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Red Bull: Behind the Notorious Blue Can

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Reading Time: 6 minutes

Red Bull is an energetic drink sold by the Austrian Red Bull GmbH in over 170 countries. It was introduced in the market in 1987 and, since then, it has achieved the selling landmark of 7.5 billion cans in a year, achieving market leader status with a market share of 43% in the energy drink market. You have probably heard “Red Bull gives you wings”, which has become one of the world’s most recognizable slogans.  

The brand was created by the Austrian entrepreneur Dietrich Mateschitz with Chaleo Yoovidhya, a Thai businessman who created the original Thailand Red Bull drink. With a slight modification to westernize the original energy drink, Dietrich led the company to worldwide success.  

In the more than 30 years since its inception, Red Bull has kept its essence as an energy drink, selling the same idea which sold in the beginning, despite some variations in taste and special editions. In fact, Red Bull remained very loyal to its strategy, only amplifying to a greater audience. It is a very loyal brand, associated with radical sports, such as Formula 1, Surf and Snowboarding. Furthermore, it also sponsors a lot of athletes and YouTube personalities. It is a brand associated with a healthy and active lifestyle and aims to portray these aspects in every marketing campaign. 

Global Energy Drinks Market Share 
Source: T4 Data 

The Business Model 

The Austrian energy drink has been the dominant brand in the industry, despite fierce competition from copy-cats. It can easily be argued that Red Bull’s unique business model is what gives the company an edge over the competition. 

An important aspect of the business model has been little to no diversification whatsoever. When it comes to the variety of products, Red Bull produces the very same product, although with some differences geographically. It has introduced special editions from time-to-time and, in total, 20 different variants, including a sugar-free version. Red Bull’s decision not to move to other segments in the food and beverage industry relates to their intent to preserve the values and principles of the firm. This strategy contrasts with what has been the golden rule in the industry of expanding to other segments to gain market power and benefit from synergies, exemplified by Coca-Cola’s rule in the beverage market, from sodas to tea and bottled water. Pepsi has followed Coca-Cola’s lead too, also producing energy drinks and even entering the food industry with Lays, Cheetos and Sun Chips, besides having the regular soda. 

Another peculiarity of the energy drink lies in the company’s operations, or lack thereof. The majority of consumer goods companies, especially in the food and beverages industry, such as the Coca-Cola Company, have a strict control of their operations for a quality guarantee standpoint, as well as to keep their formulas secret. Red Bull, on the other hand, is not in charge of its own production, which is outsourced to two companies licensed under the Thai Red Bull. In fact, Red Bull GmbH is not even directly responsible for the entirety of its distribution, relying on already established distributors to bring the famous blue can to some parts of the world.  

Outsourcing operations is not too uncommon in the corporate world. It is actually a way of bringing value to the value-chain that the company could not bring on its own. Nevertheless, it is uncommon for a brand the size of Red Bull to have so little control over its operations. This is not a result of poor resources or capabilities; it is part of a greater strategy to focus on what the company does best – marketing – which has been a winning formula so far. 

The famous blue Red Bull can 
Source: Red Bull 

Marketing as Core Activity  

Red Bull’s success was determined not only by the quality of its product, but also by its marketing strategy. Red Bull has the highest market share of any energy drink in the world, with approximate revenue of €6.07bn in 2019, a third of which was re-invested into marketing, which proves the importance of that department to the company.  

“In terms of attracting new customers and enhancing consumer loyalty, Red Bull has a more effective branding campaign than Coke or Pepsi”, says Koehn, professor of business administration at HBS. 

Rather than following a traditional approach to mass marketing, Red Bull has generated awareness and created a seductive “brand myth”. Their strategy has not focused on promoting the popular product, but rather to create a brand that embodies a distinct lifestyle and audience. 

Their advertisement objectives were to create a brand preference as their primary source of income within Generation Y’s young active males, but also to attract and maintain a secondary target market of older males needing energy to maintain their heavy workloads. 

To increase awareness among their most likely consumers, 18- to 34-year-old-males, Red Bull followed a marketing strategy with the aim of making the drink just edgy enough to grab the interest of this public (“Wing 1 of the Dragonfly Effect Model”). The focus was subtle branding that grabs attention, while having high production quality without an overproduced look. In addition, to start engaging with both its original and second target demographics, Red Bull began sponsoring “breath taking” stunts. Big doing so, RB subtly invites people both to take action and fulfil their biggest dreams. Besides sponsoring and participating in multiple sports, Red Bull also owns Red Bull TV Online, Red Bull Radio, and Red Bull Media House.  

Other revenue streams  

In 2019, Red Bull sold 7.5bn cans of their energy drink, for a revenue of over US$6bn. Despite the impressive numbers, this is not the only revenue stream that Red Bull is capitalizing on, especially given the decreased growth that they have observed since 2012, triggered by their one-product only strategy. Many of the marketing initiatives to promote the energy drink got a life on their own as businesses, in addition to serving as a support activity to the drink: 

  1. Media Production: They own Red Bull Media House, a globally distributed multi-platform media company that seeks to “inspire with ‘beyond the ordinary’ stories”, both direct-to-consumer and through partnerships. 
  1. Team ownership: Some of the Football teams owned include RB Leipzig, FC Red Bull Salzburg, Red Bull Brazil and New York Red Bulls, allowing them to take advantage of synergy. They also own teams in Hockey, EC Red Bull Salzburg, in Formula 1, Red Bull Racing, and other sports, such as MotoGP and Skateboarding. 
  1. Broadcasting: Inserted in their media house, they own Red Bull TV Online, where they share the exclusive images from the events they organise. This platform also includes radio, magazine, and digital platforms.

4. Contract Management: Red Bull established contracts with professional athletes that aim for the top brackets in their areas, adopting this as a way of promoting their brand.

Sebastien Vettel, F1 World Champion for Red Bull Racing
Source: Formula 1

Conclusion 

Red Bull is no ordinary company, with no ordinary business model. The Austrian company has taken advantage of industry best practices to create a brand bigger than its blue can, becoming the biggest player in the energy drinks industry in the way, with a market share of over 40% of the energy drinks market. Despite competition from industry giants, such as Coca-Cola, through Monster, and Pepsi’s Rockstar, Red Bull did what no other drink achieved – successfully marketing itself to a new customer base.  

What is more, the company created a media and advertising ecosystem to project the energy drink, which cemented its brand image as seductive ‘myth’, that is still the company’s biggest asset. As a result, that same media ecosystem that once started as a marketing campaign became a business of its own rather than an annual expense.   

Sources: Banknotes, Forbes, Inside Beer, Investopedia, MarketLine, Medium, Red Bull, Statista, The Economist, T4, Whide Group

Tiago Rebelo

Alexandre Bentes

Diogo Almeida

The collapse of the Soviet Union

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Reading time: 6 minutes

Context

For many decades, the USSR was regarded as an economic powerhouse. It achieved rapid industrialisation through central planning, despite an enormous human cost. In the 1950s and 1960s, it grew rapidly, and many observers in the West considered it possible that the USSR would surpass the US as the biggest economy in the world. Furthermore, it also achieved full employment, stable low prices for basic items, and free social services to its population. It seemed that the system worked, attaining both growth and material well-being for the population. 

However, by the 1970s and 1980s, there were many signs of economic problems. Growth rates were declining, as well as consumption, with many people having to recur to black markets. In technological terms, the USSR was lagging behind the capitalist world, with lower quality and quantities of industrial production. This implied that the country was not able to compete in international markets for manufactured goods. From industrial power, the USSR turned into a mere exporter of raw materials. Moreover, some indicators of life quality like infant mortality or life expectancy were declining. 

The very nature of the Soviet regime prevented it from dealing successfully with the economic and social challenges it faced in the 1970s and 1980s. Reforming a socialist regime, whit state ownership of the economy and firm control of the Communist Party was not an easy endeavour. However, the regime was not doomed to collapse like it did in 1991. Many frail and inefficient regimes subsist despite serious troubles. The story and the impact of the collapse can only be understood when looking at the attempts at reform, and the events and decisions of the agents at the time. 

Gorbachev’s reforms 

The most important actor was Mikhail Gorbachev, who served as the General Secretary of the Communist Party of the Soviet Union from March 1985 to August 1991, which was the most influential position in the Soviet State.  Contrary to what some might believe, he did not act as a sole visionary, but rather he represented a faction inside the Communist Party that defended the need for reforms deviating from orthodox Marxist thought to overcome the problems of the USSR. 

A political overhaul of the Soviet Union began during this period. The period is named for Perestroika policies. The term means restructuring, which encompassed economic, social, and political reforms. Regarding the economic activity of the USSR, two important laws deeply changed the functioning of the Union: 

  • The 1987 law on State Enterprises, which decentralized economic controls: removed restrictions concerning workers’ wages and companies’ chosen output production, allowing them to keep a share of their profits and reinvest them. Besides, factory and farm managers were to be elected directly by the company workers, rather than through the Party. 
  • The 1988 law on Cooperatives, that permitted the creation of privately owned businesses in the services, manufacturing, and foreign-trade sectors. The size of these cooperatives was not limited by law and they could participate in any legal economic activity, being able to form joint ventures with foreign companies as well. Effectively, they were indistinguishable from capitalist enterprises. 

Furthermore, another concept deeply related to the Perestroika, was the Glasnost, meaning transparency. Gorbachev wished to increase the openness of state affairs to the public, which was pursued by increasing media freedom. This provided ideological opponents of Marxism-Leninism, from Nationalists to Liberals, new platforms to express their dissatisfaction. However, this was also a period of tension and unrest. 

Returning to the cooperatives, numerous administrators and managers, especially in the foreign trade sector, were able to enrich themselves through lucrative deals with foreign investors. This culminated in Artem Tarasov, a founder of one of these cooperatives, proclaiming to the media that he was the first soviet millionaire in history. To the soviet population, who were taught from early the importance of economic equality and economic democracy, this was outrageous, at best. Riots ensued. 

The fact is the whole Perestroika proved to be a failure: in 1989-90 the USSR experienced significant inflation, allowing speculators to purchase goods at state-owned stores, which had fixed prices, and resell them at exorbitant rates. This led to state-wide shortages which further fueled the wrath of the population, increasing public unrest. The moderate 2.3% real economic growth in 1985 had turned into a -11% recession in 1991. 

Pressured by nationalist and pro-independence movements across the different republics, the Soviet regime organized a referendum in March 1991, where it was asked to the Soviet citizens if they wished to remain in a renewed Soviet Union. With a turnout of 80% of its population, over 76% voted that they wished to preserve the USSR, despite the hardships. 

However, this was not enough to prevent the dissolution of the USSR. Boris Yeltsin, who had been elected the president of the Russian section of the USSR in June of 1991, albeit initially claiming to be a pro-USSR reformer, would deal the decisive blow. His signature of the Belavezha Accords with the leaders of the Ukrainian and Belarussian republics in December 1991 marked the effective end of the USSR. 

The aftermath 

After the dissolution of the USSR, Russia was turned upside down, with enormous changes in the economy, society, and politics.  

Firstly, there was an opening of the Russian economy to the world, promoting the relations with foreign countries, especially with the U.S, as the dissolution of the Soviet Union also marks the end of the Cold War, followed by liberalization of the economy with Boris Yeltsin’s radical reforms.  

This shock therapy included the sale of the Russian state assets, privatization of some industries, and the liberalization of the economy. Although, these reforms did not happen the way Yeltsin predicted. During this process, the state assets were sold at a lower price than what they valued, and there was hyperinflation reaching 2 000% during 1992. The government, in an attempt to control it, implemented tight monetary and fiscal measures (such as taxes and interest rate increases and subsidy cuts). Nevertheless, this led to a shortage of goods because the producers began slowing down their production.   

In these circumstances, Russia lost most of its power and could no longer achieve global supremacy. It moved from a country that fought for global supremacy to a broken and corrupt country with an uncompetitive economy. Its economy suffered from the loss of some of its states. Another factor to take into consideration is that its Cold War economy was targeted to the military sector and it faced some difficulties in being competitive when they enter the global market. Consequently, there was a major decrease in real GDP per capita. 

A comparison of the real GDP per capita of the USSR with the USA and the world GDP per capita shows the dramatic crises around the time of the collapse that lasted for many years. 

This breakdown of the economy had an extensive effect on the living conditions of the population. Life expectancy decreased from 70 years to 64, only between 1988 and 1994, and by 1992 about a third of the population lived in poverty. There was also an extensive gap between rich and poor, worsened by the high corruption within the regime, revealed by the Gini Index that reached 48,4 in 1993. Besides that, the liberalisation of prices made an entire class of people with fixed income (such as pensioners) suffering a drop in living standards. Furthermore, there was an increase in criminality (in 1990 were registered 1. 84 million crimes, and in 1995, 2.76) since the regime lessened its force in an effort of democratisation, allowing the growth of the Russian mafia. 

Cartoon from 1992, regarding Yeltsin’s reforms. 

As the market barriers disappeared, western companies entered Russia. But other barriers disappeared as well. Western products, trends, and tastes became widely accepted and disseminated. These contacts with the West were not only an economic shock, but a cultural one as well. 

The collapse of the USSR created economic, geopolitical and cultural shocks and problems that are somewhat present today and may help to understand 2021 Russia. 

Sources: American Enterprise Institute for Pulbic Policy Research; BBC; Brookings Papers on Economic Activity; Financial Times; Gapminder; History.com; International Labour Office; Investopedia; Irénées; Journal of Eurasian Studies; Macrotrends; National Bureau of Economic Research; Norwich University; Pew Research Center; Russia Beyond; Statista; The Atlantic; The Conversation; The Guardian; US News; VOXEU; Wilson Center; World Bank. Robert W. Strayer, Why Did the Soviet Union Collapse?: Understanding Historical Change. 

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The team

Rui Ramalhão

André Rodrigues

Mariana Gomes

Palestinian Election

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Reading time: 7 minutes

For the first time since 2006, Palestinian citizens were expected to exercise their right to vote in legislative elections initially scheduled for the 22nd of May 2021. In a complex geopolitical territory located at a crossroads between Africa and Asia and with a past of Western influence, the opportunity to express their voice in the polls is a rare occasion for Palestinians. As it has been seen in current events, these elections are expected to trigger reactions from the international community and neighboring powers, notably Israel.

Modern Palestine’s complex past

Although the region of Palestine has long been controversial, regarded as the Holy Land by Christians, Jews and Muslims, the State of Palestine dates back to the 20th century.

Between 1896 and 1948, due to Zionist movement [1], and later to flee prosecution across Europe during the Second World War. Hundreds of thousands of Jews re-settled on what was initially the Ottoman Empire and following the Empire’s fall, British Palestine, in a majorly Arab and Muslim populated area. The local Arab community, which started developing their identity as Palestinian Arabs, resisted the attempt of a national Jewish homeland, claiming the land was theirs. Arabs thought Britain would endorse them in return for their support against the Ottomans during the First World War [2], but Great Britain and France predicted instead an international division of the territory [3]. In 1947 and marking the fall of British rule, the United Nations (UN) proposed a partition plan to split the territory in two and grant the city of Jerusalem, disputed by both parties as their rightful capital, a special international status. While the Jewish community agreed to the plan, Palestinians feverishly opposed it, the scheme being interpreted by locals as “Europeans trying to steal their land”.

Figure 1: UN proposed division of territory between Israel and Palestine in 1947
Source: Vox

Two major conflicts in the 20th century were especially defining for Palestine. Firstly, the Arab-Israeli war (1948) opposed Israel to five Arab powers: Jordan, Iraq, Syria, Egypt and Lebanon, seeking to establish “a unified Arab Palestine”. Following the conflict, Israel controlled more than two-thirds of former British-ruled territory. Additionally, Jordan took over the West Bank while Egypt took control of the Gaza Strip. In 1964, the Palestine Liberation Organization (PLO) was founded with the objective of forming an Arab state in Palestine, largely comprised of the territories that had previously been British dominated and would now be illegitimately occupied by Israel. The second major event was the Six Day War (1967), which again resulted in significant land losses for Palestine to the benefit of Israel, who took over the Gaza Strip, the West Bank, the Sinai Peninsula and the Golan Heights. Nonetheless, the PLO’s existence was recognized by the Israel through the Oslo Accords (1993), in exchange for Israel’s right to exist to be recognized by the PLO itself. Following these agreements, Yasser Arafat (PLO), Shimon Peres (Israel) and Yitzhak Tabin (Israel) were awarded the Nobel Peace Prize, for their efforts to create peace in the Middle East.

Palestinians wish to establish a State in a part or in all territory that is now occupied by Israel. Today, the State of Palestine is officially recognized by more than 135 UN powers (but not by the United States and Israel) and includes parts of modern Israel as well as the Gaza Strip, along the Mediterranean Coast, and the West Bank, which is located west of the Jordan River, although no international consensus regarding the borders has been achieved. Around 20% of the Israeli population identify as Arabs. The West Bank and the Gaza Strip are home to a majorly Arab population, territories which are also disputed by Israel, although many Palestinians also live in neighboring countries like Lebanon.

Fatah, Hamas and the long-lasting division of Palestinians

For decades, Fatah, the major political party in the PLO, dominated Palestinian politics. Fatah leaders negotiated the 1993 Oslo Accords that handed limited control of Palestinian territories from Israel to the new Palestinian Authority (PA). Since then, they have led the government through successive crises and peace deals with Israel and international parties.

In 1987, however, the opposition party Hamas was created on the pretext that Fatah and the PLO were too compromised with Israel. Hamas disagreed with many of the deals, and soon came to be seen by many as a threat to peace in the region, a violent extremist group who did not accept the existence of Israel and actively seeked its destruction. In 2003, Fatah negotiated with Israel under US President Bush’s “roadmap for peace” – a plan to end conflict in the region by creating a stable Palestinian state alongside Israel, which Hamas opposed.

In the 2006 legislative elections, Hamas won a surprising victory. With 74 out of the 132 seats in the Legislative Council, it could take control of most government positions. In response, the US and Israel imposed economic sanctions on the Palestinian Authority. They hoped these would destabilize the government, leading to new elections.

The formation of a Hamas government, in which Fatah refused to participate, led to an increase in hostility between both sides. These tensions quickly turned into incidents of violence between the supporters of the two groups, leading to dozens of deaths.

Figure 2: Hamas demonstrators clash with Palestinian Security Forces in the West Bank
Source: The Eletronic Intifada

In early 2007, Fatah and Hamas signed an agreement to form a coalition government, in order to end violence in the streets and lift international sanctions against Palestine. However, it was just some months until Palestinian President Mahmoud Abbas, Fatah’s leader, declared a state of emergency and dismissed the coalition, including the Hamas Prime Minister. Hamas, regarding the President’s actions as unconstitutional, formed an alternative government. A brief civil war erupted, with each party supported by different factions of the armed forces. These conflicts concluded with Hamas taking control of the Gaza strip, and Fatah having control of the West Bank.

Figure 3: Division of Palestinian State in the Gaza Strip, controlled by Hamas, and the West Bank, controlled by Fatah
Source: ResearchGate

Since 2007, many attempts have been made to mend the conflict. Disagreements over holding elections led legislative and presidential votes to be postponed in both territories. Numerous talks and attempted deals between the two parties were unsuccessful. Most recently, in 2017, Hamas and Fatah agreed to hold new legislative elections in 2018, but these never occurred. On the West Bank, President Abbas announced elections would be held in 2019, but then postponed them.

Palestinian Elections – Dream or Reality?

In 2021, Hamas and Fatah agreed to hold legislative and presidential elections once more, later scheduling them for the 22nd of May. However, it was not long until Abbas postponed both indefinitely, allegedly due to uncertainty regarding Palestinians’ access to polls in East Jerusalem. In fact, just as in the 2006 elections, while Israel has control of the area, it has issued no formal announcement on whether it will allow elections to take place.

This postponement has been widely criticized not only by Hamas, but also by future voters, especially those under the age of 34, who have not yet been able to exercise their rights. Some believe Mr Abbas postponed the elections by fear of not having enough support, as he has seen his popularity shrink in polls. Having led the country for a decade over his initial mandate, new younger faces are now competing against him even within his the party. Both Fatah’s party member Marwan Barghouti, who is currently in jail, and Nasser Al-Qudwa, who is the nephew of Fatah’s founder, will compete against Abba, being a symbol of a younger generation who seeks to reshape the party’s values. However, Fatah still holds some advantage over Hamas in election polls, partly due to the latter’s mismanagement of Gaza, who has seen three destructive wars over the last 10 years.

Figure 4: Mural painting in Gaza City calling on people to vote for the 2021 elections
Source: BBC

15 years later, these elections could symbolize a reunion of Palestinians with democracy.

The delay will cause a great disappointment among Palestinians, most of (whom) hoped it was time to end the dividiond and bring about a change.

Talal Okal, Gaza analyst

In light of the previous events, what will these elections mean? Will they mark a turning point in Palestine’s history, or is history just repeating itself?

[1] According to Britannica, Zionism is a “Jewish nationalist movement supporting the creaton of a Jewish national state in Palestine, the ancient homeland of the Jews. [..]. Though Zionism originated in eastern and central Europe in the latter part of the 19th century, it is in many ways a continuation of the ancient attachment […] of the Jewish religion to the historical region of Palestine, where one of the hills of ancient Jerusalem was called Zion.”

[2] McMahon–Hussein Correspondence.

[3] Sykes–Picot Agreement.

Sources: Britannica, History, BBC, Vox, Albawaba, Aljazeera, Reuters, Washington Post, Financial Times, Oxford Journals, Brandeis University Publication

Ana Terenas

Manuel Barbosa

Antonio Payan

Maria Mendes

The Hidden Champions of Germany

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Germany’s success has been built on its SMEs, but why do they succeed? Will the pandemic put an end to this remarkable journey?

Today, Germany is the 4th largest economy in the world in terms of nominal GDP, enjoying the biggest current account surplus on Earth, in absolute terms, even greater than that of China’s, and a high level of quality of life. It is, therefore, no wonder that it is seen as a role model for aspirating economies to follow. However, unlike many others, the engine of the German economy is not the big multinationals, even though it is home to quite large corporations, such as Siemens, Bosch, Daimler and Allianz. Rather, what allows the German economy to have an edge are its Mittelstand.

The Mittelstand are small- and medium-sized companies, which often only employ up to 500 workers. In fact, while Germany only counts for 28 of the global 500 biggest companies worldwide, in terms of niche markets – the main focus of the Mittlestand strength – the economic giant is most definitely a market leader, accounting for around 48% of these small “hidden champions”. They are given this nickname, because, although the markets in which they operate are not very large and they themselves are not well known, they are the market leaders of these niche fields. Examples of Mittelstand include sausage packaging, cabin pressure control systems for passenger jets, realistic 3D anatomical models, food for ornamental fish and shoe manufacturing machines.

Furthermore, the Mittelstand are normally family businesses which are mostly export-driven, being the main contributor for Germany´s long-standing positive trade balance. These small- and medium-sized firms account for around 99% of the total companies in Germany and employ close to 60% of the total employed workforce of the country. Moreover, these approximate 3.3 million firms are responsible for about 35% of the total country turnover. 

Figure 1 – SME shares 2018 in Germany; Source – Federation of German Industries (BDI – Bundesverband der Deutschen Industrie)

Why the Mittelstand Succeed

First of all, they focus on customer satisfaction, they are committed to establishing a long-lasting relationship with their customers, striving to attend to their wishes and not solely focusing on the profit side of the trade.

Secondly, they invest a lot in state-of-the-art technology, deploying significant resourceson innovation and differentiation. Indeed, data shows that Mittelstand enterprises have five times more patents per employee than large businesses, but that these are also five times less costly. Innovation and efficiency are key to continue leading the market.

Thirdly, they are less focused on immediate and short-run profit, instead opting to think carefully on their business choices, maintaining high equity ratios and sometimes foregoing short-term success for perhaps a lower, but steadier and longer lasting growth. In fact, most prefer not to rely on debt as a means for growth preferring to avoid it and grow more slowly, in a more “sustainable” manner. This aversion to debt may arise due to deep rooted cultural factors, as the word for guilt and debt is the same in German, “schuld”.

Moreover, they also value the workplace, with their workers being a detrimental part of their business. As such, they employ a lot of resources into guaranteeing a healthy working environment, striving to keep their employees motivated and, hence, promoting productivity gains.

Besides, this appreciation of the workforce is also seen in the effort they put into apprenticeship programs, a lot of which are aimed at newly graduates looking for an entry in the job market. In most countries, there are either very qualified college educated workers or very low skilled ones, and not much in between. In Germany, thanks to the close connection between high school education and the Mittelstand, there is a sizable medium-skilled workforce, ideal for complex manufacturing jobs.

Furthermore, in Germany, it is also common for labor unions and workers to have a greater saying in how companies are managed. In fact, large companies with more than 2,000 workers are required to have union representatives on their administrative boards. This shows that, in Germany, there is greater cohesion and connectiveness between workers and management, allowing companies to sometimes take tough decisions, such as reducing salaries in times of crisis without as much unrest, as workers are more aware of the firm’s difficulties.

Finally, the fact that most of these firms are passed down from many generations serves as a guarantee that the future owners were born into the trade and are well aware of the goals of the company, as well as of the structure of their operations, ensuring a great knowledge of the market in question.

Challenges for the Mittelstand

However, as competitive as the Mittelstand are, they also face a myriad of challenges. The pandemic, in particular, is pushing these hidden giants to the brink. Here are some of them:

The Mittelstand do not have as much bargaining power with their suppliers as their larger, publicly listed rivals may have, which may lead to lower profit margins.

Secondly, due to increasing globalization and freedom of exchange of goods and services between countries, the Mittelstand are facing growing international competition, especially as China transitions its economy to the production of more added-value goods.

An ageing German population is also a cause for concern, as this will mean fewer consumers for the internal market and a smaller labor force from which to recruit young and talented workers, which may reduce the total production capacity of the Mittelstand and also stifle the fervorous innovation these companies need to stay on top. German companies are actually already facing shortages of skilled labor.   

Sometimes, the family business characteristic can also be a disadvantage, as it may lead to problems of succession or even disputes among future potential heirs of the business.

The Mittelstand face a growing challenge regarding the digitalization of the economy too, and increasingly important technologies, such as AI and Big Data, have not yet been adopted at a wide range. Overall, there is still much to be done if these companies want to stay on top when the Industry 4.0 takes flight.

Nonetheless, all the challenges referenced so far have been ones that the Mittelstand had been facing even before Covid. As suggested before, however, the pandemic is bringing a new array of challenges.

Figure 2 – Top issues of business associations; Source: IfM Bonn 2020

Among them, lack of liquidity has been of particular concern, as business activity has greatly fallen and, unfortunately, due to the slow resolution of the pandemic, businesses have not recovered much. Although lay-off programs and other support measures from the German government have mitigated some of these problems, the fact is that they are no full replacement for normal business activity.

Due to the spread of the virus, companies have also been forced to shut down their facilities, which has caused halts to their production. Some firms have been able to cope with this shutdowns better than others, though, as industries that mainly rely on the so-called “white collar” workers have been able to maintain part of their activity through remote working models. Models that have also come with their fair share of challenges with regards to adaptation one must admit, but still these companies have performed better than the many that rely on blue collar workers.

Finally, the Mittelstand have also had to cope with pressure on their supply chains, as these too have been subject to restrictions, therefore causing delays and problems in terms of acquisition of inputs and for the export of products. Going forward, many of these firms are rethinking their supply chains by possibly decreasing their reliance on overseas suppliers and switching to more local networks to a greater degree than before.

Final Remarks

Although the large German corporations may catch everyone’s eye, Germany’s success lays in the giants one does not see. The Mittelstand focus their attention on niche markets, too small for the big companies to get involved in, but too complex for the average smaller company. Their achievements are the result of many factors, but the challenges they face are equally as many. Nevertheless, one ought not to bet against them not coming out on top of those.

Sources: BBC, BDI, Entrepreneurial Living, Financial Times, IfM Bonn, McKinsey and Company, Harvard Business Review, PwC Reuters, The Economist

Rodolfo Carrasquinho

Inês Lindoso

Jorge Lousada

New opportunities call for new strategies: Nudging in the e-commerce era

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With the introduction of the Internet into our society, online transactions between producers and consumers were made possible and thus, e-commerce was born. Amazon was one of the first renowned e-commerce websites in the USA that paved the way for thousands of other businesses to start selling products on the internet as well. Thanks to easy access, convenience and mostly pleasant experiences the digitalization of sales has developed exponentially, shaping consumer’s buying methods and needs.

Additionally, social media was also created due to this technological breakthrough, as a way for people to communicate, share thoughts, recommendations and information. These online communities then evolved into much bigger platforms, not only to socialize, but also to serve as retail and marketing tools. 

Moreover, ever since the Covid-19 pandemic became a part of our lives, social media platforms and e-commerce have boomed tremendously. Faced with lockdown measures, a wave of isolation and uncertainty settled into people’s minds which caused an unprecedented change in their behavior as consumers. Online shopping and bulk-buying (excessive purchase of a certain good) became the new norm. As a result, businesses and brands had to adapt in order to meet these changes in new ways of selling and marketing.

This article will discuss how e-commerce and social media has influenced consumer behavior.

From the first e-commerce online platform to worldwide digital marketplaces, running an online business is not only a new concept, but also a highly competitive one, due to low barriers of entry. As a result, securing consumers and making them become loyal customers is at the top of the priorities of any online business.

Amazon was one of the first online retailers to implement user reviews and ratings for their products, which to this day is a very common tactic among these markets. However, any person can access a website for the first time and leave it immediately the second after with no inconveniences imposed or time wasted. Behavioral economics can help these online stores with nudging strategies for potential consumers that find themselves on what is called a sales funnel (a way to illustrate what processes to apply as you observe each stage of a potential consumer’s buying decision).

Stages of the Sales Funnel

Starting at the top, we have ToFu (Top-of-the-funnel) consumers, mainly first-time website visitors. At this stage, the biggest concern is to ensure your business is trustworthy and that you somewhat segmentate your customers according to their preferences. Such can be achieved through lead generation quizzes during a sign-up. It is very likely that many of us have come across a BuzzFeed quiz to know which character in a famous series we are or what type of coffee we relate to today and found it quite entertaining. This is an example of an interactive and creative way to offer first time customers more personalized products and specially gather more information about them, without them even realizing that they are providing you with crucial data regarding their preferences.

Businesses such as vitamins and hair care subscriptions are known to use this strategy in order to best select products that each consumer would be more willing to buy. Questions such as the example below, pop up one by one and in between a request for your e-mail address may appear. While they ask, it is common to notice a small text explaining what the purpose is for giving the information to them, e.g., “So we can save your answers”, reclaiming a sense of awareness and trust to the consumer, making them comfortable in sharing valuable personal data.

Example lead generation quizz

Another way to gather more information about new consumers and ensure trust is through social media. A study from GlobalWebIndex shows that social media influences 71% of consumer behavior. Big platforms such as Facebook, Instagram, Twitter and recently TikTok put a huge emphasis on advertisement as their main source of profit, which is personalized to each consumer. Thanks to the ongoing pandemic this strategy has caught more and more attention from all businesses, as we are tucked away in our houses with much more time to spare scrolling through our phone.

Such paved the way to a new and very popular career path known as social media influencers.These people are content creators on these platforms that form a large and loyal audience, sometimes up to millions, thereby even being viewed as internet celebrities. A research study in 2017 (De Veirman, Cauberghe and Hudders) states that having a large number of followers leads to the belief that an influencer is likable and popular, which creates opportunities for successful promotion of brands. This differs from a traditional ad, because of the interactive aspects made possible by social media, as followers have a sense of connection and identification with the influencer. Thus, this highlights the importance of social proof, since an advertisement done by an internet personality that you follow is mostly considered a credible and genuine recommendation.

How social media promotes global consumer’s engagement

Furthermore, down-the-line we get to the MoFu (Middle-of-the-funnel) customers, they are the ones who have engaged with e-mails and products but have not made a purchase yet. Therefore, subtle and profitable nudging strategies to better guide them through their shopping experiences are applied. Some that stand out are, for instance, recommending products based on abandoned items on shopping carts, but even more interesting, sending sales promotional e-mails in the form of calendar invites. During busy events and holidays, such as Black Friday and Christmas, one can feel quite overwhelmed already with the numerous sales and promotions that are happening at the same time. A good way to stand out from the crowd is to send out beforehand the calendar’ invites to your customers with the dates and hours of when the sales are starting.
In both strategies, the company and the consumer are benefited, as the latter also enjoys recommendations in accordance with its preferences.

Example of promotional calendar invite

Lastly, we reach the BoFu (Bottom-of-the-funnel) costumers. These are consumers who are ready to buy for the first time or are repeated customers. In this case, the payment process needs to be easy and nudge their specific purchases with the right incentives. A common and frustrating situation is when you find yourself eager to buy that jacket you always wanted, but unfortunately it happens to be out of stock. Businesses redeem themselves by instead redirecting the customers from the sold-out page to similar or top-rated items and wish lists. Besides, and by also triggering FOMO (fear-of-missing-out) on consumers, companies establish a certain benchmark of items’ value in the shopping basket for free shipping discounts, in this case, two distinct effects come into play, not only does the consumer feel the urge to make the best possible deal, but also is affected by the power of the “free” in the shipping part.
As Dan Ariely showed in his book “Predictably Irrational”, when people were given a choice between a 15cent premium chocolate and a 1cent low quality one, only 27% chose the low quality one. In comparison, by simply dropping the price of each chocolate by 1 cent (maintaining the same economic incentives but now with the low-quality chocolate as free), the number of people who went for the low quality one were now 69%.

Furthermore, with continuous technological advancements, payment transactions have never been easier. With the introduction of PayPal Express, checkout frictions have mainly disappeared. A business report by Volusion, states that online merchants who offered this option have said that its buyers increased by 5.4% with 83% of PayPal users being first time consumers. An online purchase has now evolved to be one click away from your mobile phone.

How e-commerce digitalized the payment transactions

All in all, e-commerce opened the doors for new businesses and careers to emerge and as lockdown and the pandemic unfold, these behavioral strategies will only be amplified as more people from all age groups globally adhere to these platforms. Social media and Influencers have also helped advertisements be more targeted and viewed as authentic and thus, becoming more effective, forever changing the paradigm of marketing and consumer behavior. 

Sources: Big Commerce, Miva, Maryville University Blog, Volusion, Sleeknote, Search Engine Watch, Forbes.

Benedita Elias

Afonso Serrano

Daniel Calado

Mozambique’s Cabo Delgado Conflict

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On October 5th, 2017, 3 police stations in the city of Mocímboa da Praia were raided by 30 armed attackers, killing 17 people, including two police officers and a community leader. This attack marked the beginning of a prolonged conflict in Mozambique which has destabilized the province of Cabo Delgado and has triggered a humanitarian crisis.  

Mozambique is being hit by a devastating wave of terrorist attacks. The unrest has already resulted in over 4.000 deaths and 700.000 internally displaced people within the Cabo Delgado province, where the conflict is centred. These attacks are part of an ideologically driven war, where Islamist militants are attempting to establish an Islamic State. The main insurgent faction is Ansar al-Sunna, locally called Al-Shabaab. It has ties to ISIL, but it is not controlled by them. There is, however, evidence that ISIL has sent trainers to aid the insurgent forces. 

Mozambique as a vulnerable country 

Mozambique, which ranks as one of the lowest countries in terms of GDP per capita, has extreme levels of internal wealth inequality, and the northern provinces have disproportionately high poverty rates. These inequalities are especially worrisome given the large amount of internally displaced people at the moment. One of the UN’s main targets currently is to ensure those people are assisted and taken care of. According to the UN’s World Food Program, over 950.000 people are currently facing severe hunger in northern Mozambique. Moreover, the north’s significant exposure to terrorism and violence is partly due to lower wealth in the region and explains how 100 radicals sufficed to occupy and control Palma, one of the largest cities of the province. Northern Mozambique was targeted due to its insufficient ability to oppose violence and fragile infrastructures. Most radicalized members are Mozambiquan nationals and come from Cabo Delgado. The other members come mostly from neighbouring countries, such as Tanzania, Somalia, and Kenya. The group finances its operations through illegal contraband, religious networks, and human trafficking, which they primarily use to send new recruits to neighbouring countries for military and ideological training. 

There’s no end to terror. What are the impacts? 

The terror in the Cabo Delgado province has lasted for almost four years now. In this period, there have been recurrent cases of group beheadings, violence and the raping of women, burning of houses, attacks on buses, and ambushes on public roads. The last major event was the attack on one of the province’s most important cities, Palma, located close to Total’s multi-billion-euro natural gas project. 

“Valued between 20 and 25 billion euros, the company’s extraction project is the largest private investment underway in Africa”, but after the continuous attacks in Palma, Total withdrew the remaining staff it kept in the project, delaying a billion euro valued initiative that had scheduled the first liquefied gas export for 2024. 

Strongly impacting the country’s exports, the attacks also resulted in important economic consequences for Mozambique. In fact, the sudden interruption of Total’s activities affected other companies with links to their value chain. The “armed attacks in northern Mozambique have caused losses of 174.4 million euros and led to the closure of 1.110 companies”, stated the president of the Confederation of Economic Associations (CTA). Of the total number of companies that have been forced to close due to the armed violence in Cabo Delgado, 410 are from the districts directly affected by the attacks. Due to strong connections within the value chain, many companies suffered indirectly from the attacks through exposure to those chains of trade. It is estimated that 198.000 jobs were lost, of which 56.000 in business units in the districts affected by the violence and 143.000 in the family farming sector, during the almost four years of conflict. 

Moreover, the crisis has officially been declared a humanitarian disaster. According to a report by the International Organization for Migration (IOM), 18.661 people have fled Palma following the attack. Of those displaced, 43 percent are reported to be children and 31 percent women. The organization raises concerns over the possible spread of cholera, “warning that, since March [2021], 15 local authorities in at least five districts of the province have recorded 3.141 cases and 16 deaths”, measles, and, of course, Covid-19. The country has also been experiencing the negative effects of climate change, as various cyclones hit the region. As the strength and frequency of natural disasters increase, existing wealth inequality and the country’s vulnerability continue to escalate. 

The world is watching 

As the conflict persists, the news of the dramatic events quickly spread around the globe, triggering responses by many countries and organizations. The Mozambiquan President, Filipe Nyusi, expressed the need for help from the Commonwealth to cope with Covid-19, as the country is having difficulty controlling the virus with so few resources and amidst a military conflict. “The Commonwealth can make a difference, acting as a whole, in mobilizing more resources to acquire vaccines against Covid-19 [for member countries with fewer means],” Filipe Nyusi declared. 

Portugal, which has close ties to Mozambique, sent 60 members of the military to assist the country following the Palma attacks, in addition to recently offering 250 thousand euros in aid. The Portuguese Ministry of Foreign Affairs (MNE) condemned “vehemently” the terrorist attack, while the president of the Camões Institute said that the next cooperation program with Mozambique, to be signed by the end of the year, should be marked by the crisis in Cabo Delgado, advocating the strengthening of aid: “We are going to start negotiating the strategic program of cooperation with Mozambique for the next five years and we obviously cannot be unaware of what is happening [in Cabo Delgado], both in humanitarian and development aid terms,” said Ribeiro de Almeida. 

Globally, the United Nations (UN) is also watching carefully the recent events in the African region. The president of the UN Security Council ensured that the situation is being followed with maximum attention, due to a possible “rapid expansion” of the violence to other African regions. The UN Under-Secretary-General and Special Representative of the Secretary-General on Sexual Violence in Conflict, Pramila Patten, also assured that the Office on Sexual Violence is closely monitoring the Mozambique region. However, the UN special representative to the African Union said that the insurgency in Mozambique is not advanced enough to justify international military intervention or peace operations. 

More humanitarian and economic aid is being planned both by the UN, Portugal, and other nations, but the conflict keeps persisting and seriously threatening the country’s economic development, says the IMF director for Africa. The question that remains to be answered is, still, for how long will this atrocious situation drag on? 

Sources: BBC, Expresso, Observador, Publico, RTP, TVI, UN News, Visão 

Christian Weber

Ana Terenas

Pedro Estorninho

Electric rEVolution | Will Tesla win the race?

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Tesla, the electric car company, has been making headlines on a regular basis, not only due to Elon Musk’s unique persona, but also owning to pioneering growing trends in the market, including driverless capabilities and car sharing.

The company’s innovative approach changed the landscape of the automotive industry from the process of buying a car all the way to what powers it. Its influence is so significant that the public’s changing perspective regarding electric vehicles has come to be known as Tesla effect, as a result of the role of the American manufacturer in marketing the segment as tech and performance oriented, rather than just environmentally friendly, as previously perceived.

However, Musk’s success in the automotive world may be short-lived as traditional manufacturers, such as Volkswagen, Volvo and Chinese brands follow suit and make a move to the now-mainstream electric vehicles, a market Musk essentially created, thus threatening Tesla’s dominance in the process.

A bubble waiting to burst?

Tesla’s impressive current market capitalization makes it the most valuable car company worldwide. In fact, its share price skyrocketed more than 700% just last year; if we went back a decade, then, since it went public in 2010, Tesla´s stock price registered no less than a monstruous 20,000% increase. However, digging deeper into production output and financial performance, there is not much significant substance to back up this massive growth, other than investors’ expectations.

Figure 1 – Tesla 5 years stock price performance
Source: Nasdaq

As a matter of fact, only last year was Tesla able to avoid a net loss (registering for the first time a positive $690 million net income), with a net profit margin of 2.2%. Adding this to an extremely high P/E ratio of around 1000, it is not difficult to reach the conclusion that Tesla is be overvalued.

Figure 2 – Tesla Net Income evolution 2011-2020
Source: Macrotrends

Nevertheless, we cannot possibly disregard the huge driving force that Tesla represents as the clear market leader among the EV (Electric Vehicle) market, being undoubtedly the main trigger of the electric revolution we are currently facing. Indeed, Tesla has a great lead in this ever-growing sector, both with its first-mover advantage and its crucial competitive advantage in terms of technology and batteries, as the partnership with Panasonic provided the manufacturer with the best-performing battery autonomy range in the market. Moreover, the fact that the company was able to experience such an impressive sales growth in a year in which many car makers saw their revenues decreasing is by itself a remarkable achievement, leading many to expect Tesla to become the future leader of the car industry.

Figure 3 – Global Plug-In Electric Vehicle Market Share between January and June 2020, by producer               
Source: Statista

A future market leader?

This poses the question of whether, once the EV market matures, Tesla will be able to maintain its position as market leader, with other historical giants of the industry massively shifting their production towards the electric sector. Most likely, the answer to this question will be directly linked to the direction towards which Elon Musk will decide to take his company; by all means, choosing to focus on high-performance vehicles or opting instead to pursue his original master plan of making cars affordable to all may dictate Tesla´s future fate in the car market.

Despite the fact that Tesla’s product portfolio is on the high-end side with prices up to $140k, the brand had long planned an affordable vehicle – Model 3. This is a $35k (in the USA) entry level car and bestselling EV with 365k deliveries in 2020, though the car is still rather expensive for most people, particularly outside the US. Moreover, it comes packed with technology and features seen as luxurious, which are not a priority for the majority of consumers who see price as a determining factor, especially now that EV are no longer a niche market.

Can Tesla withstand competition from legacy manufacturers?

As aforementioned, the company’s plan to dominate the industry is now threatened by conventional carmakers, such as Volkswagen, which is committed to this new market and even has an ambitious plan to knock out Tesla from the podium by 2025.

Last December, the new ID.3 from Volkswagen was the second most sold car in Europe, with 27,997 units sold, 3,430 more than Tesla’s Model 3. Volkswagen’s brand-new car has a slightly greater range (15km) and is cheaper (€4,000), but has lower power than Model 3, smaller cargo space and does not have autopilot. Most importantly, it does not seem to discourage consumers from buying a ID.3 instead of a Model 3, especially because the car already fulfils the needs of most consumers in a great package overall.

Figure 4 – New Volkswagen ID3, released in September 2020.

Competition also comes in the tech segment, mainly in China. The commanding position in the biggest electric vehicle market (China) is occupied by Tesla. Nonetheless, during last year, Tesla saw rivals such as Nio Inc., Xpeng Inc. and Li Auto Inc. catching up. The difference in cars sold between the trio and Tesla has been declining, reaching the lowest value in September 2020, amounting to a total of 1,000 cars. The rise of Chinese EV is strongly connected to Nio’s boosted sales, even though at a higher price tag than Tesla’s Model 3. The threat from China should not be ignored, since it is Tesla’s second largest market.

Figure 5 – Monthly EV Sales figures in China in 2020 by producer                    Source: CAIN

Which Tesla will we see in the future?

Although Tesla has surprised us before, its best chances are to stick to its current target market of high-performing cars, that offer the best technological features to consumers who value those features and are willing to pay a premium. In this area, Tesla has a big advantage that allows it to exercise a fierce competition with its direct rivals: no other car company has yet been able to offer the same high-speed range in an EV and battery autonomy like Tesla. However, it is unclear whether the company will be able to sustain this competitive advantage in the long term, as the tendency is for other companies to be able to eventually reach the same technological potential. Moreover, even with superior features, Tesla has not been able to convince a big share of the loyal consumers of long-standing companies, who prefer to abdicate some horsepower for the quality and reliability traditional automakers have left us accustomed to. Most importantly, legacy manufacturers seem to be transporting the driving essence people are familiar with to electric cars, making the move to electric easier, which might make Tesla’s job to win over customers certainly more difficult.

Notwithstanding, Tesla has been especially successful in captivating the American market, with more than 50% of its sales being centred in the US, a fact they have most definitely taken into consideration, as it has been made clear with Tesla’s bet on the innovative Cybertruck, surely having this prosperous target market in mind.

Regardless of Tesla being or not the biggest manufacturer in 5- or 10-years’ time, one thing is certain: Tesla has accomplished every objective the company established back in 2006 when Musk released The Secret Tesla Motors Master Plan. Furthermore, the brand shed light on a fundamental aspect, the sustainability of transportation, a sector responsible for 28% of all greenhouse gas emissions. Whether you buy a Tesla, a Volkswagen ID or any other electric car, you are proving Elon was right in pursuing the sustainable energy project.

Sources: Business Insider, CAIN, Car and Driver, Cleantechnica, Forbes, Inside EV, Macrotrends, Marketline, Nasdaq, Statista, Tesla, Volkswagen.

Tiago Rebelo

João Correia

Inês Lindoso

Scientific revision: Patrícia Cruz

The Po(o)rtuguese Problem: Portuguese Economic Growth Backwardness

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Reading time: 6 minutes

Introduction

The Industrial Revolution in 18th century Britain was a turning point in History. With industrialization countries were able to have sustained economic growth for long periods. Successive waves of industrialization, occurred in Europe during the 19th century, bringing a period of great economic expansion. However, some countries, like Portugal, grew but not as much as the European leaders. This trend continued for most of the 20th century, with some exceptions. Today Portugal still lags in many indicators from its European counterparts.

            Our goal with this article is to understand a part of the historical dynamics that prevented Portugal from reaching sustained economic growth. We will use the “four golden rules to achieve lasting economic growth” as explained by a group of our colleagues (https://theawarenessnews.com/2021/03/08/four-golden-rules-to-achieve-lasting-economic-growth/) and explain how they evolved during Portugal’s contemporary history.

Economic Diversification

One of the main drivers for real economic growth is economic diversification. Succinctly, if an economy is well-diversified, then its performance will not be as crippled if one of its sectors faces adversities, thus being easier to deal with shocks and facilitating long-term economic growth.  

Concerning Portugal, it would be valuable to analyze the impact of its different economic sectors on its GDP to discover whether the country ever was dependent on a specific area of its economy.  

Table 1 – Percentual impact of each sector on Portugal’s GDP; Source: Bank of Portugal (1954-95) and INE (1995-2010)

From the table presented above, we see that Portugal’s Agricultural and Industrial sectors have lost significant influence over this period, going from a combined 55% of Portugal’s GDP in 1954 to a mere 14,5% in 2011. Consequently, a gradual increase in the services industry has been observed, overtaking the previous two as the main sector in Portugal’s economy.

One must ask then if this evolution is different than the one experienced in most Western countries. The answer is negative. This information is reflective of the contemporary deindustrialization phenomena that have led to a gradual shifting of industries that were once established in the Global North to the Global South, particularly to South East Asia. Likewise, the development of the services industry, mainly propelled by developments in technology, has been observed throughout most developed economies.

Besides, Portugal has never even been a country with the possibility of being dependent on a certain commodity which could have swayed Portugal’s past leaders to fully focus on the development of a certain facet of its economy.

Therefore, we do not believe that a lack of economic diversification could explain Portugal’s economic shortcomings.

Productivity

Another factor that is usually employed to explain long-term economic growth is the level of productivity of an economy. Productivity measures the efficiency of production, meaning that a productivity improvement would be an increase in the output produced by each worker or each machine in an economy. It is expected that higher levels of productivity would lead to greater profits for businesses and income for individuals.

Regarding Portugal, throughout its history, there have been many periods where productivity growth was observed. From the late 19th century to the First World War, when the fires of industrialization were first ignited in Portugal, to the periods of 1951-1973 and 1985-2000 there have been plenty of years where productivity in Portugal grew.

However, these levels of productivity have always been worse than the ones experienced in most of western Europe. When in the mid-19th century countries in central Europe started to benefit from the industrial revolution, Portugal’s main economic activities were still related to the primary sector, with the exportation of cork and wine, for example. It seems as if, throughout its most recent history, Portugal has always been trailing behind the rest of Europe in this field.

Figure 2 – Labour productivity per hour worked in Portugal; Source: Pordata

This trend has not stopped for the past two centuries, resulting in Portugal today being the 7th least productive country in the European Union, having only 65,9% of the EU average levels of productivity in 2017.

Could lower levels of productivity explain the economic flaws of Portugal? Perhaps. The problem with productivity is that many other variables can influence it, such as geography or the a country’s institutions. For example, it would be nonsensical to claim that the main reason why the Bedouin tribes of Mauritania are not as wealthy as the Portuguese is a reduced level of productivity when the hardships of the Sahara Desert and the historical phenomena of the region are vastly different from the Portuguese’s.

Openess to trade

It is a well-known result in economics that openness to trade is highly correlated with long-term economic growth. As the economic historian Jaime Reis pointed in his investigation of the phenomenon of Portuguese economic backwardness, peripherical economies in Europe seemed to benefit from integration in international trade in the 19th century. However, for the Portuguese case, the data indicates that there were not many developed exporting sectors in the country that could have lead to an industrial take-off. Even more, Portugal was not fully open to international trade, nor able to exploit all opportunities trade gave to development.

Analysis for other periods gives even more evidence of the important correlation between a higher degree of openness to trade and economic growth. A study by Óscar Afonso and Álvaro Aguiar concludes that the acceleration of trading relations relates to the improvement of the economy’s productivity from the 1950s and 1960s onwards and the convergence with the most developed European countries. The integration in the European Economic Community in the 1980s was also an important driver of economic growth and convergence.

In conclusion, it does seem that openness to trade is correlated with the historical growth of the Portuguese economy, but there is not much evidence to support the idea that this is the most important factor to explain the country’s problems.

Institutions

Lack of “inclusive institutions” might be the factor. This term first appeared in Why Nations Fail and reinforces the importance of respecting property rights and having an effective justice to achieve continuous prosperity. The concept is defined in opposition to the concept of “extractive institutions”, ones that extract resources from the economy to the benefit of a small group, thus preventing sustained growth.

Portugal’s contemporary history is a pendulum that swings between more inclusive to more extractive institutions, and back to more inclusive institutions. The 19th century starts with the end of absolutism and the instauration of the liberal monarchy. However, the monarchy was not always a fully liberal regime, with periods of instability and authoritarian rule. In 1910 came the Republic, another period of instability that ended in the corporativist dictatorship of the Estado Novo, an obvious example of “extractive institutions”. Only in the 1970s did Portugal come to be a modern democracy.

We see that overall, the period is marked by instability, lack of liberal and democratic institutions, and by regimes and elites that prevented the development of growth-friendly institutions and reforms.

The weight of history can be seen in the institutional problems Portugal faces today. The 2020 Corruption Perceptions Index places Portugal in 33rd place, behind several developing countries. This value suggests Portugal is not among the most efficient economies, as corruption is expected to result in lower levels of capital productivity.

In the 2020 Economic Freedom Index, Portugal has an overall score of 67, making it the 52nd freest economy in the world and 29th in Europe. The index identifies the government’s longstanding record of overspending and the continuing need for labor market reforms to reduce the number of workers who are forced to take temporary or part-time positions as the two major impediments to a greater economic freedom. While the business and monetary freedom are considered attractive from a regulatory point of view, labor reform packages in recent years have not been able to succeed in raising labor productivity.

The institutional factor may be the reason why Portugal is not achieving strong prosperity and still lags behind the most developed countries.

Sources: Análise Social; Banco de Portugal; Conselho para a Produtividade; ECO; Francisco Manuel dos Santos; Jornal de Negócios; Jornal I; Instituto de Ciências Sociais; Instituto Nacional de Estatística; Pordata; Público; Sábado; Transparency International; The Heritage Foundation

André Rodrigues

Madalena Andrade

Rui Ramalhão

The Wall Street Crook

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Reading time: 6 minutes

“In today’s regulatory environment, it’s virtually impossible to violate rules […] it’s impossible for a violation to go undetected, especially for a considerable period of time” was Bernard Madoff’s opinion on how “wrong” people misjudged Wall Street, in October 2007, one year before being considered the greatest scammer of Wall Street history for having ran, more than 15 years, the largest Ponzi Scheme the world had ever seen. Madoff has passed away on the 14th of April 2021, at the age of 82, due to health complications, in the Federal Medical Center, in North Carolina.

Bernard Madoff: The Rise

Bernard Lawrence, known as “Bernie” Madoff, was an American hedge-fund investment manager and former chairman of the NASDAQ stock market (in early 1990s), who executed the largest Ponzi scheme in history. This scheme translates into a financial fraud in which the first investors are reimbursed with money acquired from subsequent investors, instead of the real return on investment. He defrauded thousands of investors by tens of billions of dollars over at least 17 years, and possibly more.

Bernie Madoff started his career as a penny-stock trader in Wall Street. At age 22, in 1960, he created “Bernard L. Madoff Investment Securities, LLC”. He started by trading penny stocks with $5,000 earned by working as a lifeguard, and then persuaded family friends and others to invest with him.

The success of the company began when Madoff and his brother Peter started developing electronic capabilities that attracted a large flow of orders and boosted the business by providing insights into market activity. By the 1990s, Madoff’s broker was processing 10% to 15% of all trading orders for the New York Stock Exchange (NYSE).

Madoff was so well-respected on Wall Street that he also served three terms as chairman of NASDAQ stock exchange board of directors. This would later provide him the reputation and networking he needed to create a Wealth Management unit within his investment firm. It was in this department that Madoff pulled off the largest Ponzi scheme in history.

The Scheme

It is hard to comprehend the reason why Madoff started his Ponzi scheme, in the first place. Equally shrouded in mystery is the time at which it all started.

Madoff claimed in court that his scheme started in 1991. However, one of his closest associates, Frank DiPascali, who had worked at his firm since 1975, said the fraud had been occurring “for as long as he remembered”.

Madoff’s Ponzi scheme story is, in many ways, a story of successful marketing. Indeed, one of the reasons why Madoff was able to sustain the operation for so long was his great ability to bring in new investors. He started off by introducing a brand-new investment approach that would involve a highly complex derivatives trading strategy. He named it the “Split-Strike Conversion” strategy, and began pitching it to his investors, stating that it was able to provide them with steady returns, alongside low-risk.

Madoff would sometimes reject new clients at first, to create a feeling of exclusivity around his money-management services.  Overall, his reputation in wealthy social circles grew and the steady and high annual returns, always between 10 and 20%, made it so that he did not have any shortage of new people wanting to invest their capital. Madoff did not attract wealthy investors from the social elites only. His scheme also affected many people who were not very wealthy and that entrusted him with their life’s savings. Among his clients were also several non-profit organizations and major banks and corporations, such as BNP Paribas, Banco Santander, and Bank Medici.

Madoff mostly kept his investor’s funds at an account in Chase Manhattan Bank and would pay out their supposed “returns” from the capital acquired from other investors. The great complexity of the whole operation was in forging the return statements and other documents that might come under scrutiny from clients or from the SEC (U.S. Securities and Exchange Commission). Madoff would work from his returns backwards, that is, he would start off from a certain return and then see how to forge a trading record that could justify that return. So, Madoff and his associates would look at previous price changes in stocks and other assets and would create an investment strategy that would have corresponded to the paid returns.

Overall, Madoff’s great attention to detail when forging all the required documents, and his intelligence to lay low, sometimes fake negative returns, either during stock market rallies or crashes, allowed him to go under the radar for so many years.

Madoff’s Fund returns vs the Benchmark (Sentry was Madoff’s largest investor). Madoff’s scheme almost always provided the same results, even laying low when the market spiked in the Dotcom bubble (1994-2000). Source: Investing Per Excellence

There were also some special clients, the so-called Big 4 (not the ones you are thinking about, but unknown multimillionaires), whose accounts stood out and were handled differently from the other clients’. There were instances when some of these clients would send back their forged trading statements to Madoff and his accountants, when they thought that their returns were too low. Miraculously, the amended accounts would then show higher returns. Indeed, this proves that there was some pressure on Madoff for higher returns from clients who knew about the fraud that was occurring.

The Fall

Well, as the old saying goes, “if something seems too good to be true, it probably is”, and, even though the collapse of Madoff’s wealth management division surprised the financial system, it was not by lack of warnings.

Harry Markopolos, known today as “Madoff’s whistle-blower” was a portfolio-manager at a Boston trading investment firm that first spotted the fraud in 1999. Back then, his boss informed him of a hugely profitable hedge fund, ran by Bernie, that was delivering steady 1 to 2% returns a month, and would latter ask him to recreate his “Split-Strike Conversion” strategy to try and duplicate Madoff’s results for their own firm. In Markopolos’ words: “It took me 5 minutes to know that it was a fraud, it took me another 4 hours of mathematical modelling to prove that it was a fraud”. For Madoff to be executing his trading strategy and perform the way he was, he would have had to buy more options on the Chicago Options Exchange than actually existed. For Markopolos, there were only two plausible explanations for the outstanding performance: either Madoff was insider trading or he was running a huge Ponzi scheme. He later took his suspicions 5 times to the Securities Exchange Commission (SEC), to which they replied that “there was no evidence of fraud”.

Harry Markopolos, Madoff’s whistle-blower, testifying in the senate how he was ignored by the SEC. Source: CNBC

Despite numerous warnings concerning Madoff’s activities, the suspicions of fraud did not themselves led to the collapse of his investment firm. Amidst the 2008 subprime mortgage crisis, multiple investors tried to withdraw their money from the fund only to realize that, from the supposed $20bn he was holding, only $200mn were left. On December 11, 2008, Bernard Madoff was arrested and charged with securities fraud, one day after revealing his scheme to his two sons, Mark and Andrew Madoff.

The End

Following Madoff’s arrest, the case was publicized around the world and was talked about in the news 24/7: it was the largest Ponzi scheme in history. Madoff plead guilty to all charges brought against him in court. The judge sentenced him to 150 years in prison, the maximum for his crimes, and a symbolic sentence for what the judge considered was “extraordinarily evil” conduct by Madoff.

Bernard Madoff arrest. Source: nypost

Following Madoff’s arrest and incarceration, efforts began to try to help victims recover their lost funds. The Madoff Victim Fund was created to try to restore funds to victims of the scheme, many of whom were thrown into financial instability with the collapse of the scheme. People who benefited from Madoff’s scheme had to forfeit their gains and, through this fund, this money is being returned to those who were affected by the scheme. So far, Madoff’s victims have been able to recover about 80% of their losses.

On April 14, 2021, Bernard Madoff passed away at the age of 82, in the Federal Medical Center in North Carolina, due to kidney disease.

Sources: Encyclopedia Britannica, Fortune, Investopedia, The Motley Fool, Wikipedia

Francisco Nunes

Raquel Novo

João Baptista

João Correia

Portuguese Presidency – Priorities for the EU

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On midnight of January 1st of 2021, while most Europeans were celebrating the end of annus horribilis 2020, a team of hundreds of people, divided between Lisbon and Brussels, were taking on the six-months challenge of the Presidency of the Council of the European Union. To those readers who are not up to date on how the European machine works, the Council of European Union – not to be mistaken by the not at all confusingly named Council of Europe – has a rotating six-month Presidency among the 27 members of the EU. To avoid further confusion, from now on, we will be referring to the Council of the European Union as simply, the Council.   

The moto of the Portuguese Presidency is “Time to deliver: a fair, green and digital recovery”, and it will be working around the following 3 priorities: 

I. Promoting an European recovery boosted by the green and digital transitions. 

II. Delivering the European Union’s Social Pillar as a key element for ensuring a fair and inclusive green and digital transition. 

III. Strengthening the strategic autonomy of an Europe that is open to the world. 

Portuguese Prime Minister, Antonio Costa, in front of the logo of the Portuguese Presidency. Picture from Politico. Taken by Antonio Pedro Santos 

According to the Portuguese government, these three priorities will  be achieved under a program focused on five lines of action. The first of which is a Resilient Europe that promotes the Union’s recovery, cohesion, and values. Ensuring the implementation of the new seven-year Multi-annual Financial Framework (MFF) that came into effect on January 1st is one of the responsibilities of the Presidency that fall under this line of action. You may learn more about the new €1 trillion 2021-2027 MFF on a previously published article titled “European Budget”. On top of the new MFF, Portugal will have to ensure the implementation of the €750 billion NextGenerationEu recovery package that aims at helping member states recover from the economic and social deterioration caused by the Covid-19 pandemic.

 In this context, Portugal has invited all 27 member states to a high-level summit in Lisbon focused on the recovery and response to the economic crisis. Besides the goal of guaranteeing the recovery of the EU from the Covid-19 pandemic and its devastating impacts on the European Economy, Portugal wants to strength the EU’s coordination in disaster response and enhance its capacity to identity and tackle future infectious diseases. This objective is aimed to be achieved through a reinforcement of the European Union Civil Protection Mechanism, which may be used by countries when their own domestic capabilities are overwhelmed by a disaster.  

The European Budget for 2021-2027 and the NextGenerationEu recovery plan. By the Council of the EU 

As for the controversial Pact on Migration and Asylum that was announced by the Commission President Von der Leyen in September of last year, the Portuguese Presidency hopes to bring “the positions of the Member States closer together”. The pact can only become EU law if it is both approved by the Council and the EU parliament. The position of the Portuguese Presidency is to create as much common ground as possible among the member states, however, it has not shown an intent to bring the proposal into law by the end of its presidency. 

The second line of action is a Green Europe that promotes the EU as a leader in climate action. Portugal announced as a “big priority” the approval of the European Climate Law by the end of the mandate. The European Climate Law aims to write into the law the Green Deal’s goals of reducing greenhouse gases in the EU by 55% compared to 1990 levels and achieve net-zero emission by 2050.  

Despite being the 12th country of the European Union in terms of land area, Portugal’s exclusive economic zone is the 3rd largest in the Union. Having this in mind, it is easy to understand that an important target for the country, during the following months, is to highlight the importance of the blue (ocean) economy and its sustainability. A conference on this very subject is expected to be held in June on Azores’ islands.  

The Portuguese Presidency has also committed itself to conclude the negotiations on the Common Agricultural Policy with the objective, among other things, of improving the environmental sustainability of the Union’s agricultural sector.  

The third line of action is accelerating the digital transformation in service of citizens and enterprises. Portugal will focus on accelerating the Union’s digital transition as a tool to foster a faster economic recovery, from the covid-19 pandemic, and to bolster European leadership in digital innovation. On January 7th, the Portuguese minister for economic affairs, Pedro Siza Viera, announced Portugal intends to move ahead on negotiations on two legislative packages called the Digital Services Act and the Digital Market Law. The two proposals are protecting European consumers’ rights by increasing regulatory control on major technological platforms, such as Google and Facebook. Although the minister acknowledged he does not expect to reach a complete agreement on these two measures, he hopes to achieve “a consensus that can soon be followed up”. Portugal also plans to upgrade the continent’s digital infrastructure by creating a strategic European Data Entry platform based on submarine cable that will link Europe, South America, and Africa. There is hope that this project could result in a boom of Europe’s telecom industry.  

World map of active (orange) and planned (red) submarine cables. Source Politico EU and TeleGeography 

The fourth line of action is the enhancement and strengthening of the European social model. With the planned high-level Porto Social Summit, the main focus of the Portuguese Presidency appears to be on energising political support for the implementation of the European Pillar of Social Rights and its action plan. The European Pillar of Social Rights sets out 20 key principles and rights that aspires to an EU that is “fair, inclusive, and full of opportunities”. The action plan by the European Commission turns these principles into actions and it proposes targets to be reached by 2030. The President of the European Foundation for Progressive Studies, Maria João Rodrigues, has said the Porto Social Summit “can be an historic moment” of the EU’s commitment to social rights.  

The 20 principles of the European Pillar of Social Rights. Source: European Commission 

The fifth and final line of action is promoting an Europe that is open to the world. The Portuguese Presidency will continue the European diplomatic strategy of openness to the world and effective multilateralism. The Portuguese minister of foreign affairs has acknowledged that he hopes to have a free-trade agreement between the EU and Mercosur concluded before the end of the presidency, which shows a synchronisation with the EU’s trade strategy that focuses on the development of new bilateral or plurilateral trade agreements. The 6th EU-African Union Summit demonstrates the interest of Portugal to maintain a strategic dialogue between the two continents to address global challenges such as climate change or peace and security. Lastly, there has been a renewed interest by Portugal to strengthen the dialogue between the EU and both the United States and India. As for the time of writing, there are ongoing negations for a meeting between the EU and the Biden administration, and the prime minister of India has been invited to a meeting with European leaders that will take place this May in Porto.   

Sources

  • 2021portugal.eu 
  • Politico.eu 
  • Observador.pt 
  • Público.pt 
  • Euroactiv.com 
  • Ec.europa.eu 
  • Bellona.org

Authors

Ana Terenas

João Sande e Castro

Francisco Pereira