropy, using the first to build wealth and the other to make a positive social difference. Sustainable investing, which includes values-based, environmental, social, and governance (ESG) integration, thematic investing, and impact investing approaches, allows investors to align their values or mission with their investment portfolio. Another shift has been the increase in research addressing the misconception that doing good requires a financial trade-off. Harvard University and Brookings compared a portfolio of companies that performed poorly on sustainability with a portfolio of companies that performed very well on the same issues. One dollar in the low performance portfolio grew to $14.46 between 1993 and 2014. The same dollar in the high performance portfolio rose to $28.36 over the same period. And at Morgan Stanley’s Institute for Sustainable Investing, we examined ten thousand mutual funds across seven years of performance, comparing sustainable to traditional investing strategies. We found that 64 percent of the time, sustainable strategies performed either the same, or slightly better, than traditional ones. Meanwhile, volatility for those strategies was the same, or slightly less, 64 percent of the time. Finally, the University of Oxford conducted a meta-analysis of over two hundred studies and found that incorporating ESG business practices resulted in better operational performance, lower cost of capital, and better stock price performance. We’re also seeing a shift in how sustainability factors into stock and company valuations. More and more investors and analysts are asking how to incorporate ESG into existing models of valuation. Whether a multinational company disposes of waste responsibly, monitors its water usage, and recycles increasingly matters. Sustainability efforts are more than corporate reports—they are considerations that can be materially relevant to core business practices and results. 2) How is “sustainability” measured, and what counts as sustainable investing? We take the broad view that sustainable investing encompasses both financial sustainability and environmental and social sustainability. As part of the sustainable investing evolution, there has been a great deal of work in the field to better understand the type of sustainability considerations that can have both real business and investment impact. The United Nations Principles for Responsible Investment (UNPRI) and the Sustainable Accounting Standards Board (SASB) are two important examples of increasingly-recognized bodies developing standards and frameworks for measuring and reporting on sustainability. UNPRI has not only established what responsible investment should entail, but as a membership organization, it is a platform for signatories (asset managers, owners, and service providers) to express their commitment to a more sustainable global financial system. And SASB has created standards for ESG considerations across eighty industries, helping public corporations disclose material issues to investors.  As part of its standard-setting work, SASB found that climate change alone affects seventy-two of seventy-nine industries—each in specific and different ways. That’s 93 percent of the capital markets, or $33.8 trillion dollars. 3) How does sustainable investing compare to philanthropy or development aid, through NGOs and others? Are there some areas that should be left to private donors rather than investors? Ultimately, driving large-scale positive social and environmental change requires government, philanthropy, and investment dollars to work in common cause. Tax dollars and philanthropy alone are not sufficient to fix the world’s problems. Private investment can play a crucial role in filling that gap. Still, sustainable investing should not be seen as a replacement to philanthropy. Indeed, there are critical situations when philanthropy and government aid should be the first resort, such as when an immediate response is required, as in humanitarian efforts and disaster relief. Aid is critical in these instances where financial returns, cannot, or should not, be expected. But governments and philanthropies also play critical roles as catalytic investors. They provide the visionary risk capital to enable discovery and innovation, setting the stage for future markets. For example, microfinance began as a donor-led space, eventually growing to a robust field where private sector investment has enabled scale and reach. 4) What are the U.S. rules and regulations that have helped, or hindered, sustainable investing? In the U.S. context, one of the most important recent changes was the revision to U.S. Department of Labor guidance around ESG investing for Employee Retirement Income Security Act (ERISA) plans, announced late last year by Secretary Thomas Perez. Employee retirement plans, such as pension funds or 401(k)s, are bound by the ERISA, which sets a fiduciary duty, or legal obligation, for managers to act in the interest of plan participants. In October 2015, Secretary Perez and the Department of Labor issued a clarification that “environmental, social, and governance factors may have a direct relationship to the economic and financial value of an investment.”  Rather than an external and separate consideration, ESG factors could now be considered relevant in evaluating an investment’s economic qualities. This clarification went a long way in addressing the perception that ESG consideration might be at odds with fulfilling fiduciary duty. Globally, another important development was the Paris Climate Conference (COP21) agreement that set binding targets to limit global emissions. It sent a clear signal of change that may open new conversations on ESG and sustainable investing, as well as the inclusion of climate change-related risk as a material financial consideration. 5) Looking ahead, what is the outlook for sustainable investing, in the short and long term? Within ten to fifteen years, we believe sustainable investing should be perceived as a redundant term. Sustainability considerations will be a part of a best-in-class investing thesis, rather than being a separate analysis. Just as political and cyber risk has become a core part of the risk and return analysis, so too do we believe that sustainability factors will become a core part of risk and return analysis. There has already been impressive growth in the field. In 2012, the U.S. Sustainable Investing Forum reported one out of every nine dollars invested in the United States had some type of sustainable mandate to it. From 2012 to 2014, that figure grew by 76 percent to one out of every six dollars. Though the starting point was small, we are seeing rapid growth, with more than $20 trillion dollars now invested in the sector globally. Another driver of change in sustainable investing is the influence of millennials. Compared to other generations, millennials are three times as likely to pick an employer based on their ESG performance. They are also twice as likely to check product packaging for sustainable sourcing information before they choose a product. And this philosophy carries over to their investing decisions. Millennials are twice as likely to check a mutual fund or equity investment and choose it because of sustainability, and twice as likely to divest—or walk away—because of objectionable corporate activity. As this generation is set to inherit more than $30 trillion in the United States over the next thirty to forty years, it will be significant how they integrate their sustainability priorities into their investment decisions going forward.