Author: Awareness News

From the conference room to Zoom: the future of remote working

May 10, 2020January 23, 2021by Awareness NewsLeave a comment

Telecommuting, or remote working, has been frowned upon by employers for many years, who feared unsupervised workers would be much less efficient. However, developments in teleconference and telework technology and, most importantly, the constraints imposed by the coronavirus outbreak, have brought forward a great increase in the remote workers count, and key takeaways from the situation include a boost in employee productivity and reduction in fixed costs for firms, which not only mitigated the fears of employers, but also anticipated a shift in strategic and operational paradigms for firms.

Global crises are historically known to alter societal behaviours, namely on consumption and organizational levels, ultimately altering the path of history. The Black Death, the most fatal pandemic recorded in human history, which is estimated to have killed nearly half of the European population in the 14th century, is credited to have dismantled feudalism, as serfs (peasants) searched for higher wages due to labour shortages.

Rosie the Riveter Inspired women to serve in World War II

Another example is that of World War II when, due to the allocation of a significant share of the male population to war efforts, women were encouraged to enter the workforce, and such effects persisted in the aftermath. COVID-19 is no different, and while changes in consumption habits may only be temporary, this might be the beginning of a new era for employment in general.

From companies’ perspective, it is not only expected, but necessary, an increased focus on reconfiguring the work space to promote safety, as well as on enhancing working-related software, de-risking their supply chains and raising efforts for crisis preparedness. What’s more, a survey conducted by PwC unveiled that 49% of companies plan to make remote work discretionary for positions that allow them to do so, 40% intend to accelerate automation and new ways of working and 26% want to reduce real estate footprint. The latter finding means that this transition in work ethic is likely to hamper office real estate, as firms opt for smaller office spaces or none at all as their workforce transits to their own homes.

Regarding efficiency gains, there is no consensus on how productivity is affected at home. Despite some studies suggesting that teleworking leads to a substantial decrease in productivity, sometimes as much as 45%, there is no clear evidence of such, as there are external factors at play, for instance the conditions of the workplace. In fact, the impact on productivity depends, in part, on the nature of the characteristics of occupations and the nature of tasks, as more creative duties are likely to experience a positive impact, while more dull, repetitive ones are likely to be negatively affected.

Regardless of the possible impact on productivity, the current crisis changed both employees and employers’ perception over teleworking and its benefits. A survey conducted during the pandemic showed 82% of employees in offices would like to telework one or more days a week after the Covid-19 crisis (Colliers, 2020), implying the experience has been positive. Furthermore, 74% of companies say they intend to formally implement telework (Gartner, 2020), meaning companies are also satisfied with the new working conditions.

In these times of great uncertainty, it seems as if one thing is certain:

the working experience will not be the same even when normality returns.

According to researcher Christopher Kent, work routines and rhythms will most likely be restructured, shifting from the general workday structures of a 9 to 5 towards a more objective-based workday, managed by deadlines and check-ins. Furthermore, the technological developments that enhanced and allowed companies to continue its operations should not be set aside, but integrated and internalized. Now that the majority of companies have already gone through the painful process of adaptation of these tools, it is important that firms take the most out of them even after the crisis has gone by. Lastly, business leaders and managers must be wary of changes in policy and regulations in the work environment in order to prevent future crises like the one we are currently experiencing, while ensuring viable forms of staff surveillance shall telecommuting persist.

Sources: McKinsey, PwC, BCG, Lavola, Forbes

Dubai: The Pearl of the Middle East

May 7, 2020February 9, 2021by Awareness News1 Comment

This city needs no introduction. As the main attraction and destination of the Middle East, Dubai is an exotic and trendy city full of luxury and amazement. Skyscrapers everywhere, including the highest in the world, building new ones nonstop. The most amazing and extravagant hotels, such as the Burj Al Arab: a seven-star hotel with 200 rooms, each 2 stories high. A coast with artificial capes and islands, full of extraordinary mansions. Its very own indoor ski resort, the Ski Dubai, while outside temperatures reach more than 40º Celsius. One of the most spectacular cities in the world, that in many ways makes no sense at all. How can a city so successful in so many ways be built in a hostile desert, by a previously unknown people, in a region so influenced by political tensions and wars?

The Past

Dubai is one of 7 monarchies that would make the United Arab Emirates (UAE), located on the coast of the Persian Gulf.

In the beginning of the twentieth century, Dubai was just a small insignificant trade port. The city survived by having special diplomatic relations with the United Kingdom, offering stability, and by selling its finest trade resource: high quality pearls. The only special thing about this city was its strategic position, close to the Strait of Hormuz.

In the 1930s, the creation of high-quality fake pearls and the Great Depression devastated the economy. Dubai experienced great migrations and economic losses, now as an official protectorate of the British Empire. It was in this period that the people realised the disadvantages of being dependent on one trade resource and the advantages of having stability in the region, provided by the British. These will be the two factors that will define Dubai.

Throughout the twentieth century, more and more oil was being found in the Emirates, but not much in the Emirate of Dubai. When the UAE became independent in 1972, the country was increasingly dependent on their oil exports. But Dubai learned from its past; it focused on diversifying its sources of income. As such, it invested their share of the oil revenues on infrastructure like ports, roads and airports. From there, they attracted foreign investment, granting special economic zones for any interested. All of this was only possible by having almost perfect stability in the country. As the years passed, they became great competitors in maritime trade, banking, finance, energy, science innovation, aviation and, of course, real estate. It was in the 1990s that the city exploded with the famous skyscrapers, while wars were being fought all over the Middle East.

The Present

Nowadays, it is a global city like no other. Over two million people live in Dubai, with more than 3 quarters being immigrants. While more than 80% of UAE’s GDP is dependent on oil related revenues, less than 5% of Dubai’s GDP is as such. Because it is right between Asia, Europe and Africa; and is so safe and diversified in its services, it serves as a bridge for business and diplomacy between the continents. It is, in many ways, the Switzerland of the Middle East.

The main types of people that Dubai attracts are entrepreneurs, to establish their companies in the city so that it becomes increasingly competitive; qualified workers, to work in such companies; and tourists, 13 million per year, from the extremely rich to the normal western, as tourism is a field where Dubai excels at.

I was able to interview an entrepreneur and a tourist so that they could share their experiences in Dubai:

Our entrepreneur is the owner and CEO of a marketing company in Portugal. He chose to do business in Dubai to take the advantage of the bridge between societies. Not only is it easy to set up business in the city, but also there is easy access to other markets from Asia and Africa. There are companies from all over the world in Dubai, making the competition fierce. It’s extremely difficult to survive in such a market, with all the big international players present. Still he is steadily surviving.

Our tourist is a student from Nova SBE that travelled to Dubai during the summer holidays. She found many comparisons between Dubai to the big cities of the USA: big skyscrapers, big shopping malls, great suburban areas, gigantic highways and the automobile as its main form of transportation. Everything like that, only everything more extravagant. She particularly liked the desert landscape, the extravagant shopping malls and the culture. Most of the old Dubai is often forgotten, but that is where you can truly find the roots of the people, in the old part of the city, like per example, the Souks, covered traditional markets with a different one for each type of product, from clothes to gold.

Dubai’s traditional covered markets, the Souks

Her trip dismisses the myth of Dubai being only for the super-rich. You can still have a great holiday in Dubai without spending that much.

These testimonies only confirm what was already stated. Dubai is a safe and exciting place to visit and work. But the city is far from perfect: it has serious problems.

The city grew exponentially in only 30 years. The city was not planned to grow that greatly, so there are very serious logistical problems. Big highways separate entire neighbourhoods and many streets are completely disconnected from each other by foot.

Dubai is seen as having a very relaxed law relative to neighbouring countries, and that is true for the most part. Women do not have to cover their hair, other religions are free to be practiced, even alcohol is legal. But there are still harsh laws. You can’t drink in the street, you can’t show intimacy in public (like hugging, holding hands and kissing) and you can’t say or report badly about the government, not in public nor in social media. There is no freedom of speech. One shocking case was of a British Phd student that was in Dubai to study. He was arrested for just suspicion of spying. Trialed and sentenced for life imprisonment with no lawyer present. He was later released, but not after 5 months in solitary confinement.

And then there is the rule of law itself. Many laws are ignored when it becomes convenient. There are reports from tourists of showing intimacy and drinking in public with no repercussions. Some labor laws are also ignored.

Living conditions of forced labor workers

And that leads to problems in human rights. Many less educated people come to Dubai to work. The more desperate are cheated out of their salary when recruited to various jobs, mostly construction. They are maintained in conditions considered less than humane, forced to work without pay. This is no different than slavery. It is possible that those amazing skyscrapers were constructed by these people.

The Future

Dubai will certainly outlast oil, thanks to its diversification and its eccentric identity, attracting business and attention worldwide. It has serious problems, but they should be overcome with increasing influence from the west.

Meanwhile, the increasingly more bizarre construction projects are underway, like the Dubai Creek Harbour. This will be an urban complex full of luxury apartments, green parks and the Dubai Creek tower. This latter will cost one billion US dollars and it will be the tallest structure ever made by mankind, standing 1,3 kilometres high. Construction was expected to finish in 2021, but that will probably be postponed due to the Covid-19 pandemic. Nevertheless, when it does finish, it will maintain Dubai in the hotspot that it is currently standing.

The Dubai Creek Tower (source: EMAAR Properties)

Crisis Makers: CDS and CDO

May 4, 2020January 23, 2021by Awareness NewsLeave a comment

CDS

A credit default swap, also described as CDS, is a type of financial derivative that provides an investor protection against the payment’s default.

In these types of derivatives, there is the buyer who is insured by a compensation in case of default. Usually, the payoff corresponds to the face value of the loan. And then, there is the seller who agrees to reimburse the investor in a situation of default. Most of the time, the holder of a CDS is required to pay a continuous premium called “fee” or “spread”, whilst holding the contract. The value of a CDS is determined upon the likelihood of default, as well as its demand.

CDO

It is also important to mention CDO’s, short name for collateralized debt obligations, when mentioning the financial securities involved in the 2008 financial crisis. These products are another type of derivatives and they are created by banks by pooling individual loans into a single product and sold to investors in the secondary market. Hence, the payment’s installments are now redirected to the investor who bought the CDO’s. They are collateralized, meaning there are assets associated with it that work as collateral in case of loan defaults. When constituted by mortgage-loans, these derivatives are called Mortgage-backed securities (MBS).

There is a variation of these instruments called synthetic CDO’s. It uses other derivatives to generate income such as credit default swaps or options, rather than mortgage loans that correspond to cash assets. The buyer takes a short position assuming the underlying assets like the CDOs or mortgage loans will default, paying a premium for the position. Essentially, the buyers are betting for the outcome of the loans. Usually investment banks or hedge funds are involved in finding the counterparty of the deal, since these instruments are not traded in the stock exchange.

The role of CDOs and CDSs in 2008

We often hear the terms CDS and CDO intertwined with the extreme economic downturn period that started in December of 2007 in the US and turned into a global recession in 2009, known as the Great Recession. The reality is that the collapse of the US housing and financial markets can be traced to the unregulated and irresponsible use of these financial instruments.

From 2001 to 2004, the US Federal Reserve held low interest rates to fight slowdown in the growth of economic activity. Simultaneously, federal policy encouraged home ownership which led to a boom in the housing market and its weight on the US economy. Mortgage debt rose at an astonishing rate at the same time as CDOs, using mortgage loans as collateral, proliferated.

Households resorted to mortgage lenders for mortgage loans with small worries about paying back since real estate prices were continuously rising. The lenders would sell these mortgages and pass the risk to investment banks who compiled mortgages in CDOs and split them in three tranches for their clients, passing on the risk. If the loan would default, the first tranche would be the first to get paid followed by the middle and the bottom, which made the top tranche safer than the middle or bottom. As it is in the financial markets, more risk was rewarded with higher return rates. Credit agencies would label the top tranches AAA, the middle BBB and would not even bother to rate bottom tranches.

The continuous rise in the housing market made the demand for CDOs very high, so mortgage lenders lower the standards for qualifying for a mortgage. In other words, these financial intermediaries attributed mortgages to households that were not credit worthy (subprime mortgages). Defaults were not a worry since mortgages would immediately be sold to an investment bank and house prices kept rising. Credit rating agencies did not downgrade these CDOs and investors kept blindly buying them until borrowers started defaulting and lost their homes. Lenders tried to sell all these houses, but since there were so many, housing values did the impossible and plunged, bursting the housing bubble and destroying the value of CDOs. Synthetic CDOs amplified the exposure of the economy to the mortgage market since they enabled infinite bets on the mortgage market and were easy and cheaper to create. Banks and financial institutions were filled with these assets and were unable to sell them, which collapsed and crippled the financial system dragging the US and World economy along.

*Collapse of Lehman Brothers in 2008, Source: The Guardian*

Post 2008 Scenario

A major lesson withdrawn from the crisis was the lack of regulatory oversight over CDS, which was considered one of the main grounds for the turmoil. Therefore, shortly after the financial crisis, on July 21, 2010, as an attempt to regulate de credit default swap market, the Dodd-Frank Wall Street Report Act of 2009 was signed into US federal law by President Barack Obama, the greatest regulatory overhaul of financial markets since the Glass–Steagall Act almost eight decades earlier. The act not only phased out the riskiest CDS, but also forbade banks from using customer deposits to invest in derivatives, including swaps – Volcker Rule -, enhancing the separation of proprietary trading from commercial banking activities. Also, it required the Commodity Futures Trading Commission to regulate swaps, setting up a clearinghouse to trade and price this type of derivatives.

*Sign of the Dodd-Frank Wall Street Report Act of 2009 by President Obama*

Consequently, many American banks shifted their swaps across the Atlantic to escape the strict U.S. regulation, since, although all G-20 countries agreed to introduce new legislation, most of them were still finalizing the rules. However, in October 2011, this strategy was sabotaged when the European Economic Area introduced the MiFID II, ensuring fairer, safer and more efficient markets and facilitating greater transparency for all participants.

Furthermore, in 2010, during the November Seoul Summit, leaders of the G-20 countries agreed on new bank capital and liquidity regulations – Basel III-, proposed by the Basel Committee on Banking. These new rules addressed some loopholes that had been exploited by banks, through CDS contracts. Yet, although these regulations appear to convey some degree of safety to banks, if many of their activities are taken off their balance sheets, the risk associated with their portfolios might, on the contrary, be amplified.

Also, the 2008 financial crisis aftermath meant a dry up in demand for CDOs. However, in the years following, the disappointment for the low returns of other bank vehicles reignited investors’ interest in these complex securities. Nevertheless, the environment is undeniably distinct from the scenario leading up to the “Great Recession”. Due to the tighter regulations and capital requirements imposed on these markets, lenders are far more cautious, and investors seem more reluctant when investing in these assets.

Despite the introduction of several regulatory measures on the credit default swap market two years earlier, public attention was once again focused on CDS after the large trading loss sustained by J. P. Morgan. On May 10, 2012, Jamie Dimon, J.P. Morgan Chase CEO, announced the loss of $2 billion, due to the bank’s bet on the strength of the market and, by 2014, the trade had cost the bank $6 billion. Some acknowledge the London Whale (1) case as the result of ineffective risk management, reigniting the controversies about the misuse of CDS and the need for even stricter regulations.

A decade later, the post crisis credit market is still undergoing major structural changes and one can argue that both Dodd-Frank and Basel III are still works in progress, ultimately reinforcing the emergence of Basel IV. Indeed, the effect of such regulatory measures remains under-research, but their impact is undeniable, and the market is responding through the creation of new products, such as CDS index swaptions and CDS futures. Hence, although there is an emergent need for greater regulation and insight of the market, the development of new CDS and CDO related products gives rise to an innovative market channel full of financial opportunities, setting the tone for a whole new paradigm in credit markets.

(1) Nickname given to the trader Bruno Iksil, who was considered the responsible for the loss of at least $6.2 billion for JPMorgan Chase & Co. in 2012.

Sources: Corporate Finance Institute, The Balance, Bank for International Settlements, Investopedia, Business News Daily

Taiwan’s Search for Status

May 1, 2020March 3, 2021by Awareness News1 Comment

Taiwan in the Past

The island of Taiwan was first settled by the Chinese in the 7th century AC. Its early history is intertwined with that of mainland China. The Portuguese reached the island in 1590 and named it Formosa, “beautiful”, it was then known by this name in the West for the following centuries. Taiwan was once a colony of the Netherlands and Spain, until mainland China regained control in 1683, under the Qing Dynasty.

In 1895, after the Sino-Japanese War, the island was ceded to Japan, who retained it until the end of the Second World War. After Japan’s defeat, the Allies conferred Taiwan to the Republic of China (ROC), a democratic republic that had replaced the Qing Dynasty in 1912.

However, at the time the ROC was fighting a civil war against Communist rebels in the mainland. Even Though the Nationalists, or Kuomintang, led by General Chiang Kai-shek, and the Communist Party of China, led by Mao Zedong, had made a truce during WWII to fight the Japanese invasion, after the war, hostilities resumed. In 1949, after losing four successive capitals in the mainland, General Chiang took refuge in Taiwan and declared Taipei the temporary capital of the Republic of China. He was followed there by two million people – mostly soldiers, members of the Kuomintang intellectual and business elites – and brought with him many Chinese national treasures and much of China’s gold reserves.

Henceforth, Taiwan was ruled as a single-party autocracy under martial law.

General Chiang regarded himself as the legitimate ruler of China, promising to one-day reconquest the mainland. His government retained China’s seat in the UN General Assembly and on the Security Council until October 1971, when both were transferred to the People’s Republic of China. Along with Richard Nixon’s 1972 visit to Beijing recognizing the PRC, this marked the end of the ROC’s plans to reconquer the mainland.

In 1987, martial law in Taiwan was lifted, opening the doors to democracy. In 1988, Lee Teng-hui became the first Taiwan-born president. Lee continued democratic reforms and replaced many mainland-born high officials with ones born in Taiwan. He promoted Taiwanese culture and held the first legislative elections in four decades. The old Parliament, elected in 1947, still had representatives of mainland China; the new Parliament only represented Taiwan, acknowledging it had no control over the mainland.

Throughout the 1990’s, Taiwan continued to move towards democracy and away from its territorial pretensions. A constitutional amendment in 1991 designated Taiwan as the “Free Area”, the only area under the government’s jurisdiction.

Taiwan Currently

Despite operating independently since 1949, China still regards Taiwan as a rebel region that they urge to recapture. Plus, due to Chinese pressure, merely 15 countries have official diplomatic ties with Taiwan, and though the US is not among them, they provide Taiwan with military support, serving as their grand ally and protector. Therefore, the China-Taiwan relationship is somewhat combative. However, it has been improving: transport, trade and communications were restored between the countries in 2008.

Though initially deep-seated in Chinese tradition, Taiwan has been able to move far enough from the Chinese core ideals for them to be differentiated. For instance, even though their official language is Mandarin, they have also developed their own dialect, Min Nan Chinese. Moreover, they have their own currency, and their political system is visibly disparate from the mainland´s.

The current Taiwanese president, Tsai Ing-wen, became Taiwan’s first female president, after winning the 2016 elections with 56% of the votes in favour of her traditional, Democratic Progressive Party (DPP), 16 years after the party’s first presidential victory. Tsai’s vision has always empowered the idea of an independent, Taiwanese identity, while putting democracy at the country’s steering wheel.

While Tsai devotes her political involvement to Taiwanese sovereignty, she must mind the consequences of her actions, in order to prevent estranging China, and throwing to waste the 8 years of friendly ties, under the former President, President Ma Ying-jeou.

In defiance of China’s oppression, Taiwan ranks among the world’s leading computer technology producers, with Foxconn Technology Group as its leading firm, netting an income of 4.24 Billion US Dollars in 2018, making it a major economic player in Asia. In addition to that, it has marked its presence globally, as one of the freest places to live, despite the uncertainty surrounding it being an independent nation.

Freedom, according to data, is correlated with the political system – democracies seem to provide freer living standards. In a report done by the Cato Institute, the Fraser Institute and the Liberales Institut at the Friedrich Naumann Foundation for Freedom, the Human Freedom Index (HFI) represents the state of human freedom globally, to what pertains personal, civil and economic freedom. It is estimated that Taiwan has an HFI of 8.4, ranking closely to Nordic countries in terms of freedom; while China merely has an HFI of 6.17, which ranks closer to less developed countries, such as Libya (4.64) and Iraq (4.34). This could be rooted in their different political systems, though other factors contribute too.

Taiwan in the future

Taiwan’s future remains uncertain. The last elections were the result of Taiwan’s will to remain detached from China. Tsai Ing-Wen, the re-elected president from the democratic progressive party, had an expressive victory, in the 2020 presidential elections, over the second favourite pro-China candidate. He is the only hope, for many citizens, to maintain and reaffirm Taiwan’s sovereignty.

China, however, doesn’t seem to give up on Taiwan that easily. President Xi Jinping has already clearly stated that Taiwan’s issue “should not be passed down generation after generation”. China’s plan to finally solve Taiwan’s question seems to be near. Many doubts arise from this desire. How will China accomplish the so-called Chinese reunification, after already having retrieved Macau and Hong Kong territories?

Many say that Taiwan will not be able to manage China’s growing diplomatic and military pressure. Others argue that Taiwan is willing to fight for their recognized independence, at whatever costs. The truth is that military investment from both countries has been growing during the past years: In 2020 Taiwan announced that military expenses would amount to 11.9 billion dollars, roughly 2% of their nominal GDP. China’s army, on the other hand, will have a budget of 180 billion dollars, corresponding to 1,3% of their GDP.

An obvious interrogation arises:

Can we be witnessing the escalation of an unavoidable war?

Sources: BBC, Statista, Taiwan Government Website, CATO Institute, Economist Intelligence Unit, Financial Times, Council on Foreign Relations

Manuel Barbosa Afonso Silveira Botelho Nuno Teixeira de Sampayo

European (Dis)Union: North vs South

April 28, 2020January 23, 2021by Awareness NewsLeave a comment

The health crisis

The current public health crisis, which has put the world on pause, is a test to human beings and to societies in general. It’s one of the biggest challenges faced by humanity since WWII (as stated by Germany’s chancellor Angela Merkel) and has put in check all structures of society and their response to the unknown. With that being said, the Coronavirus crisis has also been a test to the European Union (particularly, the Eurozone) and its unity.

Since the beginning of the crisis, the unity has been questioned as there wasn’t a prepared common strategy to deal with it. Indeed, borders started to shut down individually rather than collectively, which didn’t make much sense as it affected the free movement of people, a key pillar in European unity; Italy, which was the first European country severely affected with the virus, appealed to its neighbours for medical equipment and aid, which was promptly denied, further increasing the division and loss of faith in the EU; the question regarding coronabonds re-woke the mutualised debt discussion in the Eurozone and increased pre-existing tensions, with southern countries strongly defending this mutualised debt instrument to respond to the crisis and others (Germany, the Netherlands, Finland and Austria) initially denying it, reopening the old gap between North and South.

Productivity

Indeed, every major crisis becomes a challenge to the EU (more specifically, to the Eurozone) and to its continuity and reinforces core differences between these “two regions”.

One key difference that cannot be ignored is productivity. On average, the “North” is much more productive than the “South”. According to OECD data, in 2018, countries like Germany, Netherlands, or Austria presented a higher GDP per hour than the average GDP per hour in the Eurozone ($59.64/hour); on the other hand, southern Eurozone countries such as Portugal, Spain, Italy or Greece had a lower productivity, below the Eurozone’s benchmark. This productivity division exists for a while and has impacted how countries experience economic growth and thus, their position as economic powers in the EU. Over the years, productivity has been increasing in both regions, with North above and the South always below the benchmark.

This difference has given space for some remarks throughout the EU’s history, with Southern nations being perceived as lazy by some Northern nations (let us remind some unfortunate comments made by former Dutch Finance Minister and president of the Eurogroup, who stated that crisis-hit countries, which were mainly Southern countries, spent their money on “drinks and women”). As shown in the graph, these comments are somewhat unsubstantiated, as Southern European countries work more hours yearly than Northern countries, reducing productivity, a complex and broad concept, often inherent to cultural characteristics. This serves only to further increase tensions between the two regions and further divide the EU, more noticeably in moments of crisis.

European Debt Crisis

Another moment of division in the Eurozone dates back to 2008, when the Great Recession led to the European Debt crisis, resulting in the collapse of financial institutions and high government debt. This occurred due a high fiscal divergence between the member states, with Northern countries lending intensively to the South, creating an imbalance of capital flows.

Indeed, in years prior to the crisis, current accounts of the two “regions” were symmetric, with Germany, Austria or Finland experiencing positive values, while Portugal or Greece had negative accounts. Also, capital accounts presented a similar pattern, with the North experiencing much lower values than the South. Instead of promoting structural change in the economy (greater capital accumulation) to converge with the richer countries, the South channelled capital flows from the North to non-tradable goods, i.e., having no export value and created both consumption and investment bubbles (due to low interest rates). Following the 2008 financial crisis, this led to an unbearable situation that culminated in the financial rescue of many southern countries.

Who is to blame?

From the North’s point of view, the South was living above its means and was not taking essential structural fiscal measures: while Germany was promoting fiscal discipline (surplus over deficit), the South was excessively expanding domestic demand to raise consumption and investment, unprecedentedly. Southern countries argued that this crisis was a double-edged sword, as creditors were lending at their own risk (low interest rates) and thus, they also had some responsibility for the imbalances in the eurozone.

The lack of common analysis on the crisis encouraged division and the financial rescue packages (based on strict conditionality and fiscal consolidation, dictated by the North) generated political and public criticism in the South, as austerity was deteriorating socio-economic structures and life conditions. The South blamed Germany for imposing its domestic preferences, with major protests against austerity, criticizing what they called the “German-run” Europe.

Nevertheless, while Portugal, Greece or Cyprus were tightening their budgets to repay the debt plus interests, with low investment and unemployment was peeking, Northern countries, like Germany or Austria, benefited from the shift of investment from the south, improving borrowing conditions for their companies (for instance, in 2014, Portugal’s yield of its 10 year bonds were at 5.675%, while Germany’s were 1.944%) and hence, promoting their economic growth, further deepening the division.

Coronabonds

In order to respond to this pandemic crisis, eurozone members discussed possible emergency economic solutions for 10 days, reaching a consensus. The coronabonds, a jointly issued bond, was one of the possible solutions, which intensified the friction between “North” and “South”. The eurobonds were mainly defended by Southern countries because it would be less costly to their governments to pay back the debt, also given the considerable amount of debt that they already have, as they would have easy access to credit at low rates. However, countries in the North, led by the Netherlands (and Germany), declined the idea of a eurobond because it would mean that their own taxpayers would be on the hook for the benefit of other countries, who they claim to have lived beyond their means, raising concerns of moral hazard. This divergency is not new; in 2008, in the financial crisis, the idea of eurobonds also emerged and was not applied. Unlike the previous crisis, where one can argue was caused by financial misbehaviour of some countries (endogenous factors), the current crisis is an exogenous shock that doesn’t discriminate based on cultural and fiscal differences, meaning that there should be a common solution rather than trying to blame countries on something that it’s not their own making.

Even though the EU has reached a short-term agreement worth over €500 billion to respond to the crisis, it hasn’t yet agreed on a common economic recovery, which is still a source of division. The real test will be when the economy slowly starts the path to normality. Meanwhile, populist, right-wing forces and eurosceptics observe, with discontent, how this crisis unfolds.

It’s up to the European Union to stay together.

Sources: Financial Times, Time, Público, OECD, Pordata, Expresso, npr, NAC, Euronews, The balance

Behavioral economics in action: the role of behavioral units in politics

April 25, 2020January 24, 2021by Awareness NewsLeave a comment

In this era of social networks, communication has reached new levels of virality. The Network of Networks – the Internet – has facilitated the creation of a new status quo: from governments and businesses to common citizens, each piece of information inserted and shared in the Web has the potential (given some very small probability factors) to become viral. If that happens, it cannot be stopped. No matter how far you are from the formal location where the original information fluctuates you will know about it. And it only needs a fraction of seconds.

How should people be in such an environment? At the current speed at which media spread, even words have tremendous impact when misused. Likewise, silences also have a tragic impact when speech is needed. There is a need to be fast and ready to process information. In the case of politicians, words mean actions, words mean decisions, and these decisions impact much more than themselves: they affect millions of lives.

One lesson that Behavioral Science has taught well is how it is human nature to systematically make mistakes in evaluating circumstances. This comes with no shame: our ancestors needed to make decisions quite fast, and that led us to develop mechanisms to quickly judge whether a shadow was one of a rock or say, a lion. This is no different at this time, as we are still required to make these fast decisions. Politicians, corporate top management, governmental bodies’ leaders, some people’s job is to make decisions better than others for others. Yet, very often is forgotten how even our leaders are human. As so, they are equally prone to the same heuristics of anybody else. Yes, they may be more aware, and yes, they are skilled decision makers (usually), but emergency situations require quick reactions.

Our brain is programmed to follow a more rational, logic system (lets call it system 2) when decisions are complicated and require abstraction. However, most is processed by a quick, instinctive mechanism (that we call system 1). The latter, is the one responsible for both convenient intellectual shortcuts as well as for all of our biases and heuristics.

Availability is the name for the heuristics that describes how we evaluate situations based on examples that come up to our mind. This is among the main reasons why people are more scared about a plane crash when the news has reported one unlucky case, ignoring how many flights are done daily, yearly, with virtually no accident.

For the same reason, when something has never happened (or, to better put it, has never happened while we were conscious and alive…), we fail to capture the potential consequences of that event dramatically. We human beings are simply very bad at evaluating probabilities. Again, this is true even for the most capable, skilled leaders! (see our article on Nudging for more insights)

The work of behavioral economists has helped highlight this condition. Starting from the first inception with the research of psychologists and Nobel prize recipient Daniel Kahneman and his fellow Amos Tversky, the more recent work of economists such as Richard Thaler and Dan Ariely (author of the acclaimed Nudge and Misbehaving, among others), helped spreading awareness about the potential benefits of the behavioral science among various high ranks. President Obama himself has been a perpetrator of the nudging theories in his second mandate; yet, it is a case rather than the norm.

Availability heuristics, Groupthink (the tendency of believing something just because others believe it), Inertia and many other cognitive and emotional biases, help us explain why governments failed to evaluate the Covid-19 threat on a systematic, large scale. Why did this happen, despite early warnings and examples by the first victims, from China to South Korea? No simple answer is the right answer: many actors from different contexts with different interests likely lead to an environment where cooperation and mission alignment is tough to achieve. But one thing we can be sure: we are all humans, and as such, as scientific research has demonstrated, we are all prone to biased decision making. Through this, perhaps we could find a common denominator, a common ground for global discussion, from individual to country level.

The current situation shows how the role of behavioral science is still unclear. As an example, the UK has indeed a behavioral insights team operating. In the last days, the debate is around the decision of prime minister Boris Johnson not to enforce quarantine measures but rather “nudge around” the situation. Is it the right choice? Is it the right time to act like this? Is behavioral science going to be blamed in case the decision doesn’t have the hoped results? Still, the ultimate decision power doesn’t lie in behavioral units, but in politicians. Takes unbiased foresight for a leader to understand when a threat has to be taken seriously despite no direct consequence can be observed in his/her community. In this case, we should keep in mind that it is the prime minister’s decision on when to take action and who to ask for collaboration from.

Should perhaps behavioral science be first a way to improve decisions at a widespread individual level, before becoming a toy at disposal of biased leaders? Behavioral units are still scarce, with a bunch of countries actively using them. We shall see how events unfold…

Take this little quiz to test which system you’re naturally relying on to read a piece:

1-A bat and a ball cost 1.10€ in total. The bat costs 1.00€ more than the ball. How much does the ball cost? … cents

2-If it takes 5 machines 5 minutes to make 5 widgets, how long would it take 100 machines to make 100 widgets? …Minutes

3-In a lake, there is a patch of lily pads. Every day, the patch doubles in size. If it takes 48 days for the patch to cover the entire lake, how long would it take for the patch to cover half of the lake? …days

To check your answers go to our instagram/web page. Did you get them? Maybe just some? If you’re interested in exploring more of the research behind “clever formulations” and its applications, consider the read of “Nudge”, by Richard Thaler and Cass Sunstein.

Sources: The Guardian, Politico, Apolitical, The conversation, Behavioural Economics.com, Springer

QUIZZ SOLUTIONS:
1- (5 cents)
2-(5 minutes)
3-(47 days)

The Federalist Papers: Short overview and considerations about the future of fiscal federalism in the EU

April 22, 2020January 24, 2021by Awareness NewsLeave a comment

“After full experience of the insufficiency of the existing federal government, you are invited to deliberate upon a New Constitution for the United States of America. The subject speaks its own importance; comprehending in its consequences, nothing less than the existence of the UNION, the safety and welfare of the parts of which it is composed, the fate of an empire, in many
respects, the most interesting in the world.”

— Alexander Hamilton as Publius, Federalist No. 1

Following the American Revolutionary War, and the drafting and ratification of the Articles of Confederation by the 13 states, it soon became obvious that the young confederate government was severely hindered in its functioning by an overall lack of power. Indeed, without an executive or judicial branch, the new government lacked the power and authority to tax, for example. Since it could only request money from states but didn’t have any ability to enforce these requests, both the government and the U.S. army were majorly underfunded.

It was, therefore, to evaluate and, possibly, amend the Articles of Confederation and improve the current situation that delegates from the 13 states gathered in Philadelphia, in 1787, in what was called the Philadelphia (or Constitutional) Convention. Even though a new constitution was drafted and signed in this convention, it was not with this goal in mind that these delegates joined in assembly. However, since many were convinced of the inadequacy of the current system, the convention soon evolved into an effort to redesign and rebuild the whole political structure of the union from a loose confederacy into a more solidly cemented federal union.

However, the drafting of the new constitution and its signing in the convention was only the first step. Next, and most critically, to enter into force, the new Constitution needed to be ratified by 9 of the 13 states. It was to lobby votes in favor of ratification that Alexander Hamilton, one of the convention delegates from the state of New York and the 1st Secretary of Treasury of the United States of the future government, wrote, along with James Madison, one of the most central figures in the drafting of the new Constitution and the Bill of Rights and future president of the U.S., and with John Jay, future 1st Chief Justice of the Supreme Court of the new government, a series of essays whose collection is referred to as The Federalist Papers.

These essays, 85 in total (1), were published as serial installments in newspapers and discussed topics ranging from the benefits of a federal union under the Constitution on matters of war and taxation to the discussion of the principles of separation of powers, how it is upheld by the Constitution and how the system of checks and balances between the three branches of government works under the Constitution, all the while attempting to refute many of the anti-ratification arguments of the time.

Although their effect in promoting the ratification of the Constitution is unverifiable, they certainly are a window into the political and historical framing of the federalists vs anti-federalists debates of the time and can prove useful in understanding some of the debates and arguments employed with regards to federalism in the European Union.

In Federalist No.11, Hamilton talks about the advantages of a common commerce policy, as achievable by federalization with, for example, the ban on inter-state tariffs, echoing many of the free-trade ideas that helped create and develop today’s European Union’s common market.

In Federalist No.30, Hamilton describes the poor situation of the government’s revenues under the Articles of Confederation and argues, namely, that the state of public debt of such a government will be extremely precarious. Indeed, while talking about the future creditors of the government he says:

“to depend upon a government, that must itself depend upon thirteen other governments, for the means of fulfilling its contracts, (…) would require a degree of credulity, not often to be met with in the pecuniary transactions of mankind”

— Alexander Hamilton as Publius, Federalist No. 30

The solution to such a problem, he argued, lied in giving the new Congress the general power to tax and levy tariffs.

However, federal revenues were mainly dependent on tariffs until the beginning of the 20th century, before the creation of the income tax (2). As this new tax was being levied and grew in size, federal fiscal policy also grew in scope, with the creation of the New Deal during the Great Depression, for example.

Both Hamilton’s arguments at the time for a more energetic government, empowered by the power to tax, and the expansion of the scope of federal fiscal policy after the Great Depression timed with the creation of the income tax provide insights into the current discussions on the expansion of centralized fiscal responses by the European Union.

Indeed, for the central institutions of the European Union to be able to provide a more timely and powerful response to a crisis such as the present one, they must also be able to access bigger sources of revenues.

If we want more powerful central institutions in the EU their budgets must also increase.

In 2017, EU budget expenditures were about €137,000 million. These paled in comparison to the U.S federal government’s almost $4,000,000 million in outlays. In Europe, where countries’ governments are already very fiscally active, it is hard to imagine a scenario where an increase of the central EU budget to levels more comparable to those of the U.S. federal government would not come at the cost of shrinking national government’s budgets.

Whether a more centralized response by the EU would, then, be net-beneficial is not something I’m arguing for or against. Indeed, the question that I desire to pose is whether this response, at the expense of member-states’ fiscal power, is politically achievable. Such a question is impossible to definitively answer. On one hand, emergency situations, like the Great Depression in the U.S., seem to be breeding grounds for centralization, on the other, the shifting political landscape in Europe, namely with the rise of Euro-skeptic parties, may foresee a grimmer fate for European federalism.

(1) You can find The Federalist Papers at: https://www.congress.gov/resources/display/content/The+Federalist+Papers or listen to public domain recordings of it by LibriVox at: https://librivox.org/the-federalist-papers-by-alexander-hamilton-john-jay-and-james-madison/

(2)- Even though Clause 1 of Section 8 of Article 1 of the U.S. Constitution gave Congress the ability to levy taxes it was only with the creation of the 16th Amendment to the U.S. Constitution that Congress was able to levy country-wide income taxes.

Africa’s Endless War

April 19, 2020January 24, 2021by Awareness NewsLeave a comment

The Sahel is a narrow semi-desert region located south of the Sahara Desert. It stretches from the Atlantic coast to the Red Sea. The region comprises parts of Mauritania, Mali, Burkina Faso, Niger, Nigeria, Chad, Sudan, and Eritrea. In broad terms, we can think of the region as consisting of authoritarian states, with great difficulties to assert their authority inside their borders – in some cases, they are simply failed states.

Although all these countries suffer in various degrees from terrorism and related problems, our piece will focus on the key geopolitical security threat faced by the more western countries. We will also explain how and why the USA and some European countries have been involved there.

Conditions for violence

The entire region offers the same suitable conditions to the spread of terror. Being one of the poorest in the world, the countries located there are impoverished and underdeveloped;. Furthermore, it is subject to severe food shortages and the effects of climate change, which deepen the problems.

Although these countries are, theoretically, democracies, mistrust in the political classes is widespread, and rightly so. As it is frequent in many African countries, corruption is common and the institutions are generally frail. Governance is poor, agriculture will continue to have problems and security forces and foreign military are as feared as they are welcomed. The states are ill-prepared to meet the challenges their populations face.

All governments failed to have a meaningful presence there, as these zones are far away from their capitals. Islam being the dominant faith, Islamist radicals have no difficulties in spreading their violent message coupled with solutions to some basic problems, such as water supply and food administration. The region’s chronic poverty and poor education system helps it gain new recruits. Terrorists and radical groups exploit every local problem and conflict in order to expand their reach. The same logic applies to the expansion of terrorist groups in other zones, like Somalia or Mozambique.

Examples of terror

The countries in this part of Sahel have been the stage of various forms of violence in the past decades, described as “a “fireball of conflict” that involves multiple armed groups, military campaigns by national armies and international partners as well as local militias”. Conflicts have been constant, arising for many different reasons. The recent peak in violence has drawn the attention of both al-Qaeda and ISIS, among several local groups who fight between themselves as well as against local governments. There are constant news and reports of military operations and attacks, and 2019 was the deadliest year so far, with over 4000 deaths.

We will focus on the most recent events, starting with the most important Islamist terrorist group, Boko Haram. It is the strongest and deadliest, but by no means the sole actor in the conflict.

Boko Haram’s roots can be traced back to the early 2000s, but it started gaining attention in 2009, with a series of attacks in Nigeria. At the same time, the Arab Spring in the northern African countries and the violence that ensued further destabilized the area. Later in 2014, the group pledged allegiance to ISIS and proclaimed a caliphate in the region. This led to the intervention of a regional military coalition in 2015, (Benin, Nigeria, Cameroon, Chad and Niger, backed by the US, UK, and France) which regained the Nigerian territory previously controlled by the terrorists.

Following this, Boko Haram’s new core presence was in the Lake Chad region, one of the poorest regions of Africa and an ungoverned territory in the frontiers of Chad, Cameroon, Nigeria and Niger, where it still operates and was able to extend its reach in other anarchic frontier regions.

Following Boko Haram’s example, jihadists in northern Mali also proclaimed a caliphate in 2014. A quick military intervention led by France, authorized by the United Nations and supported by several non-African countries, regained the territory they controlled. France is the region’s former colonial power, and even though there is a pervasive anti-French sentiment,, it has been long involved.

In 2013, the French government expected to conduct only a short intervention in Mali. Seven years later, it remains there. The United Nations, the African Union and the European Union have also intervened, engaging many countries, with western military operations expected to increase in number and dimension in the next years. This will likely happen even though the Trump administration, that last month nominated a special envoy to the Lakes Region, seems keen to reduce their presence there, in contrast to its European allies.

European and American involvement

João Gomes Cravinho, the Portuguese Defense Minister, said last January:

“It is absolutely fundamental to be present in Sahel. We cannot let the deterioration of the situation in Sahel continue because the result will have an impact on Europe […] It would be irresponsible to turn our backs.”

— João Gomes Cravinho

The support is indeed needed because the military of these Western African countries lacks resources, material, training, and education. They could not win the conflict only by themselves, and stability in the region is the main goal for Europe. Endemic violence and no state control will increase the flow of drugs, arms and human trafficking, illegal migrants and refugees and terrorist threats against the continent. European countries would pay a high price for not intervening.

The western countries have the resources to militarily destroy much of these groups, but as recent interventions in the Middle East and Afghanistan proved, strength is insufficient. A full-out war would in the middle run fail to fill the power vacuum in the Sahel, and other Islamist groups would likely arise. There is a political and diplomatic front as well in this war, and the European Union starts to be aware of that, with commissioner Borrell repeatedly asking for a greater diplomatic and military involvement in Sahel.

There is a broader political mission to face, which constitutes the hardest challenge. It is about stabilizing communities with a basic step that simply has seldom been undertaken: broad, local dialogues among community groups, police forces and officials can prevent radicalization. Local governments and institutions, the civic groups and the foreign actors should all step in this task. At the same time, poverty has to be mitigated and economic development aided.

However, the prospects are not good. In fact, European presence is vital to defend the European countries from security reasons and can mitigate various threats to the continent. Nevertheless, there are no easy ways to counter the underlying challenges that bolster terrorism and violence in Sahel. As The Economist put it: “unless local governance improves, [the military interventions] will not eliminate the jihadist threat”. Poverty and anarchy seem to be there to stay, and where they are, terrorist groups will too.

Sources: ABC news, Al Jazeera, BBC, Financial Times, Guardian, Institute for Security Studies, jornal I, New York Times, Observador, Politico, Reuters, The Economist, The Telegraph, United States Institute of Peace, Vox.

Ana Catarina Salgado Christian Weber Ana Maria Terenas Rui Ramalhão João Maria Sande e Castro

The Cloud Wars: AWS Vs Azure for the Control of Your Internet

April 16, 2020February 9, 2021by Awareness News1 Comment

Late last year, on October 25th, the United States Department of Defence announced that they would award a contract worth $10 billion dollars – the Joint Enterprise Defence Infrastructure project, henceforth referred to as JEDI – to Microsoft’s cloud computing business – the Microsoft Azure.

In the larger picture, the JEDI contract is but a small drop in the ocean of public contracts. According to the United States themselves, the federal government spends roughly $500 billion dollars on contracts every year. At face value, it was just another story of a tech-related government contract being awarded to the company with the most competitive bid.

Figure 2 – AWS Logo , Source: Amazon

But Amazon would contest the decision soon after, claiming errors in the process and political interference by President Trump. Like Microsoft, Amazon Web Services (AWS) – a subsidiary that provides cloud computing services – was in the run for the JEDI contract, and was even considered to be a frontrunner. By February of this year, Microsoft’s work had been halted, and the Pentagon was reconsidering the decision, as shown by court documents.

Though this story has taken an acrimonious turn, pitting Amazon against the Executive Branch of the United States with allegations of political interference, the competition between Microsoft and Amazon is not unlike that of any other two companies fighting for market dominance. The reason why President Trump allegedly interfered with the process is because cloud computing is a nascent, rapidly growing field that both companies – Microsoft and Amazon – have deemed crucial in strategic terms. So, he hit Amazon and its founder, with whom he has had public spats in the past, where it hurt.

Ultimately, this begets the question:

What is cloud computing, and why are the stakes so high?

Cloud computing is the delivery of computing services such as servers, databases, storage, software and analytics through the internet (the cloud = the internet).

Cloud computing services offer several benefits to clients:

No capital expenditures – You don’t have to buy your own physical assets, you rent them via the “cloud” instead. Like retail chains that started to lease and rent property instead of buying it.
Scale & Flexibility – The cost of the rent is proportional to the size of the business and traffic and it is very easy to increase your capacity. In other words, as your computing power needs increase with business and traffic, you are unconstrained by current equipment.
Speed & Performance – Your only limitation is your internet connection. Cloud services run on the latest high-tech hardware, so you are not limited by outdated hardware and you don’t have to constantly update your devices.
Security and Reliability – Cloud computing services come with automatic backups and disaster recovery, as your data is in many places instead of a single server. Cloud service providers also come with the latest network security methodologies, which would be too expensive for a single business to implement on its own.

These services can be split into three types:

Infrastructure as a service (IaaS) – the most basic version where you rent IT infrastructure such as servers for storage.
Platform as a service (PaaS) – Services that supply on demand environment for developing and testing software applications, such as mobile apps.
Software as a service (SaaS) – delivery of software over the internet, on demand, often requiring only a terminal (no need for installation).

Cloud computing has provided a unique benefit to society in general – it makes it much easier to launch a tech start-up, as the start-up costs are almost non-existent when compared to the 90s. Cloud computing was a major enabler in the tech boom of the last decade.

Amazon was the first of the two to launch their cloud computing business via AWS, back in 2006. The story of AWS is interesting. Initially, before 2006, what would become AWS was a private cloud system within Amazon to support data collection and server management across the entire company. Only after using and developing AWS for four years before offering AWS to the market. AWS was not planned and was born of Amazon’s culture of innovation and experimentation.

Microsoft would follow suit in 2010, at the time launching “Windows Azure”.

Today, these companies take up 70% of the market share valued at 227 billion dollars in 2019 (with Amazon being the market leader at 40%).

And seamlessly, without us ever noticing, they power many of the platforms and companies that we use in our day-to-day.

Figure 2 – Netflix Logo , Source: Wikipedia

Consider Netflix, one of AWS’ high profile clients. In 2009, they opted to migrate from their physical data centre to the cloud, moving thousands of terabytes of data into Amazon owned servers, data that has to be accessed tens of thousands of times per second by 160+ million subscribers in all parts of the world.

Figure 2 – HP Logo , Source: Wikipedia

Alternatively, consider HP, one of Microsoft Azure’s high-profile clients. According to HP, they handle more than 600 million technical support contacts each year. The accumulated data points for each of these contacts was used to build an AI assistant via one of the solutions provided by Microsoft Azure.

Either of these examples illustrate different services provided under the same umbrella term of “cloud computing”. Both cloud computing platforms ultimately aim to help businesses develop and meet their organizational goals: they offer many tools and frameworks to build an «on your own terms» platform.

But how would a manager choose between them? If a company already works with a platform, why consider getting a service from a competitor?

Part of the answer lies on the many different services they supply, as well as the current data infrastructure of the company in question. Microsoft is ubiquitous to any company in the world, but AWS seems to be more advanced in the cloud computing game as of right now (hence its frontrunner status in the JEDI contract). Regardless, none of the cloud suppliers offer the same service in the exact same way, or with the same value proposition. For a manager, choosing between AWS and Azure might be a balancing act, and they might end up using both.

Ultimately, the Cloud consumes our day-to-day lives. From the political contrivances as seen in the JEDI contract to the shift in paradigm that directly affects decision-makers, both high and low in a company, articles much like these are but a warning sign of a braver new world to come.

Sources: US Department of Defence, US Datalab, NY Times, Gartner, Microsoft Azure, AWS, Wikipedia

The Impact of Globalization on Inequality

April 10, 2020January 24, 2021by Awareness NewsLeave a comment

Since the European discoveries, several waves of globalization have shaped the way we live today. The most recent one started around the 80s/90s of the previous century and was pushed by several circumstances. First of all, the economic reforms implemented in China around that time by Deng Xiaoping, who ruled the country as paramount leader* between 1978 and 1992 and the fall of the USSR in 1991 brought economic development and openness to vast territories, changing its interaction with the rest of the world. In addition to these two events, the improvements in communication and transportation technologies were key aspects that enabled all the process, boosting global trade and movement of capital between countries. For instance, according to the World Bank, exports of goods and services grew from US$4.1 trillion in 1980, to US$23 trillion in 2015, at constant on 2010 prices.

Since the beginning of the process until now, globalization is said to have taken a lot of people out of poverty due to those infusions of foreign capital and technology in less privileged areas of the globe, bringing them economic development and spreading prosperity. Stil according to the World Bank, the global population living with less than US$1.90 per day in this condition decreased from 36% in 1990 to 10% in 2015. The two countries that most contributed to this outcome were China, where this indicator fell from around 66% to 1% in the same time-frame; and India, where poverty affected almost 49% of the population in 1987, shrunk to 21.2% in 2011. Undoubtfully, this is clearly positive and a major advance towards the United Nations’ sustainable development goal of eradicating poverty.

However, even though poverty has shrunk at a global level, the fact is that the increasing wealth that is created and the benefits of globalization are said not to be distributed fairly.

Global real income growth (1988-2008)

This chart was elaborated by Branko Milanovic, an economist recognized for his work and research in inequality and income distribution, and depicts the variation in real income according to each percentile of the global income distribution between 1988 and 2008. It can be clearly seen that, during this time frame, the ones who saw their income increase the most was the population living in emerging countries and also the richest citizens of the world. On the other hand, the middle classes of developed countries and the extremely poor virtually remained the same, with some even getting worse off.

When looking for answers that may explain why this has happened, the novelties brought by this recent wave of globalization should be taken into consideration. The reductions in transportation costs and trade barriers created an atmosphere of incentives for capital owners to move the production segment of the supply chain from developed countries to others with better cost advantages, mainly regarding labor, in order to pursue competitiveness. Therefore, these new opportunities have benefited the global elite, as well as the population of where these jobs were created. On the other hand, this has led developed countries to experience major job losses and its working class to see their real wages/income stagnated overtime, and even decreased.

Even though globalization may have contributed for more inclusiveness and less poverty at a global level, smoothing differences between the richer and the poorer countries, the fact is that, when considering the internal situation of each nation, it may be a different story.

Distribution of pre-tax national Distribution of pre-tax national income in the United States income in China

These graphs clearly show that inequality in the United States as well as in China increased. In both countries, independently of whether real incomes increased or not, the share of national income received by the bottom 50 percent of the population fell, while the top 10 percent saw their share of income increase. This being said, it is quite clear that inequality should be a priority for national governments.

*Paramount leader: informal term for the most prominent political leader in the People’s Republic of China, not necessarily involving an official position.

Sources: Forbes, The World Bank Data, Equitymaster, World Inequality Database