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Profit? Yes! But Must be Clean

The Royal Commission Report into Misconduct in the Banking, Superannuation and Financial Services Industry will be released to the public this afternoon (4 February 2019). The Commission had already published an Interim Report in September 2018.

The Interim Report had hardly anything good to say about the industry. Rather, the Commission used the word “greed” to describe the industry’s behaviour and how the industry largely treated the ordinary customers. Otherwise, how can one explain fees charged for services not provided? Fees charged to dead people?

The Australian banking industry had been politically very successful for decades. In the post-GFC years, the industry used the excuse of  ‘rising costs of funds’ in international markets for raising their interest rates asynchronous to the RBA’s rate decisions. Nobody raised an eyebrow when the major four banks reported record profits year after year while still crying poor about rising costs of funds. The crux of the matter is the banking industry fell into a culture of profit at any cost and bank executives’ remunerations were linked to profit and revenue.  Thus, the bank executives in Australia all they cared for was whether they were contributing to the bank’s revenue and profit. Bank leaders did not care enough whether their employees were doing the right thing for their customers. If the bank management were thinking that they were more focused on creating shareholder wealth, shareholders thought differently.   ANZ, NAB,  and Westpac – all received a ‘first strike’  2018 under Australia’s ‘two strikes’ rule.  CBA  received a ‘first strike’ in 2016.

So, the bottom line is: yes, we want our banks to be profitable and financially strong. Yes, we need strong banks for a strong economy. But the profit must be clean.

Coping with COVID-19: The ‘fiscal stimulus gap’ between rich and poor nations

Many countries across the world have undertaken unprecedented fiscal action to cope with the economic consequences of COVID-19. ILO has bemoaned the fact that the fiscal stimulus packages that have been enacted across the world have been rather unevenly distributed. The ILO’s Director General notes that the  “fiscal stimulus gap” is … around US$982 billion in low-income and lower-middle-income countries.’

The highly uneven nature of fiscal policy responses can be seen in Figure 1 below, with many countries in poorer parts of the world not being able to muster sufficient resources to cope with the pandemic-induced recession.





Figure 1 Global map of budgetary support (as % of 2020 GDP) in response to COVID-19 driven recession, derived from IMF Fiscal Monitor, April 2021

A clearer picture of this fiscal gap emerges when one examines Figures 2 to 4 (derived from IMF Fiscal Monitor, April, 2021).

Two types of fiscal measures are highlighted – type 1 or ‘above-the-line’  measures that consist of additional spending or forgone revenue; type 2 or ‘below-the-line’ measures that consist of liquidity support to the private sector in various forms – equity, loans on preferential terms and credit guarantees. Three broad cohorts are highlighted: (1) Advanced Economies (AEs, e.g., Japan); (2) Emerging market and middle-income economies (EMMIEs, e.g., Thailand); and (3) low income developing countries (LIDCs, e.g., Bangladesh).

The differences are quite stark. Consider the case of AEs. For this group, the average size of the fiscal support relative to GDP in terms of ‘above-the-line’ measures are over 16 percent and around 11 percent for ‘below-the-line’ measures.  It is worth observing that, among AEs, the USA has set the pace with its latest announcement of the fiscal stimulus package amounting to a staggering 25.5 percent of GDP! If successfully implemented, this package is likely to play a key role in shaping the growth and employment recovery in the USA, while delivering significant spill over benefits to the global economy.

For EMMIEs, the pertinent fiscal indicators drop to four per cent and below. For LIDCs, the relevant metrics are even lower –  around 1.6 percent of GDP for ‘above-the-line’ measures and about 0.2 percent for ‘below-the-line’ measures.

Figure 2: Fiscal policy response (% of GDP) in advanced economies (AEs)
Figure 3: Fiscal policy response (% of GDP), Emerging Market and Middle Income Economies (EMMIEs)
Figure 4: Fiscal policy response (% of GDP), Low Income Developing Countries (LIDCs).

To a significant extent, the fiscal stimulus gap between rich and poor nations reflect multiple structural constraints faced by low and middle income economies (LIMCs) that lead to limited fiscal space. Admittedly, a greater commitment to domestic resource mobilization and cutting back inefficiencies, corruption and waste can enlarge the fiscal envelope in LMICs, but it would be naive to suggest that such home-grown efforts alone are adequate. Without global cooperation and generous external assistance, the typical LMIC is likely to flounder and suffer perhaps irreversible setback in attaining the Sustainable Development Goals (SDGs). After all, about USD 3 trillion (equivalent to 2.6% of global GDP) would be required to meet the SDGs.

Furthermore, prevailing over COVID-19, which is a precondition for resumption of normal economic growth in the medium-term, requires a great deal of global cooperation in ensuring equitable access to mass vacccination programs. Sadly, such cooperation is yet to materialize.As one evaluation from Duke University notes:  ‘High-income countries currently hold a confirmed 4.6 billion doses, upper middle-income countries hold 1.5 billion doses, and lower middle-income countries hold 721 million doses, and low-income countries hold 770 million… Many high-income countries have hedged their bets by advance purchasing enough doses to vaccinate their population several times over.’  This troubling nature of ‘vaccine inequality’ means that many LMICs will not be able to prevail over COVID-19 within a reasonable timeframe thus preventing their capacity to resume normal economic activity. Hence, an equitable global vaccination programme is urgently needed to secure sustainable employment recovery across the world.

Coping with COVID-19: the perilous case of vaccine inequality

The Lancet Commission has urged the global community that rapid vaccination on a global scale is essential in tempering and, finally, prevailing over COVID-19. This in turn requires equitable access to available vaccine supplies across the world. Alas, such a requirement has not been met.

There has been an unseemly rush by rich countries of the world to acquire vaccine supplies on such a scale that the population of these privileged nations can be vaccinated multiple times. Ten countries of the world apparently account for 75 percent of the world’s vaccine stock. UK ‘pre-ordered’ doses of such magnitude that it can vaccinate its population at least five times. (see Figure 1 below). Meanwhile, 30 countries of the world have not had the opportunity to acquire even a single dose of available vaccines. If the status quo prevails, developing countries will take about three to four years before a significant proportion are vaccinated to reach herd immunity. COVAX , the global mechanism via which poorer parts of the world are, in principle, able to access vaccine doses, has only managed to ‘…acquire over 31 million doses (which has been delivered) …to 57 countries.’ This is pitifully small.

There is also the issue of the cost of these vaccines – with two of the most effective ones being so prohibitively expensive that they are outside the reach of the typical developing country. Vaccine producers are also protecting their intellectual property rights through stringent application of patents, making it difficult, if not impossible, for producers in developing countries to replicate vaccine supplies through the dissemination of locally made, generic products.

In sum, there is every reason for critics to be full of rage and allege that the rich countries of the world have, once again, failed to act as true global citizens who care both about the welfare of their citizens as well as others. They have, in effect, acted as unethical ‘hoarders’. WHO was compelled to issue the warning that vaccine inequality is becoming ‘grotesque’ with each passing day.

Intellectual and civic activism against an inequitable and unfair global order must continue. COVID-19 in rich countries cannot be defeated unless it is effectively tackled in the developing world. Accepting the harsh global reality of ‘business-as-usual’ in sullen silence will be tantamount to a failure of our ‘moral imagination’.

Figure 1

Vaccine inequality across the world

Are we facing a dystopian digital future?

In a typically insightful piece, leading MIT economist Daren Acemoglu (he of the ‘Why nations fail’ fame), has cautioned his readers that widening inequality  – or lack of ‘shared growth’ – will be the major challenge to crafting an inclusive digital future. This is because automation, shaped by the rising market power of a few very successful tech companies and the current global policy environment, has turned out to be one of the forces fostering greater inequality. Epithets such as the ‘digital divide’ captures these concerns, but there is more to this than just unequal access to digital infrastructure.

Defining automation as ‘…the substitution of machines and algorithms for tasks previously performed by labour’, Acemoglu notes that this process has unfolded throughout history. While there have been job losses, new technology has harnessed sustained improvements in human productivity and engendered new employment opportunities. Yet, this beneficial process can no longer be taken for granted. To start with, a few tech giants, such as Amazon, Alibaba, Alphabet, Facebook and Netflix, are responsible for 66 percent of global expenditure on machine learning and artificial intelligence (AI). They set the agenda on automation which, while privately profitable, is socially suboptimal. Second, the prevailing US-led policy environment has reinforced this misguided agenda. Current estimates suggest that, in the USA, investments in software and equipment are taxed at an effective rate of 5 percent and, in some cases, benefit from net subsidies. On the other hand, labour income is taxed at an effective rate of more than 25 per cent. Such distorted factor prices, combined with the systematic weakening of the bargaining power of organized labour and the dilution of the social welfare state, has led to the baleful configuration of a dearth of good jobs, precarious working conditions and ‘excessive automation’. At the same time, the rise of ‘AI-powered social media’ has incubated disinformation and conspiracy theories on a large scale (see Figure 1 below), as current and recent events have shown. This has fuelled social discord and a weakening of democratic discourse.

These unfortunate developments are not destined to happen. One cannot simply wish them away as the inevitable price of prosperity that a digital future is supposed to engender. One would need a shared global agenda in which there is a determined effort to attenuate distorted factor prices – which is why the effort by US Treasury Secretary (Janet Yellen) to aim for a common, cross-national approach to corporate taxation is so important. It is also necessary to temper the collective market power of a few tech giants, boost the bargaining power of organized labour, invest in the social welfare state and attenuate the digital divide.

Figure 1

Twitter users with extreme political views are more likely than moderate users to share information from low credibility sources

Transitioning to a post-COVID world: a K-shaped recovery?

The K-shaped recovery

The latest (January 2021) IMF estimates reveal that world GDP for 2020 is expected to fall by 3.5 percent, with the advanced economies registering a projected decline of 4.9 percent. Emerging and developing economies are estimated to endure a fall in real GDP of 2.4 percent (Figure 1). This is unlike the last global recession of 2008 when the emerging and developing economies registered modest positive growth juxtaposed with a significant decline of more than 3 percent for the advanced economies. The net impact was that, at the global level, output contracted by a modest 0.1 percent.

Figure 1

Source: Derived from IMF, World Economic Outlook, January 2021

A ‘V’ shaped recovery is expected in 2021 across the world and the projections suggest that between 2020 and 2025 both the advanced and emerging and developing economies will continue to grow at a steady pace in line with recent historical trends (IMF data mapper, October 2020). Such a salutary outcome, however, rests on the  critical assumption that appropriate policy responses across the world will be enacted and implemented and that the timely availability of vaccines will offer durable protection against the current pandemic. In the absence of appropriate policy interventions, much more pessimistic interpretations of the nature of the global economic recovery are very likely. This point is elucidated below.

A number of analysts have highlighted the notion that aggregate growth statistics hide the fact that a ‘K-shaped’ or uneven recovery is in progress.[1] This can be gauged from both sectoral growth and employment patterns and the nature of job losses across cohorts of workers stratified by income and skill levels.

The ILO’s latest Global Monitor (January 2021) notes that specific sectors, most notably, ‘accommodation and food services, arts and culture, retail, and construction’, have experienced massive job losses, while positive job growth is evident in information and communication, and financial and insurance activities which tend to be populated by higher skilled workers. Others find that the semiconductor industry is booming, while contact-intensive, service-oriented industries are languishing.[2]

Evidence from the USA highlights a striking pattern: high wage workers experienced job gains (+2.9 percent) during the pandemic, middle wage workers experienced modest job losses (-3.4 percent), while low wage workers experienced massive job losses (-21 percent).[3] This implies that COVID-19 is likely to exacerbate existing inequalities unless countervailing policy measures are undertaken.

The thesis of uneven economic recovery also pertains to the fact that emerging and developing economies are likely to fare worse than advanced economies, despite GDP projections suggesting that the magnitude of the 2020 recession was less acute for low-and middle-income countries (Figure 1). This can be illustrated by computing GDP losses relative to the pre-COVID era (2019) across regions of the world (Figure 2). With the exception of China, in all cases, regions that form part of emerging and developing economies are expected to experience higher GDP losses relative to advanced economies.

Source: Derived from IMF, World Economic Outlook, January 2021

Notes: Em. Asia ex.CHN= Emerging Asia excluding China; LAC= Latin America and the Caribbean; MECA= Middle East and Central Asia (MECA); Em.Eur = Emerging Europe; AE= Advanced economies

Labour market indicators suggest that lower middle-income economies are expected to experience a greater degree of labour market distress relative to their counterparts in both rich and poor countries. The latest (January 2021) ILO estimates indicate that work-place closures have led to a loss of 8.8 percent of workhours globally relative to 2019 thresholds in 2020. This is distributed as follows: low-income countries – 6.7 percent; lower middle-income economies- 11.3 percent; upper middle-income countries: 7.3 percent; high income countries – 8.3 percent. Similarly, the share of labour income losses due to workhour losses are of greater magnitude in lower middle-income countries relative to their counterparts in low, upper middle-income and high-income countries.

If one adds the impact on extreme poverty of COVID-19, then the picture of the greater distress experienced by low- and middle-income economies becomes even more stark. Given the way that extreme poverty is currently measured (the ‘global’ poor earn less than USD 1.90 a day), it is almost exclusively prevalent in low- and middle-income economies. Until COVID-19, extreme poverty was on a sustained downward trend. Now, the latest estimates suggest that “… between 119 and 124 additional poor globally ” as a result of the pandemic (Lakner et al, 2021). What is worrying is the steady manner in which the pertinent projections have worsened. In April 2020, for example, the maximum expected increase in global poverty was 62 million. By January 2021, this has more than doubled.[4] Some of the most populous countries in South  Asia, such as India, are projected to experience the highest increase in poverty (Kharas, 2020). In contrast, in some advanced economies, such as the USA, a generous, but time-bound, increase in income support was associated with stability in short-run poverty during the early phase of the pandemic.

One area that has been badly hit is the education of children and young adults. In April, when the first wave of COVID-19 was at its peak, more than 90 percent of children were subjected to school closures globally. At the same time, various tertiary institutions, most notably technical and vocational institutions, were badly affected. While the situation has eased to some extent, the deleterious long-term consequences are increasingly becoming evident. World Bank estimates note that ‘learning poverty’ (inability to read a simple text by age 10) is projected to increase from 53 percent of the pertinent cohort to 63 percent in low and middle-income economies. This in turn translates into potential earning losses almost equal to 10 percent of the collective GDP of middle-income economies.

In sum, the challenges that low and middle-income economies will face in a post-COVID world are immense. It will require a combination of national determination and generous international cooperation to attenuate these challenges.

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[1] See, for example, Jones (2020) and Bheemaiah et al (2020)

[2] Manabe and Hiroi, 2021

[3] Economic Tracker (tracktherecovery.org). The data is based on November 15, 2020

[4] Lakner et al, 2021