Author: Awareness News

China’s Grand Strategy: The Belt and Road Initiative

February 13, 2020February 5, 2021by Awareness NewsLeave a comment

The acute awareness of a new world being knitted together has helped prompt plans for the future that will capitalise on and accelerate the changing patterns of economic and political power. Chief among these is the Belt and Road Initiative (BRI), President Xi’s signature economic and foreign policy, which uses the ancient Silk Roads and their success as a matrix for Chinese long-term plans for the future.

Since the project was announced in 2013, nearly $8 trillion have been promised to infrastructure investments, mainly in the form of loans to around 1,000 projects in 65 countries.

Some believe that the amount of money that will be ploughed into China’s neighbours and countries that are part of the BRI over sea – Maritime Silk Road – and land – Silk Road Economic Belt – will eventually multiply several times over to create an interlinked world of train lines, highways, deep water ports and airports that will enable trade links to grow even faster and stronger. In the meantime, the IMF issued a warning, in 2017, regarding the credit bubble, stating that the debt levels were not so much of a concern but rather a real danger.

China’s BRI was decided when the new leadership faced the combined pressure of the economic slowdown, US pivot to Asia and the deterioration of the relations with neighbouring countries after the 2008 Global Financial Crisis.

The continental economic belt focuses on the connectivity between China and Europe through Central Asia, and also between China, the Persian Gulf and the Mediterranean through Central and Western Asia. In addition, the maritime road aims to link China’s seaports to the South China Sea, the Indian Ocean and Europe.

The BRI’s five major goals are claimed to be: promoting policy coordination, facilitating connectivity, unlimited trade, financial integration and people-to-people bonds. The sectors in which the BRI has focused more time and effort are oil and gas, diversified industrial products and financial services, as shown in the chart below.

Dealing with the ‘new normal’

Serious challenges to the Chinese economy account for the most important drivers of the BRI. After the Global Financial Crisis and experiencing high-speed growth, the Chinese economy has slowed down since 2012 and entered the state of a ‘new normal’. China’s engine is cooling down, yet it continues to rack up one of the fastest rates of economic growth in the world. Given its enormous scale, this translates into substantial additions in absolute terms. In 2019, China added the equivalent of the entire Australian economy to its GDP. Nevertheless, the efficacy of China’s government stimulus has been waning.

Each renminbi of economic stimulus that the government pumped into the economy delivered less in actual GDP growth than in the past. The rise in ICOR (Incremental Capital-Output Ratio) – the amount of money the government needs to put in to yield a unit of growth – meant that economic stimulus was, in other words, getting more expensive.

Two major problems that the Chinese economy carries, which can be partially solved by the trade generated from the BRI, are overcapacity and excessive foreign exchange reserves.

The problem of overcapacity is not only in labour-intensive traditional industries, such as steel and cement sectors, but also in the so-called high value-added emerging industries, including new energy sectors. Overcapacity has kept the growth rate down, which makes it urgent to find alternative oversea markets.

Excessive foreign exchange reserves were mostly caused by the large-scale stimulus package, as high as $586 billion, and further imbalance of the economy. The accumulation of excessive foreign reserves reflects worsening external imbalance, though it is also an upside factor to an emerging economy facing the risks of global adjustment. China’s foreign exchange reserve has rapidly increased to $4 trillion in recent years and about $1.4 trillion was invested in the purchase of US treasury bonds. Undoubtedly, this development is not sustainable and China’s economic leaders face severe political and economic pressure in tackling this issue.

In order to increase efficiency, China needs to find more exits for such large amounts of resources.

Studies made by Think Tanks such as the Asian Development Bank have shown that there is huge demand for infrastructure in Asian developing economies which is not largely met with existing multilateral and regional development financing institutions. It is believed that there is huge space for mutual cooperation between China and Asian economies on infrastructure investment, which is the reason why so many Asian developing countries have signed up for the two Chinese initiatives.

Debt vulnerability in BRI countries

As anticipated, BRI spans at least 65 countries with an announced investment as high as $8 trillion for a vast network of transportation, energy and telecommunications infrastructure connecting Europe, Africa and Asia. It is an infrastructure financing initiative for a large part of the global economy that will also serve key economic, foreign policy, and security objectives for the Chinese government.

Yet, important questions arise on sustainably financing the initiative within BRI countries and how the Chinese government will position itself on debt sustainability. Infrastructure financing, which often entails lending to sovereigns or the use of a sovereign guarantee, can create challenges for sovereign debt sustainability. When the creditor itself is a sovereign, or has official ties to a sovereign as China’s policy banks do, these challenges often affect the bilateral relationships between the two governments.

Even though China’s plan sounds like a brilliant idea to fix its own problems, it is not all sunshine and rainbows. There is a concern that debt problems will create an unfavourable degree of dependency on China as a creditor. Increasing debt, and China’s role in managing bilateral debt problems has already exacerbated internal and bilateral tensions in some BRI countries, such as Sri Lanka and Pakistan. Washington-based Center for Global Development raised serious concerns about 8 nations receiving BRI financing, namely Pakistan, Tajikistan, Maldives, Laos, Mongolia, Montenegro, Djibouti and Kyrgyzstan. These nations’ mounting debt to China puts their economies at risk of potential widespread default.

immediate+marginal+impact+of+BRI+lending+pipeline.jpg

In Sri Lanka, citizens have regularly clashed with police over a new industrial zone surrounding Hambantota Port. Many argue that Chinese financing has led to a debt trap in Sri Lanka where the Hambantota Port project performed poorly once it was operationalised, operating at a loss. Consequently, on December 2017, the Sri Lanka Ports Authority renegotiated a deal with China Merchant Port Holdings (CM Ports), where CM Ports injected $1.1 billion for an 85% stake and a 99-year lease.

chinese investment in the china-pakistan economic corridor.png

In Pakistan, Chinese officials openly appealed to opposition politicians to embrace the construction of the China-Pakistan Economic Corridor (CPEC), which is BRI’s ‘flagship project’ to bolster ties between Beijing and Islamabad.

The CPEC is the only corridor that links China to one single country – Pakistan, comprising an important trade route to China, particularly because of the country’s location between China and its energy suppliers in Africa and the Middle East, enforcing China’s huge energy appetite.

Pakistan may have taken more than what it was expecting when it took China’s loans. The country’s Prime Minister is fighting to keep the economy afloat and some are worried that Pakistan’s debt to China may ultimately hurt those efforts. The total value of CPEC projects is currently estimated at $62 billion.

The Belt and Road Initiative is President’s Xi’s most ambitious foreign and economic policy initiative. Much of the recent discussion has concerned the geopolitical aspects of the initiative. There is little doubt that the overarching objective of the project is to help China’s neighbouring countries become more closely tied to Beijing. However, there are many concrete and economic objectives behind BRI that should not be obscured by a focus on strategy.

Additionally, the lack of political trust between China and some BRI countries, as well as instability and security threats in others, are considered obstacles which have to be taken deeply into account when designing an action plan.

Finally, despite ad hoc approaches to the treatment of debt problems, there are some signs that Chinese officials are moving toward greater policy coherence and discipline when it comes to avoiding unsustainable debt.

Merkel – A Legacy Part I

February 9, 2020February 5, 2021by Awareness NewsLeave a comment

In the last year and a half, Germany has been under two periods of a quasi-recession (a technical recession would happen if their quarterly GDP growth rate was negative for two consecutive quarters). But which long-term legacy will Merkel leave as Germany’s first female Chancellor?

German Legacy

A substantial number of Germans see Merkel as the saviour of the economy. Her economic reforms reduced unemployment to the low levels of the 1980’s, cut public spending and saw GDP grow by over a fifth over the past decade. However, her 2015 open borders policy was deeply unpopular in the eyes of her party’s electorate, many of which found refuge in the right-wing and Eurosceptic party Alternative für Deutschland (AfD), now the third-largest political party in the Bundestag and the main party of the opposition (the centre-left Sozialdemokratische Partei Deutschlands (SPD) is the second-largest party in the Bundestag, although it is not part of the opposition because it is part of the governing coalition).

According to a poll done in March 2019, 52% of Germans are satisfied or very satisfied with how Merkel is governing the country, but only 30% are pleased with what her government has achieved. The numbers are reasonably good for her centre-right party, even though it is polling 6.9% lower than in 2017 and 15.5% lower than in 2013.

To make matters more serious, if an election was to take place today, the current ruling grand coalition between CDU and social democrats SPD (both historically either the main opposition or governing party) would fall short of an absolute majority. The CDU, while still the favourite to win the general election of 2021, could have the worst electoral result in its history (31% in 1949). However, the decline in the opinion polls of Angela Merkel’s party is a consequence of the low popularity of her likely successor and current head of the CDU, Annegret Kramp-Karrenbauer, to whom polls attribute a 37% approval rating.

The other historical governing party, the SPD could have once again its worst electoral result ever (currently polling at 13%, below AfD) and, for the first time since World War II, no longer be either the first or second-largest party in the Bundestag.

To conclude, with only 30% of voters being satisfied by the work of the coalition, the political future of Germany is highly uncertain. This arises from the fact that the two political parties that have ruled Germany are expected to have all-time low results in the next elections, and also due to the resurgence of right-wing populism in the Bundestag.

European Legacy

Merkel was seen by many, especially in Southern Europe, as the face of austerity. The hard-line enforcement of austerity measures may have popularized her in Germany, but in parts of Southern Europe, it helped fuel support for populist movements, such as the Italian coalition between the anti-establishment Five Star Movement and anti-immigration party Lega. In Greece, it led to the rise of the left-wing and anti-austerity party, Syriza. In Eastern Europe, Merkel’s policies regarding the migration crisis were heavily criticised and used by right-wing populists to gain support, such as in Poland or Hungary.

Merkel is widely seen as a trusted politician throughout Europe. According to a Pew Research Center study from October 2019, 57% of people across the EU are confident Angela Merkel will make the right decisions regarding world affairs.

Macron is the runner-up, with 45% of people across the EU trusting his decision-making regarding world affairs. Another Pew Research Center study, dated from June 2017, concluded that 71% of Europeans have a favourable opinion of Germany. The Greek population expresses a different sentiment, where merely 24% of the population expressed a favourable view of Germany. The same research shows a plurality regarding Germany’s influence when it comes to decision making in the EU, with 48% thinking Germany has too much influence, while 44% think it has ‘about the right amount’ or too little.

Succession

Some see Angela Merkel as the last strong liberal leader in Europe and fear her absence could lead to a power vacuum that could have as consequence an increase in the influence of the current nationalist leaders in Europe. However, what this data shows, is that Merkel has established herself as a trusted politician for the majority of citizens in the EU. After 14 years as Chancellor of Germany and as the most powerful leader of the union, Merkel is nearing the end of her mandate. Although it is still uncertain who will take her place on the stage, what is known for sure is that the legacy built on 30 years of politics is hard to replicate or surpass.

On that account, independently of how positively or negatively Merkel’s legacy is judged either in Germany, in Europe or worldwide, the supreme question remains:

Is the next successor up to the task and able to fill Merkel’s Power Suits?

part II

Sources:

New Yorker
TIME
Bloomberg
Telegraph
DW
Independent
New York Times
VOX
The Guardian
Infratest Dimap
Pewresearch
Spiegel

Article Written By:

Ana Catarina Salgado - — Ana Catarina Salgado

Catarina+Salgado.jpg — Ana Catarina Salgado

João Maria Sande e Castro - — João Maria Sande e Castro

Merkel – A Legacy Part II

February 8, 2020February 5, 2021by Awareness NewsLeave a comment

An unlikely politician with extraordinary political skills – this seems to be the best description of the long-serving Chancellor of Germany and the guiding hand behind much of European politics in the last decade and a half, Angela Merkel, ‘the Chancellor of the free world’ (Times’ Cover, Dec ’15). German Chancellor from 2005 up to this day, she is said to step down in 2021. It is not possible to refer to the 21st century European Union without mentioning the political accomplishments of Angela Merkel and the legacy that shall be historically memorable not only within Germany, but within all of Europe.

Political Ascendance

Despite being born in West Germany, Merkel grew up in the former communist German Democratic Republic (GDR). As a brilliant student, she graduated in Physics and holds a Ph.D. in Quantum Chemistry, later working as a researcher. Throughout her youth, no particular interest in politics was manifested.

In 1989, the Berlin Wall fell, the Communist Bloc crumbled, and Merkel joined the small Democratic Awakening party, created in the GDR, taking her first steps towards her long political career. This party subsequently merged with the East German Christian Democratic Union (East German CDU) through which, following the first and only free elections in the GDR, she became a spokeswoman for the Prime Minister.

Finally, on October 3rd, 1990, Germany was once more reunited as a unified country, and so were the East and West German CDU. In the first elections, Angela was elected to the Bundestag (German Parliament), becoming Minister for Women and Youth, and later Minister for the Environment and Nuclear Safety. Rising through the ranks of CDU as a protégé of Chancellor Helmut Kohl, she won the party’s leadership after the loss of the federal government to the Social Democrats (SPD) and a donations scandal involving the party leader, Wolfgang Schäuble, in 2000.

After leading her party in opposition, she won the 2005 federal elections, defeating the SPD and incumbent Chancellor Gerhard Schröder, becoming Germany’s first female Chancellor.

Overcoming a Financial Crisis

One of the most defining events for Europe in the last decade was the 2008 financial crisis, which left many people jobless and took a heavy toll on the European economy.

In Germany, to alleviate the financial pressure felt by the automotive industry, which accounts for 5% of German GDP, Merkel introduced the Umweltprämie (Scrapping Bonus): by purchasing a new car and scrapping a used one, one would be granted €2500 by the government, as long as the used car dated at least 9 years. The measure cost the German government €5 billion but brought a ‘breath of fresh air’ to the industry.

With the imminent threat of Hypo Real Estates bankruptcy in October 2008, Merkel felt the need to act to avoid a mass hysteria that could result in large scale bank run. With this in mind, the Chancellor announced what later would be named by the media as the Merkel-Garantie, a deposit protection for German savings accounts, backed by the German government. The consequent bailout and eventual nationalisation of the German investment bank managed to appease the general public. Despite the opposition claiming this bailout was extremely irresponsible, it marked an end to the mass withdrawals of savings accounts.

Overcoming a Humanitarian crisis

Starting from 2012 onwards, a massive influx of asylum seekers, predominantly from war-torn countries in the Middle East, was recorded. This crisis peaked in the fall of 2015 with a recorded arrival of 890 thousand refugees during that year.

During the climax, Merkel decided, after consulting the Austrian and Hungarian Heads of State, to allow the entrance of unregistered refugees, mostly Syrian and Afghan, into national territory. Hereby she launched the Willkommenskultur (Welcome Culture), which promoted the integration of migrants and foreign culture in German society. However, Merkel faced strong backlash for this measure, even from her coalition partner Horst Seehofer, who did not approve of Merkel’s policies, instead supporting an upper limit on the number of asylum seekers entering Germany. Regardless, Merkel managed to withstand her critics and maintained an openness towards migrants, in contrast to most Heads of State across Europe.

From 2015 to 2016, around 1.5 million migrants were registered in the database of the German Federal Office for Migration and Refugees. This number only decreased in 2017.

Merkel argued on the importance of a homogenous Migrants Agreement for the EU, that should prioritize the integration of said refugees and speed up the process of the acceptance or denial of their request for international protection. Due to her stance on the refugee and Crimean Crisis, Merkel was nominated Times’ Person of the Year in 2015.

But which legacy did Germany’s current Chancellor leave its country?

part I

Sources:

New Yorker
TIME
Bloomberg
Telegraph
DW
Independent
New York Times
VOX
The Guardian
Infratest Dimap
Pewresearch
Spiegel

Article Written By:

The IKEA Effect

February 6, 2020May 9, 2022by Awareness News2 Comments

In a previous Behavioral Economics – related article (see article ‘The Power of $0.99’), we talked about what, and by which means, behavioral pricing strategies influence our brain. However, you might have realized that those strategies do not always succeed, especially when you are aware and start noticing them. It is important to understand to what extent we are sufficiently attached to a good or product, in order for that attachment to matter in our decision-making. It is equally important finding out why we value it so much. Michael I. Norton (Harvard University), Daniel Mochon (University of California) and Dan Ariely (Duke University), studied this phenomenon, naming it the IKEA effect.

In fact, it is fairly easy to understand that we give value to both things we make and to the completed end-products we buy. However, it may not be as easy to acknowledge that our neurology influences us to overvalue what we make, even if objectively it is not true. This is a cognitive bias dating way back in history.

One example puts us back in the 1950s, when cake mixes first emerged in common supermarkets. A high demand was to be expected, for a product of easy use that would facilitate every home baker across the world, saving precious time. However, in reality, the precise opposite occurred. In the process of understanding why people didn’t react well to such a time-saving product, it was discovered that consumers found it too easy. Unsurprisingly, marketeers went blue and struggled to understand why the product made people feel unattached. What they uncovered related exactly to this: attachment. Common, not-so-rational human beings give higher value to things they put a certain level of effort in. Following this theory, marketeers changed the recipe, requiring now that bakers add an egg to the mixture (instead of dried eggs being already included in the recipe). This led to an outstanding increase in sales, since the egg addition established an effort level sufficient enough to change consumers’ perception from being too easy to facilitating.

The big question lies in what that turning-point effort level is. It is a very difficult problem to solve, since its answer depends on the products, consumers and circumstances. Notwithstanding, this rationale is currently being used alongside behavioral pricing to spark consumers’ internal need for the companies’ products.

The IKEA effect name derived precisely from the extraordinarily intelligent strategy of the IKEA brand. By being an easy “build it yourself” brand, it captivates consumers’ attention for its products – even though it would be easier to buy already made furniture – regardless of the product quality. Buyers tend to view their IKEA furniture as theirs from the moment they spend time following the instructions and assembling the product themselves. The whole mechanism relies on personal investment in the creation that later tends to develop into a personal pride symbol that ultimately leads to an overvaluing of the final product. We might be aware or completely ignorant of this unconscious trick of our brains, but the truth is that we bake a ready-mix cake or build a ready-cut armoire and we take pride in it, giving us greater pleasure than eating or passing by the same readymade products. We smile when the cake is at the table or when we pass by the armoire in the living room. It is not related to our individual appreciation or gift for baking or building, it is in fact a general human bias.

In ‘The Upside of Irrationality’, Dan Ariely later discovered that we are largely unaware of this quotidian tendency and expect others to take as much awe in our cake as we do. It may be a paining truth to understand that others don’t think greatly of our cooking, designing, family, house, company or strategy as we do, but it is actually a very useful knowledge. Allowing this reality to sink in can be life-changing in the way that we look at our developed creations and subsequently it allows a more objective, real perception on them. The notion that our ideas are not always the most desirable to follow and the power of an objective perception are crucial for managerial success. Thinking greatly of made investments, even if they continually provide loss, can be an avoidable mistake through the recognition that not always our created and baked strategies are the most valuable ones.

An impartial and unbiased reasoning may lead us to understand that others’ ideas are not only not inferior, as they may be better adjusted for our current company operations.

On the other hand, acknowledging that ‘greater effort ultimately leads to greater love’ (given that labour is successful) will encourage you to foresee relaxation over effort in completing your desired activities on the certainty that in the end you will be farming long-term satisfaction. In Economics, the labour market model leads us to believe that greater effort is the root of unbearable responsibility, frustration and stress, and that real happiness lies in immediate relaxation and no work. However, the human inheritance is to be proud of our deeds and accomplishments. Seeing a completed weekly objectives list makes us understand that all the sweat and tears given to that week’s work was why we felt the overall final enjoyment.

Concluding with the same reasoning, it is often heard that the easy way is not always the best road to happiness and the IKEA effect came to prove it. The next time you feel like buying a cake, buy a ready-mix and complete it yourself, or the next time you need a new desk, take the time to assemble it. You might come to discover that you will take pride and a little bit of happiness from it, cherishing your success in a much deeper sense. At the same time, be aware that just like your valuing sentiment may not be equally perceived by others, our particular intuitions and ideas are not always the rational and most beneficial approach to the problem.

In today’s world, it is very difficult to be the best, but some strategies can make you feel the best while knowing it.

Check The IKEA Effect – Everything You Need to Know by InsideBE to find case studies and practical examples on how and when you should avoid this effect.

References:

Ariely, Dan; The upside of Irrationality; London; 2010;
I. Norton, Michael; Mochon, Daniel; Ariely, Dan; The “IKEA Effect”: When Labor Leads to Love; 2011; Harvard Business School;

Money, the most powerful motivator of all times. Or maybe not…

February 1, 2020February 5, 2021by Awareness NewsLeave a comment

Imagine you were a manager and wanted to improve the performance of your team. What would you do? Let me guess, you would try to minimize the principle-agent problem by aligning the interests of the workers with the ones of the corporation, in a way which fitted all employees. You would take a look around, study the most commonly used sources of extrinsic motivation and finally come with the answer “money”. Why not? Who doesn’t like seeing its salary being increased and wouldn´t work harder for it? Higher salary, more effort, better performance, more profit. Pretty straight forward, right? Wrong!

Motivation is the reason for people’s actions, willingness and goals. It’s the “power” which allows us to wake up in the morning and perform difficult tasks, such as studying or going to work. There are two main types of motivation: intrinsic and extrinsic. Intrinsic motivation is the motivation which comes from “inside”, i.e., we perform a task because we enjoy it or find it interesting. Extrinsic motivation is the motivation which comes from the “outside”, i.e., when you do something for external rewards or to avoid negative consequences. Both intrinsic and extrinsic motivators can be either positive or negative. All intrinsic and extrinsic motivators, positive and negative, have its weaknesses and strengths. Intrinsic motivators differ from person to person, which makes it really difficult to apply them in large teams. However, they are much more long-lasting. Extrinsic motivators are easier to generalize. However, they may be only effective in the short-run or they may worsen the environment inside a team (in the case of negative motivators, such as threats to be fired or demoted).

Money is generally seen as a powerful extrinsic positive motivator, as it can be successfully used for motivating almost everyone. At least that’s what people believe and behave accordingly. However, they couldn’t be more wrong.

The MIT (Massachusetts Institute of Technology) conducted a study in which some of their students had to perform different tasks and received one of three levels of monetary rewards (few money, some money or a lot of money).

The students who received mechanical tasks increased their performance as the monetary rewards increased, i.e., the students who received higher rewards did a better job. However, if the challenge called for rudimentary cognitive skills, larger rewards conducted to poorer performance. In order to eliminate possible wealth variables, the researchers repeated the study in Madurai, rural India, where the purchasing power is way bellow the United States’ . Again, the study showed that, when the challenge involved cognitive skills, higher rewards led to worse performance.

This way, they concluded that the “carrots and sticks” approach (giving punishments and rewards) only works when the tasks that the employees perform are purely mechanical.

“So, the amount of money employees receive is not important?”, you may ask. Of course it is. However, it’s not the most important. If, as a manager, you don’t pay people enough for their effort, they won’t be motivated. However, if you incentivise them with monetary rewards, they may worsen their performance. This way, you should pay them enough to take the issue of money off the table, letting them focus on the work, rather than on receiving their salary.

And the question stands. What is the best way to motivate employees?

According to some scientific studies, there are three factors which lead to better performance and personal satisfaction: autonomy (the desire to be self directed), mastery (the urge to get better at performing a job) and purpose (the aim to do what we do in service of something higher than ourselves). Actually, if we look into some industry benchmarks, such as Google or Atlassian (an Australian software company) we see that these factors are taken into consideration in their management. In Google, engineers can use 20% of their working time to develop their own projects and, on a typical year, about half of the company’s new products are born during that 20% time. In Atlassian, a few times a year, employees have 24 hours to think of some new ideas and present it at a relaxed party at the end of the day. It comes that a whole array of software fixes was created during that period and may never had been created otherwise.

If we think of Wikipedia, for instance, it has a business model that economically makes no sense: it was created by employed and greatly specialised people completely FOR FREE and anyone can use it without paying. Why did the engineers provide it freely instead of profiting with their creation? On one hand, it is the desire for mastery, to overcome obstacles and create something never seen before. On the other hand, the purpose behind the platform and the free access to knowledge and information.

As a summary, people only perform difficult tasks because they are motivated to do so and, as a manager, it is vital that we keep our employees highly motivated. However, it is really difficult to find an effective motivator which fits all workers.

Money is still seen by a lot of corporations as an effective mechanism to motivate people but science proves otherwise. It may be good to incentivise mechanical tasks but, if the work involves some cognitive skills, higher monetary rewards leads to worse performance and destroys creativity. This way, managers should get rid of this extrinsic motivator, based in the “carrot and stick” approach, and replace it by the intrinsic motivator of autonomy, mastery and purpose. Besides being much long-lasting, this type of motivators engage workers and make them much more satisfied with their job, as they are contributing to a better world.

The last of a generation – Alexandre Soares dos Santos, Mr. Pingo Doce

January 29, 2020February 5, 2021by Awareness NewsLeave a comment

Alexandre Soares dos Santos, the man behind Jerónimo Martins’ empire and the main sponsor of the foundations created in his grandfather’s honour, the Francisco Manuel dos Santos Foundation (FFMS). One of the richest men in Portugal, he is accredited for changing the business environment in his family’s company, as well as the rest of Portugal.

“I am unpredictable”

Early days

Alexandre Soares dos Santos was born to a family of entrepreneurs from Oporto, at the same time as his father was taking over the helm of his father-in-law’s business. Mr. Soares dos Santos interchanged his studies between Lisbon and Oporto, eventually going on to study Law, following his father’s wishes. However, to his father’s disappointment, Alexandre Soares dos Santos soon dropped out, which led their relationship to quickly sour.

As a result, Mr. Soares dos Santos joined Unilever in Germany, the consumer goods’ giant, where he’d go on to build a career for himself. At the time that he was in charge of the marketing department in Brazil, Alexandre Soares dos Santo’s father passed away, forcing him to move back to Portugal in order to take over the firm’s leadership.

Jerónimo Martins

His beginning at JM:

When thinking about the Portuguese retailer Jerónimo Martins, Alexandre Soares dos Santos should be a name that immediately pops up in our mind, being an inevitable figure in the retail giant. His ties with the company go back to way before he took charge. In 1935, his family decided to move to Lisbon, when Alexandre ́s father was offered a job to work with his father-in-law in a relatively unknown company based in the Portuguese capital: Jerónimo Martins.

Jerónimo Martins is currently the biggest food retailer in Portugal and the 56th largest retailer in the world, according to a study conducted by Deloitte, “Global Powers of Retailing”, in 2018. Although the company ́s foundation goes back to 1792, its most glorious and prosperous times occurred during the time Alexandre Soares dos Santos was the CEO of the retailer.

Deloitte’s Global Powers of Retailing, 2018

Distribution is the answer

The revolution began as soon as Alexandre started administering the firm. In his earliest days, he started a new brand “FIMA”, bought the factories of the ice-cream company “Olá” (internationally known as Algida) and signed agreements with Unilever. This last measure is particularly relevant, as it marked the entry of the Jerónimo Martins group in the distribution market, which would later lead to the opening of the supermarket chain “Pingo Doce” – the group’s most valuable brand in Portugal. This was just the beginning of one of the most successful stories in Portuguese corporate history.

In more recent years, the group has consolidated in its main markets, with special emphasis on Poland, verifying increases in revenues from 13 billion euros in 2013 to close to 18 billion in 2017. Jerónimo Martins’ outstanding performance is not only shown by sales figures, but also by distancing itself from its closest competitor, Sonae, through a greater growth performance.

Jerónimo Martins and Sonae’s revenues between 20013 and 2017

The Brazilian Setback

Although today Jerónimo Martins is a synonym of success, that has not always been the case. Back at the turn of the millennium, the company faced serious financial difficulties following the expansion into Brazil and Poland. The company lacked financial resources to withstand investing in these two growing economies, leading to debt accumulation, eventually forcing the sale of the Brazilian assets.

Despite being mostly deemed as a bad bet, Mr. Soares dos Santos took personal responsibility, blaming his own arrogance for the company’s failure in Brazil, as well as the lack of market knowledge, planning and overconfidence. He believed that the lesson learnt was a major turning point for the firm, which defined the success in Poland.

“I don’t care about the past. I only care about the day of tomorrow.”

Vision for Portugal

Alexandre Soares dos Santos was long known for his strong criticism of the political landscape and personalities in Portugal. He believed the current economic and banking systems in Portugal to be faulty, in part due to political pressure and widespread corruption. In addition, he defended that the Government creates excessive constraints to investment and job creation through a bureaucratic and centralized decision-making process, which results in little to no prosperity and growth whatsoever.

Mr. Soares dos Santos’ views of the current environment in Portugal were the result of a lifetime of investing, reflecting his several experiences abroad in countries such as Germany, the Netherlands and Poland. Nevertheless, he’d always maintain a distance from politics so as not to hamper his businesses.

“I argue that the businessman does not have to get into politics. There is a conflict between being in the government and being in a business. We obey to one goal: to defend the interests of the company and those who work there. Once a politician, a respectful guy, told me: ‘A politician’s goals are the next elections. Yours, not’”

Legacy – Fundação Francisco Manuel dos Santos

Besides his impact in business, Alexandre Soares dos Santos played a big role in some of the most relevant studies regarding the Portuguese reality in recent years, through the foundation he and his family created back in 2009: “Fundação Francisco Manuel dos Santos”. This foundation was created with the main goal of “Studying the great national problems and making them understandable for all, while stimulating open discussions regarding those topics”, as said by Mr. Soares dos Santos when presenting it. FFMS is also responsible for creating the popular statistical platform Pordata.

The database Pordata is one of the most successful projects of the FMS Foundation. It was started in 2010 as the “Database of Contemporary Portugal” and the project embodies one of the priorities of the Foundation: the collection, systematization, and dissemination of data on multiple areas of society. Pordata has a significant relevance at an economic level, as its ties with the Portuguese National Statistics Institute (INE) mean the database is one of the biggest sources of reliable economic information, not only at a national level, but regarding all of Europe.

All of this information about the Portuguese and European economic environment provide an unbiased and trustworthy analysis, which is fundamental to look into existent structural issues present in each country.

“Soares dos Santos had a great social sense, and he was sometimes frustrated that this sense was not perceived from outside.” – Seixas da Costa.

Final thoughts

Mr. Soares dos Santos was the last of a generation of industrialists, having transformed a small company into one of the most important conglomerates in the Portuguese economy, and its biggest employer. Moreover, his views of the economic and political environment led him to create a foundation which is key to understanding how Portugal can develop itself.

Mr. Soares dos Santos is seen as an example for Portuguese people, but most importantly an inspiration to the next generation of entrepreneurs who wish to make a difference.

Sources: Observador, Jornal Económico, Jornal de Negócios

Diogo Alves Duarte Vilas Boas Tiago Rebelo

Gilets Jaunes

December 8, 2019February 5, 2021by Awareness NewsLeave a comment

Introduction

Gilets Jaunes, also known as the yellow vests movement, marked its one year anniversary by going out to the streets of Paris in the past November 16th.

This movement had its beginning in mid-November of 2018 (in several regions of France) and it soon called the attention of the media all across Europe, that insisted on following up each minute of the strikes. The famous protesters wearing yellow vests attracted a large audience in 2018 for their violent and destructive behaviour. They were characterized as an atypical movement, having no designated leader nor belonging to any particular political party.

Gilets Jaunes had the power to encourage other countries, other than France, to adopt the same initiative, attaining a worldwide dimension.

History/Origin

In the second half of 2018, there was a general rise in crude oil world prices. France was also affected by this rise (making the pump prices go up) and simultaneously there was an increase in the fuel tax. As shown in the graph below, France is the fourth country in Europe with the highest diesel tax, the British being those who have the highest tax burden within the EU.

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This measure was already expected to be implemented as part of the country’s long-term ecological plan and it was meant to move the country’s citizens away from fossil fuels, in particular, from diesel cars. This would then work as an incentive for people to opt for more environmentally-friendly alternatives.

However, in May, a young businesswoman, outraged at the rise in fuel taxes, decided to post an online petition demonstrating her discontent. Although this petition initially didn’t achieve much, it sparked what would become one of the most commented strikes of the last few decades.

Some months later in October, Eric Drouet, a lorry driver, saw this petition as an opportunity to confront the government with its most recent measure, deciding to contact the young woman and bolster her petition. He aspired to reach the highest possible number of citizens and for that, he shared and promoted the online petition. As the world oil prices were rising, petrol prices in France were constantly increasing and, meanwhile, the previously ignored online petition gained hundreds of thousands of signatures.

French people felt really wronged in relation to the tax imposed on fuel and more generally the high cost of living of the country. As a result, the resentment towards President Emmanuel Macron became more evident.

Additionally, another factor that contributed to the discontent among French citizens were the tax cuts on businesses, investors and wealth, which mainly benefited the richer families. Previous President Hollande had raised taxes for this upper class, which caused many investors to leave France forlower tax countries. Emmanuel Macron introduced this measure in an attempt to fix the previous situation and make the investors return to France. However, from the Gilets Jaunes’s point of view, since he first cut taxes for the rich and only then introduced the fuel tax, which mostly affected low-income families, they felt like there was an unbalanced distribution of wealth. This caused sentiments of social injustice, with opponents nicknaming Macron “the President of the rich”.

On November 17th the first protest occurred, mobilising approximately 285 thousand people all across France. Protesters were dressed with yellow jackets, that French motorists are obliged by law to have in their vehicles. Thus, being a common symbol for all French citizens, it made it easier for everyone interested to participate.

In mid-November, French citizens were far from knowing the dimension that this movement would conquer, which turned out to be the longest-running protest since the Second World War. It lasted 13 weeks, gathering people every Saturday.

The brutality of the yellow vests was undeniable: there were 11 deaths, around 4,400 injured (policemen and civilians) and 220 arrests.

The violence and chaos caused by these protests was particularly evident on December 1st: more than 100 cars were burned, several buildings were set on fire, Arc de Triomphe was vandalized, store upfronts were broken in the richest streets of Paris…

However, the brutality of this so called “Acte 3” was not fully supported by all the protesters. A poll conducted after this day of extremely aggressive action concluded that despite 72% of French people supporting the Gilets Jaunes, 85% of those supporters condemned such violent practices in Paris. This might explain the decline in the number of protesters from the third demonstration onwards.

Objectives

Initially, the yellow vests’ goal was to revert the fuel tax imposed by the government. However, as the weeks went by, they realized the huge power they had and started demanding for more. They elaborated a list with 40 requests which they planned on presenting to the government. Among these demands, they urged more economic concessions such as lower VAT, higher minimum wage (from €1,149 to net €1,300 per month) and higher pension (no lower than €1,200/month). Regarding political matters, they demanded an alteration of the Constitution, replacing representative democracy with a more popular government. More concretely, they suggested that petitions that gathered more than 700,000 signatures would automatically turn into proposals of law. This wouldtransfer more power from the parliament and the President to “the people”.

Impact/Consequences

In the final quarter of last year, the economic cost of the yellow-vest protests was estimated in 0.1% of national output (which amounts to 2 billion euros). Some businesses like cafes, restaurants and stores dropped their weekend revenues by 20 to 30 percent, since demonstrations took place every Saturday. There was a public cost for damaged property in the amount of 30 million euros, plus other unaccountedcosts concerning police overtime and traffic radars repair.

Regarding the political environment, statistics show that the President Emmanuel Macron’s disapproval rating increased significantly, by 25%, from the beginning of 2018 until the “Acte 3”, one of the most violent protests, in early December. At the moment of this event, there was a peak of the disapproval rate (73%) and from then on it has been slowly decreasing (currently at 64%).

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Marine Le Pen, the President of the National Rally (NR), was one of the first politicians to show support for the yellow vest movement. She may have taken advantage of the instability lived in France, during the action days, to slightly increase the NR’s position concerning the voting intention for the 2022 presidential election.

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In terms of political representation, the yellow vests failed in being heard. A couple of fully yellow-vests-composed lists applied as candidates to the last European elections in May, but they weren’t successful, winning a combined well below 1% of the votes.

Achievements

In the end, this movement achieved its main goal: it made the government postpone the planned eco-tax rise on fuel.

On top of this, Macron agreed to a reduction on taxes for lower-income families in the 2020 budget and the protesters also managed to get a tax cut for most pensionists.

Since the President, by imposing the fuel tax, had in sight the reduction of carbon emissions (aimed at a greener country), but, at the same time, knowing the tax would substantially harm the poorest, it is important to analyse this trade off: Is it better to improve France’s sustainability and thus contribute to a more conscious world or instead delay that matter and focus on the country’s internal social issues, such as wealth distribution?

Impact abroad

Even though this movement is predominantly French, it also had a relative impact abroad. Inspired by the protests in the neighbouring country, Belgium also had a protest on December 8th 2018, that gathered 1000 protesters and resulted in clashes with the police. Even though this turnout had a much lower scale than the one in France, their causes for discontent were very similar: high tax burden (tax-to-GDP ratio was 47,3% in 2017), that affects mainly the middle-lower income class. Also, even though nominal average wages have increased, the purchasing power of low income earners has shrunk, reflected in a decrease in real wages.

Besides Belgium, many other countries joined the movement, although having different goals than the ones in French and Belgian protests. For instance, unlike the French non-partisan movement, which defended changes in economic policy, taxation and rising fueling, in Canada the movement was tightly linked to far-right and alt-right initiatives, mainly focusing on anti-immigration and white supremacist rhetoric. Thus, the impact of the yellow vest movement abroad varies from country to country. Portugal also attempted similar protests on the 21st of December 2018, but it gathered just a few number of citizens in the streets.

Conclusion

The Gilets Jaunes may have had good intentions at the beginning of the protests, when they claimed that the fuel tax would widen further the gap between rich and poor. But the strikes spinned out of control, especially upon the third action, when violence soared.

On the other hand, Macron implemented the tax for sustainability purposes and this measure was already scheduled according to the government’s plans. France’s President now needs to figure out how to impose ecological responsibility without being misinterpreted, that is, he must know how to state his political position and at the same time, raise awareness among French citizens for environmental concerns.

It’s good to reflect deeper on this topic and possible solutions to this problem: Is the fuel tax the only way to move consumers away from diesel to a more eco-friendly alternative? Shouldn’t Macron consider applying a subsidy on sustainable energies instead?

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Nice Dress in the Closet, Big Weight in the Shoulders

December 6, 2019February 9, 2021by Awareness NewsLeave a comment

Welcome to the world of fast fashion

Dressing up fashionably is becoming an increasingly mindless task. Shop windows change every two weeks with new collections and t-shirts may cost as low as 5$. Amazing, right? You are able to be on trend without ruining your budget. Besides, according to some well known economists such as John Maynerd Keynes, you are contributing to the growth of your economy the more you consume.

Fast fashion retailers introduce new products multiple times a week, making us feel that the clothes we own are outdated or have a poor design. Most times, this is not true.

When we think of mass production which results in low quality products, labour exploitation, environmental disregard and lack of security at work, the beautiful world of fast fashion becomes a little bit less pretty.

It’s undeniable that a consumerist world may bring some economical and even social benefits for a tiny part of the population. However, in this article, we invite you to look to the other side of the coin – the one we tend to ignore, the one which doesn’t directly affect us.

Mass production in the fast fashion industry

“No, it is not our choice. We must work overtime. If not, the gate is open for us to quit our job.”

According to the world resources institute, the average consumer is buying 60% more clothes now than in 2000, which explains why the fast fashion industry has grown so much. According to the Ellen McArthur Foundation, clothing production has approximately doubled in the last 15 years, driven by a growing middle-class population across the globe. This industry is expected to continue growing due to the foreseen 400% increase in world GDP by 2050.

The fashion industry represents 4% of the global market share (406 billion dollars), having huge implications on both the economic growth and social welfare in several countries.

Since trade law changes in the 1970’s, the supply chain has been spreading out geographically to sub-developed economies, as firms wanted to keep increasing their production while reducing average costs.

To achieve economies of scale, fast fashion industries chose to produce in countries where there were low wages and poor labour regulation.

Because of that, these countries have increased their GDP. In Bangladesh as well as in India, GDP growth was exponential, growing from 25 billions of dollars in 1995 to almost 275 billions of dollars in 2015. However, this increase in GDP was not translated into an increase in welfare. According to the United Nations’ development programme, Bangladesh has an Inequality-adjusted Human Development Index (IHDI) of 0.462 and 67.3% of the total labour force lives under poverty. In India, the reality is almost the same, the IHDI is 0.462 and 42.9% of the total labour force lives with less than 3 dollars per day.

According to the American Apparel & Footwear Association, during the 1960s roughly 95% of the apparel worn in the U.S. was made domestically. Nowadays, it’s less than 3%. The fashion landscape has changed from being seasonal to new clothes arriving every week, but at what cost? In 2007, labour rights organizations in Bangalore, India, estimated that the bare minimum a garment worker’s family (average size: 4.4 members) needs is around 4364 rupees (€ 80) per month to live. Yet the minimum wage for garment workers in Bangalore starts at 2418 rupees (€ 42) per month, and, according to Labour behind the Label, many workers earn just this amount.

Similarly in Bangladesh, a study for Clean Clothes Campaign by Martin Hearson discovered some workers on the minimum wage of 1662 taka (€ 16.60) and most factories paying an average take-home wage (boosted by considerable amounts of overtime) in the region of 2,500-3,000 taka (€ 25-30). However, at the time that this minimum wage was set, in 2006, living wage1 estimates for a Bangladeshi garment worker’s family were around 4,800 taka (€ 48). Low payment like this often means that garment workers are keen to work overtime to help bring in more money. However, in the majority of workplaces that Clean Clothes Campaign surveyed, a significant proportion of the overtime is unpaid. This is often because employers set impossible daily targets, requiring workers to stay at work until they have met them. Only then they are paid. A tailor in Tirupur told Clean Clothes Campaign “No, it is not our choice. We must work overtime. If not, the gate is open for us to quit our job.”

Besides paying low wages, the factories where these workers spend most of their time have, in general, really poor working conditions, which frequently leads to severe accidents. According to Reuters, between 2005 and 2016 at least 9 deadly accidents happened in Bangladesh, most of them in garment factories which supply global clothing brands.

The worst accident happened in April 2013 when an eight story building, Rana Plaza, housing 5 garment factories, collapsed due to a structural failure. Besides the failure to meet security standards, according to the head of Bangladesh Fire Service & Civil Defence, the upper floors had been built without permission. On the day before the collapse, some cracks in the walls of the building had been noticed and the building was evacuated. However, on the following day, workers were ordered to enter the factory despite the complaints about the appearance of cracks in the walls. Bank and stores employees were not there but more than 3000 workers, mostly women and young people, were inside the building when it collapsed, and 1134 of them died.

Affordable does not always mean sustainable

Besides the social harm of mass production, this practice will also generate negative environmental externalities. According to the World Resources Institute, to produce one cotton shirt 2,700 liters of water are needed, the equivalent of what a regular person drinks in two and a half years. On the other hand, the production of a pair of jeans generates as much greenhouse gases as driving a car for more than 80 miles. Washing clothes releases 500,000 tons of microfibers into the ocean every year.

This way, the fast fashion industry is responsible for 20% of the global water waste and 10% of total gas emissions.

To produce at a lower cost firms use cheaper materials (such as polyester, acrylic or nylon), synthetic fabrics, dangerous dyes and toxic chemicals. Moreover, when consumers wash their clothes they release plastic fibres into the ocean as most of the materials used to produce clothes in the fast fashion industry are made from petroleum. The most widely used input in the fast fashion industry, polyester, is a fine example. More than 70 million barrels of oil are used every year to produce this material and it is responsible for 35% of the microplastics present in the ocean.

“ If we only have one body, why do we need thousands of clothes?”

Slow fashion, which is the deliberate choice of purchasing better quality items, but less often, has risen in opposition to fast fashion. By using high quality resources and production methods, guaranteeing better working conditions and compensation for employees, this alternative is considered environmentally and ethically conscious rather than trend driven.

However, there are other ways beyond slow fashion capable of softening fast fashion environmental consequences, such as:

Donating unused clothes to charity institutions or to your family and friends. Do not throw them in the organic bins as, if they are composed of synthetic, non-biodegradable fibers, they will just pile up in the landfill;

Looking for shops which take back used clothes from their own brands or even from other’s;

Trying your luck in second hand stores, a sustainable and economically efficient way of getting rid of what you don’t need anymore but which may be useful for someone else.

If it is true that not all of us are able to afford slow fashion items or they simply don’t satisfy our tastes, it is also true that companies produce according to our “production orders”. That is, if we keep on buying clothes just because they are fashionable or cheap, disregarding the environmental and social impacts of their production, this situation is never going to change.

As consumers, we have the power to dictate the rules. If we demand corporations to give their employees better working conditions or their production cycle to be more sustainable, they have no other way than to adapt. However, this would require a collective change of behaviour, so that corporations feel forced to satisfy our “new purchasing preferences”.

Besides, this problem could simply be solved with pure rationality. If we only have one body, why do we need thousands of clothes? Does it make any sense?

The first step in the fight against the environmental deterioration and social damages caused by the fast fashion industry is the change in our shopping routines, something reachable by all of us. We need to work together – there are no jobs on a dead planet. There is no equity without rights to decent work and social protection. Ultimately, there is no peace if we are uncertain about the sustainability of our planet.

It’s time to change.

1 A living wage enables workers and their dependents to meet their needs for nutritious food and clean water, shelter, clothes, education, health care, and transport, as well as allowing for a discretionary income.

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The Interesting System of a Islamic Finance

December 3, 2019February 5, 2021by Awareness News2 Comments

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So, whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.”

— Qur’an – Surah Al-Baqarah [2:275]

““O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.”
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.
”

— Qur’an – Surah Al-Baqarah [2:278-279]

If you wish to hear the recitation of the verses, links are provided here: 2:275; 2:278; 2:279

These three quite ominous verses sum up, succinctly and clearly, what grim fate Allah has planned for those who deal in interest. However, it might be more accurate to say riba (ربا), rather than interest. Indeed, it could be argued that translations of the verses above which keep riba untranslated are more accurate. (Truthfully, any version of the Qur’an in English could be classified as unduly westernized.) This Arabic word’s original meaning is something along the lines of “increase”, “excess” or “addition” but is now primarily used to refer to the practice of interest or usury.

Some defend that riba doesn’t apply to all interest but, rather, only to unusually high interest-rates: usury. There is a lot of Islamic literature which equates riba with interest and that claims that there is a consensus amongst Muslim scholars that this is so.

There are many justifications given by religious scholars for the banning of interest by Allah, namely claiming that lending with interest is exploitative and that the lender/borrower relationship created undermines the spirit of brotherhood that should exist amongst Men. This religious ideal is not unique to Islam. Indeed, other Abrahamic religions have things to say about interest:

“Do not charge interest on the loans you make to a fellow Israelite, whether you loan money, or food, or anything else.”

Holy Bible – Deuteronomy [23:19]

Human beings’ innate fear of falling in eternally burning fires and our puzzling love for masochistic submission to an almighty father figure came together in the Muslim world to create a Sharia-compliant banking system commonly referred to as Islamic Banking. In broad terms, to be in accordance with Allah, Islamic banks must not receive nor pay interest and must not invest in or involve themselves with businesses which partake in haram (forbidden) activities, such as selling alcohol, pork, gambling, etc.

Now, the question lingering in everyone’s minds: “How do these institutions function?”

In Islamic Banking, the most common way of financing is what is called Murabaha. It is, essentially, a contract of sale in which the bank buys a good that its client needs and then sells it to him with a previously agreed upon mark-up cost. Say, for instance, that you need a new set of tables for your restaurant. The bank buys said set of tables from the table-maker at X€ and sells them to you at X+P€, an amount that you pay through deferred payments.

I don’t need a revelation from Allah to know that many of my esteemed readers are scratching their heads in utter confusion trying their hardest to understand how such a transaction amounts to anything different than paying interest on a loan. Is it just interest with extra steps? Indeed, this is a criticism which Murabaha-type financing receives in ample amount, implying, therefore, that it is not Shariah compliant. However, since this removes the much-frowned-upon aspect of “money generating money on its own” and involves specific commodities, supposedly, Allah is pleased. And so, in spite of its criticisms, Murabaha contracts are calculated to represent about 80% of total financing made by Islamic Banks.

Another type of financing contract that exists in Islamic finance is called Mudarabah which, contrary to Murabaha agreements, is broadly accepted as Shariah compliant. This method, which closely resembles venture capital financing, is a type of contract in which an agent provides the capital (called the rabb-ul mal (رب المال), literally “lord of money) to another agent, who invests it and operates the investment (called the mudarib). The mudarib has complete authority in operating and managing the investment. Profit after the repayment of the borrowed capital, when it exists, is split amongst both parties in a previously agreed-upon manner. On the other hand, if the project fails, the losses fall entirely on the rabb-ul mal, who will lose his invested capital.

Due to the very high risk that the rabb-ul mal faces, Mudarabah contracts contain covenants which protect him from negligence by the mudarib. However, the viability of this method of financing still suffers heavily from structural agency problems: the mudarib does not suffer from losses nearly as much as the rabb-ul mal. For the financier to be willing to take projects with higher risk, he will demand a higher profit share. However, this, in turn, diminishes the incentives that the borrower has to generate profits. And so, mechanisms that better align the incentives of both parties, like the ones used to align the incentives of shareholders and managers (for example shareholders voting to elect a Board of Directors), need to be incorporated to actually make this a practical way of financing.

A similar type of contract exists, called Musharakah, but where two or more parties pool capital for an investment and divide profits according to it.

There is a hadith in which prophet Muhammad says:

A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times.

Assuming that this is true, and that people, in general, don’t like adultery, then, it is no surprise that Islamic Finance continues to grow, with global assets exceeding $2000bn. However, its growth is not restricted to Muslim-majority countries. Many financial companies, like J.P.Morgan, now offer Sharia-compliant financial services and the United Kingdom is at the forefront of this industry’s growth in the west. With about 5% of its population being Muslim there are already 5 different, completely Islamic, banks operating in the U.K.

This is a topic whose surface I was only able to scratch in this article due to its surprising complexity. But, surely, its relevance will only increase as Islamic Finance evolves and migrates from the Muslim-majority countries to the rest of the world.

A Step Towards a More Sustainable Financial Market

November 30, 2019February 5, 2021by Awareness NewsLeave a comment

Undeniably, society’s concern about being green has been growing tremendously for the past years and environmental awareness is, certainly, one of the burning issues of the century. Consumers are changing their behaviors, opting for sustainable products and making more aware choices. However, is replacing a plastic bag for a paper one the only way of being green?

12 years ago, the European Investment Bank issued the first ever Climate Awareness Bond (CAB). These green bonds are designed to encourage sustainability and to support not only climate related but also other types of environmental projects. Backed by the issuer’s balance sheet, these sometimes called “climate bonds” are intended to fund projects that are environmentally friendly, going towards new or existing projects that are meant to have positive environmental or climate effects, supporting sectors such as renewable energy, transport or waste management.

“Green bonds offer investors the option to diversify their portfolio by not only income-based decisions but environment-based ones as well.”

This market works as a common bond market, in which borrowers are institutional investors trading their financial assets. Companies, local, state and national governments and supranational institutions ensure the lending of this eco-friendly project, representing the supply side of a growing market that has, nowadays, more than 50 issuers.

The field of action is large, involving several sectors of the economy. For instance, in June of 2013, Commonwealth of Massachusetts, as the North American pioneer in this field, sold green bonds amounting to $100 million and publicly shared which projects are being financed by green bonds and how does society benefit from the investment in this innovative financial asset. Being the main market supplier, the US, led by the mortgage giant Fannie Mae, plays an important role promoting this environmentally friendly financial asset and, since Poland opened the sovereign market in 2016, France, Belgium, Ireland and the Netherlands did not take long to follow the example of Uncle Sam’s country.

Throughout the years, the green bonds’ market has been experiencing a boost of investors looking for conscientious choices to allocate their funds. According to Bloomberg, until 1st October 2019, “assets under management at 644 funds focused on environmentally friendly investments stand at more than $220 billion, compared with around $80 billion at the end of 2014”. Also in the past month, George Ammond wrote for the Financial Times, concluding that Asia-Pacific issuance of green bonds had hit a record of $18.9bn. This value was raised from 44 green bond issuances that were open to international investors, which positively correlates with the growing interest from investors in green finance.

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Moreover, this green investment method has revealed to be beneficial for both parties: sellers and investors. The first ones benefit from the eco-friendly vision of the investment which is propitious to attract new investors, resembling almost to a marketing strategy and drawing the attention of the most concerned consumers. The second ones benefit from the fact that these financial assets are characterized by having tax-exempt income. Additionally, investing in green bonds enables buyers to monitor these projects, contrarily to the very little insight investors have into what happens with the funds raised on debt capital markets.

However, a major dilemma arises. Are these “bonds for the planet” truly used to start and develop eco-friendly projects or are they just part of a bigger marketing strategy?

As previously mentioned, green bonds have tax-exempt income, they are supported and sponsored by governments, what closely fills the expectations of environmentalists in trying to solve climate change problems. What about the cases in which green bonds are issued to promote other projects that are not so “green” and institutions still benefit from all of these advantages? Firstly, it depends on the perception of green. This broad concept can differ not only internationally but also nationally, making it difficult for issuers to comply with both standards. Moreover, the lack of a “standard universal certification system” allows for green bonds not to be analysed through a universal procedure that accounts for the borrower’s creditworthiness or “greenness” of a bond. For instance, China is the biggest carbon emitter and occupies the second position in issuing green bonds. The problem started when the chinese power used this concept to finance coal-burning plants which, even if less polluting than previous methods, don’t reduce the carbon emission in the long-run. Another dilemma, pointed by Boardman, the chief financial officer of clean energy developer Sindicatum, comes with the lack of benchmarks that causes green bonds not to “qualify as a mainstream investment vehicle.”

“I think we need to think differently, we need governments to sit down and say all finance has to be green. There has to be strong incentives, clarity over the status of green bonds, status of green loans and bank financing.”

— Michael Boardman

In an attempt to clarify this problem, several studies were conducted aiming to broaden the definition of “green”. Oslo-based Cicero (Center for International Climate Research) came up with the idea of using three shades of green according to the ecological impact of the project in question: dark green, for projects reducing the carbon emission in the long run (wind energy); medium green, for projects that take a good step forward; and light green for steps that won’t change the long-term outlook on their own, consisting in more efficient projects (China’s case).

Indeed, in the mesmerizing bonds’ market, if an investor understands the environmental risks better, the cost of capital will go down for green projects. The benefits this financial asset brings to the environment have evidently been shown. However, in order to really create an impact on sustainability, this market has to grow much more than the observed heretofore. Massive investments are required to change the way we produce energy, reinforcing the urgency for individuals to take a proactive approach against climate change. As an “idea that captures investor imagination to combine the force of capital markets for a good end”, green bonds arise as a “tool to reconnect the dots between finance and the real economy”. What determines the effect of this revolutionary financial asset not only on the environment, but also on society, is how institutions and companies incorporate and allocate these green investments and in which degree are individuals incentivized to engage in an eco-conscious behavior. It is crucial to acknowledge that ecological progress is not simply imposed on society, but rather a consequence of conscious and informed choices by society’s decision makers and green bonds are certainly an important step towards a more sustainable financial market.

Sources: S&P Global Report, Bloomberg, European Investment Bank, CNBC, Dealogical Data, The Financial Times, CNBC.