Since rising to popularity, the on-demand taxi app service Uber has come to symbolise a new breed of businesses emerging from Silicon Valley – variously described as the “sharing economy,” “the on-demand economy,” or “the disruptive creative industry.”
Uber has become so ubiquitous in this grouping that it has now become cliché to refer to any new app-based business as “The Uber of…” According to leaked documents, however, the taxi app has not been as profitable and successful as its fame and popularity would suggest.
The leaked documents, obtained by Gawker, suggest that the company has been massively unprofitable for a number of years
The leaked documents, obtained by Gawker, suggest that the company has been massively unprofitable for a number of years, despite the firm’s regular boasts of revenue growth and ability to raise billions of dollars in venture capital backing. As Gawker notes in relation to the leaked financial documents:
“[The] unaudited revenue and expense breakdown for 2013 and 2014 shows that, though Uber’s net revenue has grown substantially, the company lost more than $56 million in 2013. By the first half of 2014 alone, that number had leapt to more than $160 million.
“Another document, laying out quarterly profits and losses in 2012 and part of 2013, shows the same dynamic: healthy growth in revenue coupled with steadily deepening losses. In 2012, Uber’s losses totalled $20.4 million; from the first quarter of 2012 until mid-2013, quarterly losses more than doubled from $3.5 million to $8.1 million.”
According to Business Insider, the company dismissed the revelations from the documents as standard business practice: “Shock, horror, Uber makes a loss. This is hardly news and old news at that. It’s the case of business 101: you raise money, you invest money, you grow (hopefully), you make a profit and that generates a return for investors.”
While it is not unusual for start-ups to operate at a loss in order to expand, Uber’s loses seem to be rapidly growing, as outlined by Gawker. The company’s attempt to expand across the world has heavily added to its operating costs, with it supposedly running at low prices to undercut local taxi firms, promoting the service to new users and needing to fund lobbying efforts to prevent regulators cracking down on its app-based method of hailing a taxi.
The rich are getting richer: that’s the idea keeping luxury ticking along at the moment, and the one challenging brands to balance that all-important air of exclusivity with a booming market opportunity.
The World Wealth Report, authored jointly by Capgemini and RBC Wealth Management, reports that high-net-worth individuals (HNWIs) last year were wealthier and more plentiful than they were in 2013 or any other year before that. In 2014, almost 920,000 millionaires were added to the existing 13.7 million or so, making a combined pool of $56.4trn and promising a great deal more in the months ahead. Buoyed by robust equity returns and improved economic performance, the combined wealth of the world’s HNWIs is up seven percent, and so too, clearly, is their willingness to fork out for expensive goods.
Luxury on the up
According to Bain & Company’s 2014 annual study, the global luxury market was on course late last year to clock up a growth rate of five percent. That’s slightly short of the seven percent the year before, and far closer to total retail sales worldwide than it has been historically. Growth in the US, and to a lesser extent in Europe, is expected to be sluggish, though luxury goods are still expected to rack up a 3.4 percent compound annual growth rate between 2014 and 2020, with Europe the largest market in terms of revenue. Emerging markets, meanwhile, have shown themselves to be an integral part of luxury’s success in recent years, though a return to stability in mature markets and the rise of affluent young consumers are where the sector’s future lies.
The challenge for brands is to maintain an air of exclusivity while also avoiding ubiquity
“International tourism and a stronger middle class are shaping luxury trends, including luxury experiences and alternative luxury channels, with a focus on consumer nationality rather than geography”, says the report. This consumer segment has transformed over recent years, but the retail market has been slow to keep up.
The results show growth is settling down for a quieter, albeit more sustainable, future, having enjoyed a particularly fruitful spell of late. Furthermore, the growth is unevenly distributed and skewed in large part by touristic spending, which remains the biggest contributor everywhere but in Japan, China and South America.
“With such cross-pollination of luxury spending, it no longer makes sense to think only in terms of geographies”, said Claudia D’Arpizio, a Bain & Company partner and lead author of the study. “The focus is shifting to consumers, with local trends and tastes representing only part of the picture. This new mindset has important implications for luxury brands. It requires that they think about their product offering from a more global perspective, with the concept of seasons, a key pillar of this industry, becoming increasingly obsolete.”
Area codes are of little importance to a luxury market invested in a patchwork pattern of global consumers. Lavish flagship stores are still very much part and parcel of the deal, and few brands come without a distinct national orientation or focus. But, in reality, these gestures are more about branding than they are about a legitimate moneymaking strategy. The next fight for market share will be fought, not in high-profile shopping districts, but online.
“The bottom line is that e-commerce is becoming too big to ignore even for luxury brands”, says Sarah Willersdorf, a luxury expert from the Boston Consulting Group’s Consumer Practice.
Latecomer to digital
Statistics cited by Bain show approximately 40 percent of all luxury brands choose not to sell their wares online, and others cited by McKinsey indicate e-commerce accounts for a measly four percent of overall sales. This is despite the fact online luxury sales increased 20 percent in 2013, in a period when general sales rose only two. According to Luca Solca, who works at Exane BNP Paribas as an analyst, digital could be “the next China” for luxury, in that it could tack another $43bn onto sales in the next five years.
Whether brands choose to actually list their products online, however, is quite another matter, though surely none can afford to ignore the opportunities that accompany a consumer segment in which three in four own a smartphone and half own a tablet. What’s more, a McKinsey sample of 3,000 shoppers showed over half of all internet searches were conducted on a mobile device, and one in five surveyed admitted to often or always researching on a smartphone before making a purchase.
Taken together, the figures prove luxury shoppers are among the most connected of any consumer segment worldwide, and, with Millennials fast entering into the equation, the average luxury shopper is one for whom a strong digital experience is not a luxury but a necessity.
“While the luxury brands have been slow to embrace the internet, that definitely has not been the case for their customers”, says Pam Danziger, President of boutique marketing consultancy Unity Marketing and author of Putting the Luxe Back in Luxury: How New Consumer Values are Redefining the Way We Market Luxury. “Affluent shoppers have absolutely no hesitation to use every resource available to them to get what they want, and if it’s luxury brands online, they will find a way.”
Nonetheless, the findings have done little to speed the transition to digital, particularly for heritage brands whose indebtedness to tradition can often blind them to the benefits of a strong digital presence. True, digital converts are in the majority, but it’s mostly, if not exclusively, on the sales side that brands have been slow to keep pace.
“Luxury brands currently are very much ‘control-oriented’”, says Bob Shullman, CEO and founder of the luxury-focused marketing research and consulting firm Shullman Research Centre. “Most brands want to control their distribution channels: both physically and in their marketing and advertising. As such, the vast majority still market primarily in traditional outlets and use publications in the US for marketing and advertising.”
E-commerce aversion
Even the storied French heavyweight Chanel has erred on the side of caution, and subscribed to the theory that bricks-and-mortar sales should prevail over digital. “To be able to wear Chanel clothes, you need to try them on. You need to be in the fitting room”, said Chanel’s President of Global Fashion, Bruno Pavlovsky, in 2012. “What we want today – and the way we use digital – is to have more and more people come to the boutique to see the product, to touch the product, but also to try the product. And that, for me, is the most important part.”
Encumbered by the idea that digital can in no way replicate in-store experience, nor leave shoppers with the impression that any purchase is appropriately luxurious, high-end retailers such as Chanel have been slow to change. Only this year did Pavlovsky confirm, in an interview with WWD, that Chanel will be launching its own e-commerce business late next year, though stopped short of specifying which goods it would make available online.
“Luxury brands in general have been slow to embrace e-commerce and digital. Historically, there was a feeling from some brands that e-commerce was ‘not a very luxurious experience’”, according to Willersdorf. “Until very recently, business leaders made definite distinctions between their digital channels and their ‘conventional’ sales and communications paths. But those boundaries are blurring fast. Consumers are researching handbags online and purchasing offline, buying jackets online and picking them up in a bricks-and-mortar store, trying on shoes in a store but purchasing online to get a different colour.”
The merger of Net-a-Porter and Yoox will create a new luxury e-commerce superpower
By choosing not to move with the latest digital advances, luxury brands are effectively leaving the playing field open for more enterprising companies to steal market share. Danziger notes Farfetch, Shoptiques, InstantLuxe and TheRealReal (which each host boutiques and brands on a single online platform) could profit from luxury’s digital aversion. The merger of Net-a-Porter and Yoox will create a new luxury e-commerce superpower with annual revenues of €1.3bn.
Where exclusivity has served the fashion house well in days past (and particularly in 2013, when Chanel posted profits far ahead of its competitors), this age-old tendency towards tradition and scarcity is falling out of favour in today’s globalised marketplace. “Luxury retailers have kept their distance for fear of diminishing their cachet and being subject to heavy discounting – but this has not stopped a torrent of heavy discounting across the industry”, says Fflur Roberts, Head of Luxury Goods at Euromonitor International.
“As to whether luxury brands will get their internet-groove on, time will tell, but this marketplace is moving so fast, I wonder if they will ever catch up, let alone get ahead”, says Danziger. “Among the research-based findings that popped up in our recent study of Millennials on the road to affluence is that Millennials don’t want their mother’s or their grandmother’s luxury brands. They want brands that make a meaningful connection with them, and today many of those connections are made online. Being relevant to the customer is key and any luxury brands ignoring the needs, wants and desires of their customers risk making themselves irrelevant.”
Asked why so many high-end names have been unwilling to embrace digital, Ali Mirza, CEO of Affluential, says it’s “mostly as they feel they lose the connection with the customer, as most luxury is all about high touch, high involvement purchasing”.
However, this mentality is fast becoming a thing of the past, and a string of notable exceptions have offered proof that a digital presence need not come at the expense of exclusivity. “The experiential element gets lost when the e-commerce aspect looks too detached from the exclusivity that these brands exhibit”, says Mirza. Done correctly, the adoption of digital “would increase the channels as part of an omnichannel strategy for brands to reach customers – especially those in Asia who are increasingly purchasing online but also using online to browse pricing and products before buying”.
Net-a-Porter founder Natalie Massenet (l) and colleagues. The company has merged with Yoox to form an online luxury goods behemoth
Burberry and others
In the luxury sector, there is no more obvious a pioneer than Burberry, which not only demonstrated that harnessing digital was possible, but that it was essential for reviving dwindling fortunes. In 2010, the company became the first high-profile luxury name to facilitate online orders and its leadership has been a constant ever since.
Live-streamed catwalks, buzzy social media campaigns, cross-channel optimisation and a thriving online community have each played their part in the turnaround, and these distinctly modern solutions have done little to detract from the brand’s 150-plus years of heritage. Quite the opposite in fact: in the 12 months up to the end of March, Burberry reported sales of £2.5bn – 11 percent higher than the year before – noting digital had “outperformed” expectations once again. In Burberry’s latest full year report, the company cites “digital as a differentiator”, and the business has transformed completely in the last half decade due to its advances on this front.
The British-based trench coat maker is far from alone, however. “Crucially, more and more global luxury brands are looking at ways to strengthen their e-commerce platforms”, says Roberts. “Internet sales of luxury goods are booming, and are widely seen as the industry’s key battleground of the next five years. Consider the case of UK luxury retailer Mulberry: its digital sales were up 40 percent for the 10 weeks to June 6, 2015, compared with its overall retail growth of 17 percent. At this rate, which is typical across the luxury goods industry, it is only a matter of time before digital sales catch up with physical sales.”
Taking control
“It’s happening, but very slowly”, says Shullman of the sector’s willingness to embrace e-commerce. It’s understandable that many are cautious, given any substandard offering could take a sizeable chunk out of hard-earned brand credibility. But the odd tweet or two is not enough for the average shopper, and the transition to digital asks that brands make an all-encompassing gesture – if only to satisfy consumers for whom online absenteeism is a jarringly unfamiliar occurrence.
Greater transparency also means brands must justify their premium price tag
For the 40 percent or so of luxury brands yet to embrace e-commerce, the focus falls on building a digital presence. “Products like apps are at the forefront of retail digital innovation and are identified as key to attracting ‘internet junky’ Millennials. The luxury retail market has never been more competitive, so coming up with clever ways to attract customers is a key battleground”, says Roberts.
The challenge for brands is to maintain an air of exclusivity while also avoiding ubiquity. The changed digital landscape – not just in luxury but retail overall – has transformed the way in which brands touch base with shoppers. Greater transparency also means brands must justify their premium price tag, and some have even suggested the nature of luxury itself is changing now the products are more widely accessible and the target market growing.
Against this backdrop, it’s important to note that, by choosing not to embrace digital, latecomers are effectively relinquishing control over vitally important aspects of their businesses. When it comes to making purchasing decisions, consumers – often routinely – go online for further information, meaning brands without a digital presence are effectively ruling themselves out of the equation. The same issue applies just as easily to e-commerce, and, while concerns regarding exclusivity are understandable, omnichannel engagement means brands can more closely monitor their presence.
“The majority of luxury brands are now working to incorporate digital and omnichannel – but many of them are very late to the game”, says Willersdorf. “To be successful in luxury e-commerce, brands must master the four Cs: commerce, content, curation and community. But mastery of the four Cs is not enough. On top of developing attractive e-boutiques, brands need to focus on omnichannel and integrate e-commerce and offline retail – especially for the next generation of luxury shoppers.”
As demonstrated by the likes of Burberry and a growing number of online boutiques, digital need no longer be seen as a challenge but as an opportunity to bring more customers to the fold. And by seeing digital as a threat neither to the traditional order of doing business, nor as a destructive influence on exclusivity, brands can begin to equip themselves more appropriately for the digital age and the connected consumer.
For those who might be unfamiliar, what is vertical farming?
Vertical farming is, essentially, farming modules, stacked one on top of the other, and not, as some would say, a farm system on a roof – that’s putting a farm on a roof. By my definition, vertical farms are made up of multiple levels of growth, and, at AeroFarms, our levels measure typically between two-and-a-half and three feet, growing as high as 12 levels.
By utilising state-of-the-art aeroponics and LED technology, we can create a controlled growing environment, without sun or soil, whilst minimising harmful transportation miles. Ultimately, the technology represents a new way of transferring nutrients to the root structure, both by optimising the productivity per square foot and making it economically viable to farm close to and even inside cities.
It takes a lot of parts to get these suckers to
grow well
What is the central problem that vertical farming aims to solve?
Our mission is to address the global food crisis by building farms that can grow safe and healthy food in a sustainable and socially responsible way. What people want so much is fresh food, and one of the benefits of AeroFarms and other vertical farming systems is that they enable fresh food to be grown more easily, and in close proximity to urban areas.
One of the hardest parts of providing people with fresh food currently is that there are so many processes to go through before the food finds its way to the consumer. Vertical farming means many of the inefficiencies found in traditional farming can be done away with, and AeroFarms’ productivity per square foot is actually 70 times greater than that of a field farmer.
However, what you need to understand is that it’s not an easy fix and the technology is tricky. Looking at the engineering side of things, we have electrical engineers, mechanical engineers, structural engineers, lighting engineers, PLC engineers, industrial engineers, process engineers, and that’s only in one department. It takes a lot of parts to get these suckers to grow well. There’s an incredible amount of engineering, horticulture and biology that goes into this, but we’re able to deliver what the plants want, when they want it, and influence taste and texture, as well as nutritional factors.
In what fundamental ways could these food factories transform agriculture?
The best way to illustrate that point would be to look at the situation in the US at present. About 95 percent of all US ingredients are grown in California, where there are significant droughts going on at the moment, and that’s putting tension on the system. Vertical farming, on the other hand, means year-round production, and with better yields.
With vertical farming, you can create these ideal climates anywhere in the world, whether it’s at the North Pole or the equator. Additionally, even in industrialised rich countries, there’s tremendous spoilage in the supply chain, mainly because it takes time to deliver food from the farm to the port. Vertical farming means a lot of these inefficiencies are removed from the supply chain, facilitating the delivery of fresh food and the reduction of waste. The technology is enabling local food production on a massive scale.
Still, vertical farming is not going to replace field farming in its entirety. Most farming, even in 10 to 20 years time, is going to be done in the field, and whilst vertical farming will certainly be a part of agriculture, it’s not going to replace traditional farming altogether.
Have investors warmed to the idea of vertical farming recently?
We have, and here’s where I think 90 percent of the people who get into this space are going to fail: right now there’s this romanticised view of what vertical farming is, and a real underappreciation and misunderstanding about its complexity.
In order to get this done, it not only has to be done right, but it has to be done big, to ensure that the profits are able to absorb the costs. If we put in for a farm, we put in over $1m to automate it, and that’s only for the automation and harvesting side. I see people cutting corners in places that corners cannot be cut.
Investors, I think, appreciate the threats posed by water shortages, and see vertical farming as a solution, given we use 95 percent less water than traditional agriculture. There’s also an acknowledgement that, given today’s environmental tensions, 70 percent of the world’s fresh water goes to agriculture and 70 percent of the world’s fresh water pollution comes from agriculture. When you look at these macro issues and see we use 95 percent less water, and zero pesticides, herbicides and fungicides, there’s a big wow factor – and appropriately so – in understanding this is an area that deserves greater investment. But it has be done right, it has be done by the right people and on the right scale to make it happen. My concern is that there are going to be some trips from other players that make the industry look bad.
There are a lot of people watching this space, and I very much feel that there are eyes on AeroFarms, because we’re one of the leaders in the market. Having said that, I’m optimistic that we’re going to succeed, and I’m glad we have a lot of excellent people in the organisation to deal with all the challenges ahead.
Could you tell us a bit more about some of those challenges?
These farms are expensive. The number one challenge we face currently lies in finding the capital to get these projects started. We’re building a $30m farm and a $5m farm currently, and we’re exploring the prospect of doing a $100m farm in the future – the bigger they are, the better.
In terms of finding the capital, there are limitations as to what cheque sizes we can write, so figuring out how to scale a capital-intensive business in a capital efficient way – and finding the right partners to do so – is a challenge.
What are your ambitions for the future?
Right now we’re building the largest vertical farm in the world, and we have plans to go much further in the years ahead. Our vision is to build farms that grow wonderful-tasting products that are nutritious and fresh, in cities all over the world. We’re building two farms as we speak, and we’re about to start building another two, probably before the end of the year. We’re also looking at two other countries internationally, one in the Middle East and one in Asia, and we’d love to do something in Europe, so we’re looking for partners on that front also.
We’ve invested a lot of money, and continue to invest a lot of money, not only in the growing technology but also in the right software to manage the farm. The controls we’ve built so far allow us to look at the performance of, and even control, the farm from a smartphone. But even with all that, it doesn’t remove the human element, and it concerns me other people in this space are not paying enough attention to food safety in quite the same way we are.
In a similar fashion to ad revenue rivals Google and Twitter, the photo-sharing app will allow advertising agencies to use its users’ information, posts and even GPS location to deliver personalised ads and drive specific campaigns to consumers.
This opens up a unique opportunity for advertisers, as for the very first time businesses large and small, along with big ad-networks like Salesforce and Brand Networks, are able to post on the highly popular platform.
Market researcher eMarketer believes that the platform will generate $595m in mobile ad revenues worldwide this year
“The Instagram Ads API will help us make ads more relevant to the community, serve more diverse business objectives and make buying on the platform easier for advertisers,” said a spokesperson for Instagram. “We started working with a group of Facebook Marketing Partners a few weeks ago and they’ve brought great experience and technological savvy onto the platform. We’ll continue to build upon the Instagram Ads API in the coming weeks and months.”
Some analysts predict that the move will allow Instagram to transform itself into a major advertising business. Market researcher eMarketer believes that the platform will generate $595m in mobile ad revenues worldwide this year, according to a recent forecast looking at how much advertisers will spend on the social network.
“Now that Instagram is opening up, there is a lot of pent-up demand. The rollout of new features over the next several months means that by the end of 2015, Instagram will have a host of new ad products for advertisers large and small,” said Debra Aho Williamson, eMarketer principal analyst in a statement. “In particular, Instagram advertisers will be able to use a full slate of Facebook targeting tools, including the popular Custom Audiences feature. That will be a key drawing card.”
The market researcher contends that Instagram could even surpass Google and Twitter in US mobile ad revenues by 2017 – an assertion that is based around Instagram’s impressive user base, with it boasting more than 300 million active monthly users.
The adverts themselves will come in the form of photos or videos, which will command a higher price, helping the photo-sharing app to generate more revenue from advertisers.
Facebook has patented a new technology which will allow commercial lenders to determine loan access based on those you are connected to on social networking sites. The technology itself is described as, according to Venture Beat, “a technology that tracks the way users are connected in a network”, with its primary purpose being to prevent “members of a network from sending spam to other members with who they’re not directly or legitimately connected”.
How this technology could be both legally and practically used, however, remains uncertain
However, most striking is the description of the fourth embodiment of the technology, which the patent outlines as such:
“In a fourth embodiment of the invention, the service provider is a lender. When an individual applies for a loan, the lender examines the credit ratings of members of the individual’s social network who are connected to the individual through authorised nodes. If the average credit rating of these members is at least a minimum credit score, the lender continues to process the loan application. Otherwise, the loan application is rejected.”
What this means is that the loan risk of a customer will be determined by the credit history of his or her friends on social media. Using someone’s association with people on social networking sites leaves lenders using this as a metric open to charges of discrimination.
How this technology could be both legally and practically used, however, remains uncertain. The Equal Credit Opportunity Act lays out stringent rules for what information can and cannot be used to determine loan risks, while it is unclear how all necessary information needed from a prospective lenders social network group could adequately be gathered.
Whether its wearable fitness devices utilising exercise and lifestyle data to determine insurance premiums, or e-commerce firms such as Amazon determining patterns from browsing habits to target certain adverts, activities once thought of as seemingly inconsequential everyday activities and habits are increasingly being turned into data by businesses for commercial purposes. Now, who someone is friends with online with may be used in such a way.
Lenin once said his vision for Russia was Soviet power plus the electrification of the whole country. While talk of Soviet power has waned, most still recognise the importance of electricity as a foundation for economic progress in the developing world.
In the 20th century, often inspired by the example of the Soviet Union, many developing nations emerged from colonialism with grand plans for electrification and industrialisation. Yet decades later it is evident that many of these large scale modernisation projects failed, going unheeded or awry and leaving much of the developing world with poor access to electricity. Just as the state sector failed to provide in the Soviet Union, so the provision of energy by states has failed in many parts of the developing world.
A number of new technologies allow electricity to be generated without the involvement of the state. Old technologies are being rejigged and new technologies refined. Small Modular Reactors (small units able to provide nuclear energy) offer an alternative to large looming nuclear power plants, while companies such as Tesla have transformed battery technology into a viable means of powering homes, as private backers roll out local solar power programmes across the developing world.
Energy poverty
Nonetheless, over 1.5 billion people still lack access to electricity, according to the UN, and a further one billion are without a reliable source of energy. This means no refrigerated storage for perishable goods or medicines, while heat for cooking must be generated by burning wood or other polluting resources, increasing the risk of lung and heart disease. As a result, according to the Borgen Project, “3.5 million people each year die from indoor pollution caused by the smoke when cooking on wood and biomass cookstoves”, and local medical facilities are often unable to use vital medical equipment.
1.5bn
People lack access to electricity
97%
Of them live in Asia or Sub-Saharan Africa
3.5m
People die each year due to inhaling cooking smoke
The extent of energy poverty varies by country, with rural areas often more afflicted. For instance, according to Morgan D Bazilian, writing in Foreign Affairs, “in Liberia… just two percent of the population has regular access to electricity”. Even where states have been able to provide some semblance of a national grid, it is often patchy. Bazilian notes, “in Tanzania, nearly 50 percent of firms say that poor electricity service is a major constraint for doing business”, and that they face an average of nine power outages a month.
Even countries with a more developed national infrastructures struggle. The Economist explained that, in Vietnam, “daily life is punctuated by brownouts”, i.e. electricity supply does not completely cut out but the voltage supplied dims. As the Borgen Project notes: “Nigeria produces the highest quantity of oil in Africa, yet it has the second highest number of people without safe energy in the world (behind India).”
Small solutions
Developing nations have, in the past, dreamt of creating national energy grids, with many seeing nuclear as an opportunity. However, with the exception of a few countries, attempts at this have been fraught with problems. “A nuclear power generation programme not only requires financial resources necessary for acquiring reactors and constructing plants, but also necessitates institutional and human resource capacities, including operational expertise, regulatory expertise, spent fuel management plans and site, non-proliferation commitment, among others”, says Jane Nakano, a Senior Fellow at the Centre for Strategic and International Studies. Malcolm Grimston of the Centre for Environmental Policy at Imperial College London agrees. Nakano told World Finance the main disadvantage of developing economies pursuing nuclear power is that it is “highly capital intensive” and requires “government access to large investment funds”.
One new technology that could soon take off in the developing world is the Small Modular Reactor (SMR). According to the Institute of Mechanical Engineers, SMRs can be easily adopted in technologically deprived developing nations and installed with minimal technical skill. The manufacturers can carry out refuelling of the reactors, so the state need not educate and maintain an expensive army of nuclear engineers. One SMR model being developed in Japan could be delivered from the factory with enough energy to operate for 30 years, and then either be refuelled by the relevant experts or returned.
SMRs could provide power to industry and homes in a particular area without any major initiative from the state beyond perhaps providing money for the initial purpose. Even then, local industries, wealthy philanthropists or NGOs could provide the money for their purchase and maintenance.
Such modules can be used to slowly build up a larger energy infrastructure in a more flexible way and could be clustered in one plant to replicate the output of a larger, traditional nuclear power plant. This incremental build up is more appealing to private investors, who are unwilling to commit outright to the large sunk costs required to build a complete plant.
Leapfrogging the state
The provision of renewable energy sources by private groups is also becoming more prevalent in Africa. The charity Solar Aid claims to be working to provide “access to solar lights in some of the most remote regions of the world”. This year Access Infra Africa, a Dubai-based firm, will launch Africa’s largest privately owned solar plant in Uganda as part of a larger plan to provide renewable energy to 17 African nations.
According to Achim Steiner, Executive Director of the UN Environment Programme, speaking at a UN Climate Change Conference at the end of last year, “if you are in Africa and decide to exploit your wind, solar and geothermal resources, you will get yourself freedom from the global energy markets, and you will connect the majority of your people without waiting for 30 years until the power lines cross every corner of the country”.
Headed by celebrity entrepreneur Elon Musk, Tesla recently revealed a new battery called the Powerwall. These rechargeable batteries rely on lithium-ion, coming in 7kWh or 10 kWh sizes. There is also a larger version, able to store greater amounts of energy, intended for use by businesses. “In a lot of places there are no utility lines”, Musk said at the launch of the Powerwall in May. “This allows you to go completely off grid. It’s analogous to the way that mobile leapfrogged landlines.” By leapfrogging utility lines, the role of the state in energy provision is also being passed over.
National grids have often served as key institutions of nation-states
These new batteries also offer an alternative to energy provision where developing nation governments have failed. As the Mail & Guardian noted, Sub-Saharan African and Asia, where 97 percent of those without electricity links live, “could be good locations for so-called microgrids – self-contained systems of solar panels and batteries”.
Peter Asmus, an analyst with Navigant Consulting, told the Mail & Guardian these batteries are being sold for $3,000, which is around triple the per capita gross national income of Sub-Saharan Africa, though prices are expected to fall. Communities could pool resources to purchase a battery, or wealthy donors could pay for them. Alternatively, private businesses in remote locations could purchase such batteries. Whichever way the capital is provided, there are a number of ways local communities could make use of such batteries without waiting for a national grid provided by the state.
Outsourcing institutions
While the more immediate and secure provision of electricity is a cause for celebration, there are some concerns to consider. Historically, the provision of electricity through a national grid has solidified the legitimacy of nation-states – which is no small task in much of the developing world, where loyalties frequently transcend colonial-era borders. National grids have often served as key institutions of nation-states, helping to unify a polity and providing the first point of interaction between far-flung rural inhabitants and distant seats of political power.
A nation-state relies upon its members seeing themselves as citizens of the state. In their book Volunteer Tourism: The Lifestyle Politics of International Development, Jim Butcher and Peter Smith suggest the rise of NGO volunteer agencies and the associated concept of “global citizenship” has “outsourced citizenship”. In the same way, the provision of energy by third parties could outsource the state. This is part of a wider trend in which other non-state actors, such as the International Criminal Court and global health charities, have assumed functions previously provided for – and key to the defining of – the state.
However, any move towards decentralised energy also has the potential to offset any hope of actual industrial transformation and economic growth. While the worst excesses of poverty may be relieved by decentralised energy, one proven way to abolish poverty is to create a modern industrial economy – which often goes in tandem with the creation of a national energy grid. Some advocates of decentralised energy openly voice their lack of enthusiasm for any major economic transformation. For instance, the NGO Practical Action advocates decentralised energy provision in the developing world on the grounds that “rural people only need small amounts of energy” to increase their quality of life. But such an approach merely entrenches rural poverty; access to cheap, abundant and reliable electricity is required for real economic development and the provision of life styles found in the developed world. Technologies such as SMRs and Powerwalls have the potential to provide this, so long as they are able to generate energy not just to power homes but industry as well.
Just as robotics raises the spectre of human labour being displaced by machines, decentralised energy provision born of technological change could also displace one key function of the nation-state. Of course, the nation-state, though bereft of its role of energy provision, will endure, but for many in countries where interaction with the state by rural citizens is already rare, the state could become even more distant.
When Apple introduced the iPod to the world in 2001, it was the company’s first major foray into the music industry, enabling users to carry around thousands of songs in a small digital player. The iPod was by no means the first MP3 player of its kind, but it was the first to take digital music to a mainstream audience.
Two years later, when the company launched the iTunes Store, it was heralded as the saviour of recorded music. With the industry desperately slow to react to the advent of file sharing and pirate download sites, the launch of an online store for downloading legal music files was particularly welcome.
Late to the party
However, times change and so has the industry’s ability to sell music individually. Download sales have declined in recent years, falling by around 14 percent in 2014. This is thought to be down to a new ‘all you can hear’ subscription model that has started to become the favoured way of listening to music, making downloads seem as out-dated as the CDs they superseded. Services such as Spotify, Rdio and Deezer emerged a few years ago, offering subscribers a huge collection of music to listen to at their pleasure. As a result, Apple’s dominance of the music retail industry has waned, with download sales in the iTunes Store slumping.
Change in US music sales/streams, 2013-14
-15%
CDs
-13%
Downloads
+54%
Streams
Now, however, the company is fighting back. In June, it launched Apple Music, a streaming service that combines users’ existing music libraries with more than 30 million tracks. As is ever the case with Apple, it has hailed its new product as a revolutionary, unique and entirely original entrant into a stagnant market. Music-streaming services have, in fact, been around for a number of years, and Apple has in the past even denounced them as not being the answer to the music industry’s problems.
In order to differentiate itself from these services, Apple has said it won’t offer a free, advertising-supported option that has been popular with other providers. It is also talking up the social media aspect of Apple Music, dubbed Connect, which will allow artists to share exclusive content with followers.
One of the most striking features of the new platform is a recommendation service powered mostly by human experts. Whereas rival services have relied heavily on computer algorithms for their recommendations, Apple feels that having a human touch will allow listeners to discover music in a similar sort of way to before the advent of the internet. Underpinning the service will be playlists made by musicians, music journalists and other tastemakers. At the same time, Apple is heavily touting its new Beats 1 radio station, which will have shows by influential former BBC Radio 1 DJ Zane Lowe, as well as famous musicians.
Utilising the extensive contact book of Beats founders Dr Dre and Jimmy Iovine, Beats 1 and the curated playlist service will likely attract a huge number of users from rival services who want tailored and more intelligent recommendations for their
listening habits.
Another recently launched streaming service has attempted to do the same, although its early adoption rate has been disappointing. Tidal, a streaming service launched a few months before Apple’s by hip hop mogul Jay Z, has touted its heavy artist integration within the service. Musicians including Madonna, Jack White, Jay Z, Beyoncé and Daft Punk all have stakes in the business, and there have been promises of exclusive content from them. However, the service has been criticised and called a vehicle for already rich artists to get even richer.
Spotify dominant
Spotify’s emergence as a major player in the global music business over the last few years came as somewhat of a surprise to Apple, which had for many years claimed streaming services were not the answer to the music industry’s problems. The Swedish company launched in late 2008, backed by funding from a number of leading record labels. It has steadily grown its user base, primarily on an advertising-supported free model. For users who don’t want adverts, a subscription premium service is also available, and was what the company and industry hoped most users would adopt. However, after seven years of operation, Spotify has over 75 million users, but just 20 million paying for the premium service.
The company’s founder and CEO, Daniel Ek, has long talked of how streaming services offer the best possible future for musicians, but has faced growing criticism from artists who feel they don’t get paid enough from the company. While US pop star Taylor Swift was a high-profile critic of the service and withdrew her music, it is smaller artists who suffer the most from a lack of payment. As a result, many musicians and smaller record labels have continued to keep their music off the service, instead preferring Apple’s iTunes download store.
Speaking to music industry journal Billboard shortly after launching Apple Muisc, Iovine said he felt a considerable amount of pressure to get the platform right, coming from the music industry himself: “If we get it right, none of this matters. If we get it right, everything is smooth. I think Daniel Ek has done an incredible job so far [with Spotify] – having to make those deals like he did in those early days. There’s a lot of people doing good work [sic]. And now we’re doing this and it’s very musical. We get to move the needle of popular culture, which is the Holy Grail. When you do that — and who’s done that more than these guys – it’s a rush. Having a hit is nice, having some success, but when you move popular culture, that’s a high.”
Alongside Iovine in the interview was Apple’s longstanding Senior Vice-President of Internet Software and Services, Eddy Cue. For years, Cue has been in charge of discussions with the music industry over Apple’s various services, and he says it is this decade-plus relationship that meant negotiations weren’t as fraught as they could have been. “The great thing about the labels is we go back a long time now – more than a decade – and I think over the years we’ve learned a lot about each other and we built a trust factor. When we started, everybody said, ‘No one’s going to buy a song for 99 cents’, but they did. Did we always agree on everything? No, but I think it allows for some great discussions.”
Cue added the music industry is a particularly difficult one: “Part of the challenge that you have with labels – it’s much easier for me to sit across from you and we can negotiate and get something done, but you can’t do that with labels. Because there [are] many of them and then there’s publishers and collecting societies, so you’re having to convince a vast number of people to a common cause because all of them have a different opinion and a different priority.”
While many of these various parties have been reticent to allow the biggest online music retailer to shift towards a subscription model, the company’s huge reach has meant some feel Apple could be the company that makes streaming profitable. Sony Music CEO Doug Morris has also discussed Apple’s new platform and how he expects it to be a “tipping point” for the industry, by pushing more and more people towards signing up to streaming services. Speaking at the Midem international music conference just before Apple Music launched, Morris asked: “What does Apple bring to this? Well, they’ve got $178bn in the bank. And they have 800 million credit cards in iTunes. Spotify has never really advertised because it’s never been profitable. My guess is that Apple will promote this like crazy and I think that will have a halo effect on the streaming business.”
Morris added that he felt Apple’s launch would not be the death-knell for other streaming services, but instead help them to sign up more customers. “A rising tide will lift all boats. It’s the beginning of an amazing moment for our industry.”
Jay Z is among the recording artists with stakes in the Tidal streaming service
Finding a fair price
Not everyone in the industry has been so welcoming of Apple’s new service. Independent record labels greeted the news with complaints over the amount of money being offered for streaming rights. The US independent music lobby group A2IM warned its members not to sign up to Apple Music under the original deal. “Independent rights holders will receive no compensation for their content during Apple Music’s 90-day free trial period,” it said. “It is surprising that Apple feels the need to give a free trial as Apple is a well-known entity, not a new entrant into the marketplace. Since a sizable percentage of Apple’s most voracious music consumers are likely to initiate their free trails at launch, we are struggling to understand why rights holders would authorise their content on the service before October 1.”
The UK’s leading music industry lobbying organisation, UK Music, said smaller labels would suffer badly as a result of the three-month free trial. UK Music’s Andy Heath told The Daily Telegraph in June: “If you are running a small label on tight margins you literally can’t afford to do this free trial business. Their plan is clearly to move people over from downloads, which is fine, but it will mean us losing those revenues for three months.”
The British independent label body, the Association of Independent Music (AIM), also sent a letter to its members in June, declaring it was “not satisfied that the deal being offered under this new initiative is fair or equitable to independent music companies”. Labels are being offered 71.5 percent royalties for streams, which is 1.5 percent more than the rate companies such as Spotify pay. However, due to the three-month free trial period, labels were initially told they would not receive any payment until the full subscription kicked in. It was during this period that they feared the industry would lose most.
Recognising Apple Music had “great potential”, AIM’s CEO Alison Wenham added: “The main sticking point is Apple’s decision to allow a royalty-free, three-month trial period to all new subscribers. This is a major problem for any label that relies on new releases rather than deep catalogue as the potential for this free trial to cannibalise not only download sales – which remain a very important revenue stream – but also streaming income from other services is enormous.”
Wenham also criticised the speed at which the platform had been launched, and the lack of consultation with smaller industry players. “However, the speed at which Apple has introduced their plans and its lack of consultation with the independent music sector over deal terms (despite what Jimmy Iovine might claim) has left us with the uneasy feeling that independents are being railroaded into an agreement that could have serious short-term consequences for our members’ interests.”
Echoing these sentiments was the Australian Independent Record Labels Association, which published the same statement as AIM. Leading UK independent label Beggars Group also said it was concerned about artists releasing albums in the three months before the trial ends. The company also said the free trial would also damage the ‘freemium’ model employed by other ad-supported services, adding in a statement: “We fear that the free trial aspect, far from moving the industry away from freemium services – a model we support – is only resulting in taking the ‘mium’ out of freemium.”
The furore became headline news when Taylor Swift publicly criticised the company and pulled her latest album from the platform. Swift’s words were particularly strong. “I find it to be shocking, disappointing and completely unlike this historically progressive and generous company”, she wrote in an open letter, adding: “We don’t ask you for free iPhones. Please don’t ask us to provide you with our music for no compensation.”
Her words seemingly hit home: Apple performed a dramatic U-turn. Just a week before launching the service, Cue announced all artists would be paid during the three-month free trial.
Downloads not dead
The steady shift over the last few years towards subscription models has dramatically changed how people interact with their music. It is clear the days of music ownership are in decline, and people will now pay companies such as Apple and Spotify for access to huge libraries.
For all the talk of a revolutionary new way of accessing music, the new system is in fact closer to what came before recorded music became popular a century or so ago. Then, artists made their money through live performances and radio plays. It was only when people were able to buy records that a listener could actually take home the music and listen at will. Apple evidently feels that promoting radio and social aspects to the musicians it has the rights to will cause them to increase their audiences, allowing them to better engage with fans. This could in turn lead to paid-for live performances.
Despite this, there are still many people who will want to own their music outright. Recognising this, Cue told Billboard music downloads are still going to be around for a long time. “Music downloads have gone down a little bit, not a lot, so this is not a crater. There are lots of people who are very happy downloading and I think they’ll continue to. Will people now subscribe? Of course, and some of our customer base will stop downloading in general. But if you’re a downloader today, you’ve got a new music app that’s got a great set of features for you.”
Spotify followed up Apple’s launch with the announcement of a $500m funding round that it will use to boost marketing and expand its services to new markets. Tidal is also likely to invest heavily in ensuring it has a number of different services to Apple. With streaming the new popular method of listening to music, artists can only hope that this increased competition – and Apple’s big splash into the market – will finally get them the revenues they deserve. Getting artists – big and small – paid properly must be the priority for these services, because, without new music, users will quickly lose interest.
In an era characterised by political polarisation and policy paralysis, we should celebrate broad agreement on economic strategy wherever we find it. One such area of agreement is the idea that the key to inclusive growth is, as then-British Prime Minister Tony Blair put it in his 2001 reelection campaign, “education, education, education”. If we broaden access to schools and improve their quality, economic growth will be both substantial and equitable.
As the Italians would say: magari fosse vero. If only it were true. Enthusiasm for education is perfectly understandable. We want the best education possible for our children, because we want them to have a full range of options in life, to be able to appreciate its many marvels and participate in its challenges. We also know that better educated people tend to earn more.
To say that education is your growth strategy means that you are giving up on everyone that has already gone through the school system
Education’s importance is incontrovertible – teaching is my day job, so I certainly hope it is of some value. But whether it constitutes a strategy for economic growth is another matter. What most people mean by better education is more schooling, and, by higher-quality education, they mean the effective acquisition of skills (as revealed, say, by the test scores in the OECD’s standardised PISA exam). But does that really drive economic growth?
Disappointing performance
In fact, the push for better education is an experiment that has already been carried out globally. And, as my Harvard colleague Lant Pritchett has pointed out, the long-term payoff has been surprisingly disappointing.
In the 50 years from 1960 to 2010, the global labour force’s average time in school essentially tripled, from 2.8 years to 8.3 years. This means that the average worker in a median country went from less than half a primary education to more than half a high school education.
How much richer should these countries have expected to become? In 1965, France had a labour force that averaged less than five years of schooling and a per capita income of $14,000 (at 2005 prices). In 2010, countries with a similar level of education had a per capita income of less than $1,000.
In 1960, countries with an education level of 8.3 years of schooling were 5.5 times richer than those with 2.8 year of schooling. By contrast, countries that had increased their education from 2.8 years of schooling in 1960 to 8.3 years of schooling in 2010 were only 167 percent richer. Moreover, much of this increase cannot possibly be attributed to education, as workers in 2010 had the advantage of technologies that were 50 years more advanced than those in 1960. Clearly, something other than education is needed to generate prosperity.
As is often the case, the experience of individual countries is more revealing than the averages. China started with less education than Tunisia, Mexico, Kenya or Iran in 1960, and had made less progress than them by 2010. And yet, in terms of economic growth, China blew all of them out of the water. The same can be said of Thailand and Indonesia vis-à-vis the Philippines, Cameroon, Ghana or Panama. Again, the fast growers must be doing something in addition to providing education.
The experience within countries is also revealing. In Mexico, the average income of men aged 25-30 with a full primary education differs by more than a factor of three between poorer municipalities and richer ones. The difference cannot possibly be related to educational quality, because those who moved from poor municipalities to richer ones also earned more.
And there is more bad news for the “education, education, education” crowd: most of the skills that a labour force possesses were acquired on the job. What a society knows how to do is known mainly in its firms, not in its schools. At most modern firms, fewer than 15 percent of the positions are open for entry-level workers, meaning that employers demand something that the education system cannot – and is not expected – to provide.
Must try harder
When presented with these facts, education enthusiasts often argue that education is a necessary but not a sufficient condition for growth. But in that case, investment in education is unlikely to deliver much if the other conditions are missing. After all, though the typical country with 10 years of schooling had a per capita income of $30,000 in 2010, per capita income in Albania, Armenia and Sri Lanka, which have achieved that level of schooling, was less than $5,000. Whatever is preventing these countries from becoming richer, it is not lack of education.
A country’s income is the sum of the output produced by each worker. To increase income, we need to increase worker productivity. Evidently, “something in the water”, other than education, makes people much more productive in some places than in others. A successful growth strategy needs to figure out what this is.
Make no mistake: education presumably does raise productivity. But to say that education is your growth strategy means that you are giving up on everyone that has already gone through the school system – most people over 18, and almost all over 25. It is a strategy that ignores the potential that is in 100 percent of today’s labour force, 98 percent of next year’s, and a huge number of people who will be around for the next half-century. An education-only strategy is bound to make all of them regret having been born too soon.
This generation is too old for education to be its growth strategy. It needs a growth strategy that will make it more productive – and thus able to create the resources to invest more in the education of the next generation. Our generation owes it to theirs to have a growth strategy for ourselves. And that strategy will not be about us going back to school.
Ricardo Hausmann is Director of the Centre for International Development
In his First Inaugural Address, during the depths of the Great Depression, US President Franklin Delano Roosevelt famously told Americans that: “The only thing we have to fear is fear itself.” Invoking the Book of Exodus, he went on to say that: “We are stricken by no plague of locusts.” Nothing tangible was causing the depression; the problem, in March 1933, was in people’s minds.
The same could be said today, seven years after the 2008 global financial crisis, about the world economy’s many remaining weak spots. Fear causes individuals to restrain their spending and firms to withhold investments; as a result, the economy weakens, confirming their fear and leading them to restrain spending further. The downturn deepens, and a vicious circle of despair takes hold. Though the 2008 financial crisis has passed, we remain stuck in the emotional cycle that it set in motion.
As fear turns into fact, the anxiety worsens – and so does the performance
It is a bit like stage fright. Dwelling on performance anxiety may cause hesitation or a loss of inspiration. As fear turns into fact, the anxiety worsens – and so does the performance. Once such a cycle starts, it can be very difficult to stop.
Breaking out of the loop
According to Google Ngram Viewer, it was during the Great Depression – around the late 1930s – that the term ‘feedback loop’ began to appear frequently in books, often in relation to electronics. If a microphone is placed in front of a loudspeaker, eventually some disturbance will cause the system to produce a painful wail as sound loops from the loudspeaker to the microphone and back, over and over. Then, in 1948, the great sociologist Robert K Merton popularised the phrase “self-fulfilling prophecy” in an essay with that title. Merton’s prime example was the Great Depression.
But the memory of the Great Depression is fading today, and many people probably do not imagine that such a thing could be happening now. Surely, they think, economic weakness must be due to something more tangible than a feedback loop. But it is not, and the most direct evidence of this is that, despite rock-bottom interest rates, investment is not booming.
In fact, real (inflation-adjusted) interest rates are hovering around zero throughout much of the world, and have been for more than five years. This is especially true for government borrowing, but corporate interest rates, too, are at record lows.
In such circumstances, governments considering a proposal to build, say, a new highway, should regard this as an ideal time. If the highway will cost $1bn, last indefinitely with regular maintenance and repairs, and yield projected annual net benefits to society of $20m, a long-term real interest rate of three percent would make it nonviable: the interest cost would exceed the benefit. But if the long-term real interest rate is one percent, the government should borrow the money and build it. That is just sound investing.
In fact, the 30-year inflation-indexed US Government bond yield as of May 4 was only 0.86 percent, compared with more than four percent in the year 2000. Such rates are similarly low today in many countries.
Our need for better highways cannot have declined; on the contrary, given population growth, the need for investment can only have become more pronounced. So why are we not well into a highway-construction boom?
People’s weak appetite for economic risk may not be the result of pure fear, at least not in the sense of an anxiety like stage fright. It may stem from a perception that others are afraid, or that something is inexplicably wrong with the business environment, or a lack of inspiration (which can help overcome background fears).
Inspiring economic growth
It is worth noting that the US experienced its fastest economic growth since 1929 in the 1950s and 1960s, a time of high government expenditure on the Interstate Highway System, which was launched in 1956. As the system was completed, one could cross the country and reach its commercial hubs on high-speed expressways at 75 miles an hour.
Maybe the national highway system was more inspirational than the kinds of things that Roosevelt tried to stimulate the US out of the Great Depression. With his Civilian Conservation Corps, for example, young men were enlisted to clean up the wilderness and plant trees. That sounded like a pleasant experience – maybe a learning experience – for young men who would otherwise be idle and unemployed. But it was not a great inspiration for the future, which may help to explain why Roosevelt’s New Deal was unable to end America’s economic malaise.
By contrast, the apparent relative strength of the US economy today may reflect some highly visible recent inspirations. The fracking revolution, widely viewed as originating in the US, has helped to lower energy prices and has eliminated America’s dependency on foreign oil. Likewise, much of the rapid advance in communications in recent years reflects innovations – smartphone and tablet hardware and software, for example – that has been indigenous to the US.
Higher government spending could stimulate the economy further, assuming that it generates a level of inspiration like that of the Interstate Highway System. It is not true that governments are inherently unable to stimulate people’s imagination. What is called for is not little patches here and there, but something big and revolutionary.
Government-funded space-exploration programmes around the world have been profound inspirations. Of course, it was scientists, not government bureaucrats, who led the charge. But such programmes, whether publicly funded or not, have been psychologically transformative. People see in them a vision for a greater future. And with inspiration comes a decline in fear, which now, as in Roosevelt’s time, is the main obstacle to economic progress.
After months of speculation, Nokia has continued its restructuring plans with the sale of its HERE mapping division to a group of German carmakers. The deal, worth €2.8bn, will see three manufacturers – BMW, Volkswagen and Daimler – acquire the highly rated mapping technology from Nokia, in a move that is seen a response to ambitions by tech giants to enter the auto industry.
While HERE was widely praised as a credible alternative to Google’s Maps service, it failed to gain much traction
with consumers
Nokia has been looking to sell off HERE since April, after Rajeev Suri, the CEO who took control of the company last year, unveiled plans to shake up the business and return it to its former glory. While HERE was widely praised as a credible alternative to Google’s Maps service, it failed to gain much traction with consumers. It had been speculated that mobile taxi service Uber wanted to buy the mapping platform, while a number of Asian smartphone makers were also looking at the app.
However, carmakers have been eager to acquire the valuable tech as a way of cutting their reliance on some of the tech world’s biggest players. With talk of both Apple and Google looking at entering the car industry, integrating their various digital services, traditional manufacturers have been searching for ways to remain ahead of the pack.
Announcing the deal, the consortium said that the deal will help ensure they remain at the forefront of the car industry’s push into the digital age. “The acquisition is intended to secure the long term availability of HERE’s products and services as an open, independent and value creating platform for cloud-based maps and other mobility services accessible to all customers from the automotive industry and other sectors.”
Nokia’s future remains unclear. There has been talk that it might try to reenter the mobile phone market after an unsuccessful partnership with Microsoft ends in 2016. It has also continued to invest heavily in its telecommunications business, announcing in April a €15.6bn deal to acquire French equipment firm Alcatel-Lucent.
The US and the world are engaged in a great debate about new trade agreements. Such pacts used to be called ‘free-trade agreements’; in fact, they were managed trade agreements, tailored to corporate interests, largely in the US and the European Union. Today, such deals are more often referred to as ‘partnerships’, as in the Trans-Pacific Partnership (TPP). But they are not partnerships of equals: the US effectively dictates the terms. Fortunately, America’s ‘partners’ are becoming increasingly resistant.
It is not hard to see why. These agreements go well beyond trade, governing investment and intellectual property as well, imposing fundamental changes to countries’ legal, judicial and regulatory frameworks, without input or accountability through democratic institutions.
The manufacturer could sue governments for restraining them from killing more people
Perhaps the most invidious – and most dishonest – part of such agreements concerns investor protection. Of course, investors have to be protected against rogue governments seizing their property. But that is not what these provisions are about. There have been very few expropriations in recent decades, and investors who want to protect themselves can buy insurance from the Multilateral Investment Guarantee Agency, a World Bank affiliate, and the US and other governments provide similar insurance. Nonetheless, the US is demanding such provisions in the TPP, even though many of its ‘partners’ have property protections and judicial systems that are as good as its own.
Suing the government
The real intent of these provisions is to impede health, environmental, safety and, yes, even financial regulations meant to protect the US’s own economy and citizens. Companies can sue governments for full compensation for any reduction in their future expected profits resulting from regulatory changes.
This is not just a theoretical possibility. Philip Morris is suing Uruguay and Australia for requiring warning labels on cigarettes. Admittedly, both countries went a little further than the US, mandating the inclusion of graphic images showing the consequences of cigarette smoking. The labelling is working. It is discouraging smoking. So now Philip Morris is demanding to be compensated for lost profits.
In the future, if we discover that some other product causes health problems (think of asbestos), rather than facing lawsuits for the costs imposed on us, the manufacturer could sue governments for restraining them from killing more people. The same thing could happen if our governments impose more stringent regulations to protect us from the impact of greenhouse-gas emissions.
When I chaired President Bill Clinton’s Council of Economic Advisors, anti-environmentalists tried to enact a similar provision, called “regulatory takings”. They knew that, once enacted, regulations would be brought to a halt, simply because government could not afford to pay the compensation. Fortunately, we succeeded in beating back the initiative, both in the courts and in the US Congress.
But now the same groups are attempting an end run around democratic processes by inserting such provisions in trade bills, the contents of which are being kept largely secret from the public (but not from the corporations that are pushing for them). It is only from leaks, and from talking to government officials who seem more committed to democratic processes, that we know what is happening.
Damaging the system of justice
Fundamental to the US’s system of government is an impartial public judiciary, with legal standards built up over the decades, based on principles of transparency, precedent and the opportunity to appeal unfavorable decisions. All of this is being set aside, as the new agreements call for private, non-transparent and very expensive arbitration. Moreover, this arrangement is often rife with conflicts of interest; for example, arbitrators may be a ‘judge’ in one case and an advocate in a related case.
The proceedings are so expensive that Uruguay has had to turn to Michael Bloomberg and other wealthy Americans committed to health to defend itself against Philip Morris. And, though corporations can bring suit, others cannot. If there is a violation of other commitments – on labour and environmental standards, for example – citizens, unions and civil-society groups have no recourse.
If there ever was a one-sided dispute-resolution mechanism that violates basic principles, this is it. That is why I joined leading US legal experts, including from Harvard, Yale and Berkeley, in writing a letter to President Barack Obama explaining how damaging to our system of justice these agreements are.
American supporters of such agreements point out that the US has been sued only a few times so far, and has not lost a case. Corporations, however, are just learning how to use these agreements to their advantage.
And high-priced corporate lawyers in the US, Europe and Japan will likely outmatch the underpaid government lawyers attempting to defend the public interest. Worse still, corporations in advanced countries can create subsidiaries in member countries through which to invest back home and then sue, giving them a new channel to block regulations.
If there were a need for better property protection, and if this private, expensive dispute-resolution mechanism were superior to a public judiciary, we should be changing the law not just for well-heeled foreign companies, but also for our own citizens and small businesses. But there has been no suggestion that this is the case.
Rules and regulations determine the kind of economy and society in which people live. They affect relative bargaining power, with important implications for inequality, a growing problem around the world. The question is whether we should allow rich corporations to use provisions hidden in so-called trade agreements to dictate how we will live in the 21st century. I hope citizens in the US, Europe and the Pacific answer with a resounding “No”.
Joseph E Stiglitz is a Nobel laureate in economics
It is often assumed that emerging-economy living standards are bound to converge with those in developed countries. But, leaving aside some oil exporters and the city-states of Hong Kong and Singapore, only three countries – Japan, South Korea and Taiwan – have come from far behind to achieve per capita GDP of at least 70 percent of the developed-country average over the last 60 years. China hopes to do the same, but it faces a distinctive challenge: its sheer size.
Japan, South Korea and Taiwan depended on export-led growth to catch up with the developed economies. But China – home to almost 20 percent of the world population and responsible for 15 percent of global output – is simply too large to depend solely on external markets. To reach the next stage of development, it will need to forge a different growth path – and that will require more difficult reforms than those on which attention is often focused.
Given that almost half of China’s rural workers are already over 50 years old, many may never migrate
To be sure, export-led growth has fuelled China’s economic rise so far, with its current-account surplus growing to 10 percent of GDP in 2008. But such high surpluses are ultimately impossible to sustain. There simply is not enough import demand in the world to absorb ever-growing Chinese exports.
The global financial crisis exposed that reality. Before 2008, China’s massive surpluses were matched by unsustainable credit-fuelled deficits in developed economies. When boom turned to bust, falling global demand hit China’s export sector, and threatened to increase unemployment.
In response, China turned to the domestic growth engine of credit-financed investment in infrastructure and real estate. Since 2008, credit has surged from 125 percent of GDP to more than 210 percent of GDP, enabling investment to increase from 42 percent of GDP to nearly 48 percent last year.
Across China, concrete was poured into apartment blocks, multilane highways, convention centres, railway stations and airports. Real-estate investment now accounts for 15 percent of China’s GDP, compared to less than five percent in 2000; when related industries like steel and cement are taken into account, that figure rises to one-third of China’s GDP. Almost 60 million Chinese workers are employed in construction today, up from just below 20 million in 2007.
China’s current growth path stands in stark contrast to that followed by Japan, South Korea and Taiwan. When those countries’ per capita GDP stood at current Chinese levels, real estate played only a minor role in their economies; indeed, the sector was often deliberately starved of credit.
The investment boom has kept China’s urban employment growing strongly. But a country needs only so much housing. True, total capital stock per capita in China still lags far behind that of developed countries. But a recent International Monetary Fund report reveals the startling fact that China has now surpassed Japan and South Korea in square meters of housing per capita, having reached a level near – or, in some smaller cities, well above – the European average.
Nearing completion
As China’s construction frenzy ends, the economy is experiencing a major slowdown. By some estimates, China’s growth stalled almost completely in the first quarter of this year. Even official figures indicate that several provinces outside the more dynamic coastal regions are in outright recession.
This leaves China facing two major challenges. One is financial: how to deal with the unsustainable debts of many local governments and state-owned enterprises (SOEs). Fortunately, the solutions here are obvious: local-government debts can be shifted to the central government, or bank loans can be written off and banks recapitalised.
The second, more profound, challenge relates to the real economy: how to redeploy workers and capital from the industrial sectors facing overcapacity and the most overbuilt cities.
This imperative is sometimes denied. Hundreds of millions of people, it is said, have yet to migrate to cities, where they will demand housing. But, given that almost half of China’s rural workers are already over 50 years old, many may never migrate. And China’s total population will begin to decline within 15 years. Far from being on the cusp of a wave of urbanisation, China is within 10 to 15 years of its completion.
Even if urbanisation did continue at a high rate, many workers would not migrate to the second- and third-tier cities where overcapacity is most extreme, but to the major coastal cities. Though the government can use its hukou (household registration) system to slow that migration, even it cannot direct people to the specific cities with the most excess capacity.
Growth and consumption
So what can be done? One option would be to export construction expertise and workers. Indeed, this is one rationale for China’s “one belt, one road” initiative, which aims to recreate the ancient overland and maritime Silk Roads connecting China to Europe. But, as with any export-based strategy, the impact of this approach would be limited by the size of potential external markets, relative to China’s economy. No feasible level of construction exports can fully compensate for faltering domestic investment.
Domestic consumption, supported by strong wage growth, must instead be the dominant driver of growth. The good news is that wages are already growing faster than GDP – a trend that is likely to continue, as demographic change restricts the supply of new labour. Over the next decade, the number of Chinese aged 15 to 30 will fall by almost 25 percent.
But major policy reforms are also needed. China must take action to curb overinvestment by SOEs, cutting off such firms’ access to subsidised credit and forcing them to pay much higher dividends to the government. Those revenues could then be used to improve health services and strengthen the social safety net, thereby removing the need for Chinese households to maintain high precautionary savings.
Such reforms would challenge powerful vested interests. It is far easier to build consensus around efforts, say, to add the renminbi to the basket of currencies that determines the value of the IMF’s reserve asset, the Special Drawing Right – a move that, while appropriate, would do little for medium-term growth. But, if China is to replicate the success of Japan, Korea and Taiwan, there is no alternative to tough reform.
Adair Turner is Chairman of the Institute for New Economic Thinking
