The Growth Conundrum

BERKELEY – The world faces a major dilemma. While rapid economic growth, such as that realized over the past 50 years, is critical to support development, we now also know that it can have serious adverse consequences, particularly for the environment. How can we balance the imperatives of growth and development with the need to ensure sustainability?

The unprecedented growth of per capita income during the last 20 years has lifted more than one billion people out of extreme poverty. In developing countries, life expectancy has increased by 20 years since the mid-1970s, and the illiteracy rate among adults was almost halved in the last 30 years.

But rapid economic growth has placed enormous pressure on the environment. Moreover, it has been accompanied by rising income inequality, which has now reached historic highs within many countries (though, across countries, such inequality has declined). Given this, one might argue that slower growth would be good for the world.

In that case, the solution would be at hand. According to a new report by the McKinsey Global Institute (MGI), aging populations and declining fertility rates in many parts of the world could dampen global growth considerably over the next 50 years.

Indeed, even if productivity were to expand at the same rapid rate as during the last half-century, global growth would fall by 40%, far below the anemic rate of the last five years. Employment growth is also set to slow significantly. As a result, even with slower population growth, per capita income growth would fall by about 19%.

To be sure, GDP would still triple, and per capita income would double, over the next 50 years. Nonetheless this rate of long-term growth would constitute a sharp break with the six-fold GDP expansion and nearly three-fold increase in per capita income of the last 50 years.

Despite its potential benefits, especially for the environment, the impending growth slowdown carries significant risks. While growth is not an end in itself, it enables the achievement of a broad set of societal goals, including the creation of economic and employment opportunities for millions of vulnerable and poor people and the provision of social goods like education, health care, and pensions.

So how do we ensure that these imperatives are fulfilled, despite demographic and environmental constraints? The first step is to secure economic growth through productivity gains.

The needed acceleration in productivity growth – by 80% to sustain overall GDP growth and by 22% to sustain per capita income growth at the rates of the last half-century – is daunting. But, based on case studies in five economic sectors, the MGI report finds that achieving it, though “extremely challenging,” is possible – and without relying on unforeseeable technological advances.

Three-quarters of the potential pickup in productivity could come from “catch-up” improvements, with countries taking steps – modernizing their retail sectors, consolidating automobile production into a smaller number of larger factories, improving health-care efficiency, and reducing food-processing wastage – that have already proven effective elsewhere. The rest can come from technological, operational, and business innovations – for example, developing new seeds to increase agricultural yields, using new materials (such as carbon-fiber composites) to make cars and airplanes lighter and more resilient, or digitizing medical records.

Another significant growth opportunity lies in boosting the employment and productivity of women. Today, only about half of the world’s working-age women are employed. They earn about three-quarters as much as men in the same occupations, and are over-represented in informal, temporary, and low-productivity jobs
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MGI estimates that increasing women’s labor-force participation rate could contribute almost 60% of potential labor-force growth during the next half-century. Realizing this potential will require efforts by both employers and governments to eliminate discriminatory practices that impede the recruitment, retention, and promotion of women, as well as credit, tax, and family support policies to help workers balance their responsibilities at work and at home.

Meanwhile, in order to mitigate the environmental impact of continued rapid growth, the world must improve its resource efficiency considerably. MGI and others have identified numerous ecologically responsible growth opportunities emanating from the smarter use of limited resources.

Consider improvements in energy efficiency, which could halve projected energy demand between now and 2020. As California – the world’s eighth-largest economy – has demonstrated, strict energy-efficiency standards can actually be good for growth and jobs. Indeed, such policies have kept California’s per capita energy demand constant for the last three decades – even as such demand grew by 50% in the rest of the United States – without compromising growth.

There is a strong business and consumer case for improving resource productivity, as it could lead to substantial cost savings. Fortunately, policies that support this goal are gaining momentum in developed and developing countries alike.

Even if gains in female labor-force participation and resource-efficient productivity growth sustain high rates of economic growth, one key challenge remains: income inequality. In fact, there is no simple relationship between growth and income inequality; after all, inequality has been increasing in both slow-growing developed economies and fast-growing emerging economies.

According to the French economist Thomas Piketty, income inequality rises when the return on capital exceeds economic growth, meaning that, by itself, faster economic growth would reduce inequality. Using a different approach, economists at the International Monetary Fund also find a positive relationship between lower income inequality and faster growth, concluding that policies that redistribute income can foster faster, more sustainable growth.

Growth still matters. As demographic tailwinds turn into headwinds, and environmental challenges become ever more apparent, businesses and governments need to think carefully about how to improve resource efficiency while fostering more inclusive economic growth.

via Project Syndicate – (@LauraDTyson & Woetzel)

By: LAURA TYSON

Laura Tyson, a former chair of the US President’s Council of Economic Advisers, is a professor at the Haas School of Business at the University of California, Berkeley, a senior adviser at the Rock Creek Group, and a member of the World Economic Forum Global Agenda Council on Gender Parity.

JONATHAN WOETZEL
Jonathan Woetzel is a director of the McKinsey Global Institute.

New Oxfam report says half of global wealth held by the 1% Oxfam warns of widening inequality gap, days ahead of Davos economic summit in Switzerland

The Swiss ski resort of Davos, home to the annual meeting of the World Economic Forum. Photograph: Christian Kober/Robert Hardi/REX

Billionaires and politicians gathering in Switzerland this week will come under pressure to tackle rising inequality after a study found that – on current trends – by next year, 1% of the world’s population will own more wealth than the other 99%.

Ahead of this week’s annual meeting of the World Economic Forum in the ski resort of Davos, the anti-poverty charity Oxfam said it would use its high-profile role at the gathering to demand urgent action to narrow the gap between rich and poor.

The charity’s research, published today, shows that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%.

Oxfam added that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.

Winnie Byanyima, executive director of Oxfam International and one of the six co-chairs at this year’s WEF, said the increased concentration of wealth seen since the deep recession of 2008-09 was dangerous and needed to be reversed.

In an interview with the Guardian, Byanyima said: “We want to bring a message from the people in the poorest countries in the world to the forum of the most powerful business and political leaders.

“The message is that rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”

Oxfam made headlines at Davos last year with a study showing that the 85 richest people on the planet have the same wealth as the poorest 50% (3.5 billion people). The charity said this year that the comparison was now even more stark, with just 80 people owning the same amount of wealth as more than 3.5 billion people, down from 388 in 2010.

Byanyima said: “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.”

Billionaires and politicians gathering in Switzerland this week will come under pressure to tackle rising inequality after a study found that – on current trends – by next year, 1% of the world’s population will own more wealth than the other 99%.

Ahead of this week’s annual meeting of the World Economic Forum in the ski resort of Davos, the anti-poverty charity Oxfam said it would use its high-profile role at the gathering to demand urgent action to narrow the gap between rich and poor.

The charity’s research, published today, shows that the share of the world’s wealth owned by the best-off 1% has increased from 44% in 2009 to 48% in 2014, while the least well-off 80% currently own just 5.5%.

Oxfam added that on current trends the richest 1% would own more than 50% of the world’s wealth by 2016.

Winnie Byanyima, executive director of Oxfam International and one of the six co-chairs at this year’s WEF, said the increased concentration of wealth seen since the deep recession of 2008-09 was dangerous and needed to be reversed.

In an interview with the Guardian, Byanyima said: “We want to bring a message from the people in the poorest countries in the world to the forum of the most powerful business and political leaders.

“The message is that rising inequality is dangerous. It’s bad for growth and it’s bad for governance. We see a concentration of wealth capturing power and leaving ordinary people voiceless and their interests uncared for.”

Oxfam made headlines at Davos last year with a study showing that the 85 richest people on the planet have the same wealth as the poorest 50% (3.5 billion people). The charity said this year that the comparison was now even more stark, with just 80 people owning the same amount of wealth as more than 3.5 billion people, down from 388 in 2010.

Byanyima said: “Do we really want to live in a world where the 1% own more than the rest of us combined? The scale of global inequality is quite simply staggering and despite the issues shooting up the global agenda, the gap between the richest and the rest is widening fast.”

Separate research by the Equality Trust, which campaigns to reduce inequality in the UK, found that the richest 100 families in Britain in 2008 had seen their combined wealth increase by at least £15bn, a period during which average income increased by £1,233. Britain’s current richest 100 had the same wealth as 30% of UK households, it added.

Inequality has moved up the political agenda over the past half-decade amid concerns that the economic recovery since the global downturn of 2008-09 has been accompanied by a squeeze on living standards and an increase in the value of assets owned by the rich, such as property and shares.

Pope Francis and the IMF managing director Christine Lagarde have been among those warning that rising inequality will damage the world economy if left unchecked, while the theme of Thomas Piketty’s best-selling book Capital was the drift back towards late 19th century levels of wealth concentration.

Barack Obama’s penultimate State of the Union address on Tuesday is also expected to be dominated by the issue of income inequality.

He will propose a redistributive tax plan to extract more than $300bn (£200bn) in extra taxes from the 1% of rich earners in order to fund benefits specifically targeted at working families.

However, the odds of the White House having any success persuading Congress to adopt the plan, given the Republicans’ new grip on both chambers, are extremely long. But Obama’s embrace of what he calls “middle-class economics” – as opposed to the trickle-down economics of the Republicans – is likely to ensure that inequality remains a pivotal theme of the 2016 presidential campaign.

Oxfam said the wealth of the richest 80 doubled in cash terms between 2009 and 2014, and that there was an increasing tendency for wealth to be inherited and to be used as a lobbying tool by the rich to further their own interests. It noted that more than a third of the 1,645 billionaires listed by Forbes inherited some or all of their riches, while 20% have interests in the financial and insurance sectors, a group which saw their cash wealth increase by 11% in the 12 months to March 2014.

These sectors spent $550m lobbying policymakers in Washington and Brussels during 2013. During the 2012 US election cycle alone, the financial sector provided $571m in campaign contributions.

Byanyima said: “I was surprised to be invited to be a co-chair at Davos because we are a critical voice. We go there to challenge these powerful elites. It is an act of courage to invite me.”

Oxfam said it was calling on governments to adopt a seven point plan:

• Clamp down on tax dodging by corporations and rich individuals.

• Invest in universal, free public services such as health and education.

• Share the tax burden fairly, shifting taxation from labour and consumption towards capital and wealth.

• Introduce minimum wages and move towards a living wage for all workers.

• Introduce equal pay legislation and promote economic policies to give women a fair deal.

• Ensure adequate safety-nets for the poorest, including a minimum-income guarantee.

• Agree a global goal to tackle inequality.

Speaking to the Guardian, Byanyima added: “Extreme inequality is not just an accident or a natural rule of economics. It is the result of policies and with different policies it can be reduced. I am optimistic that there will be change.

“A few years ago the idea that extreme poverty was harmful was on the fringes of the economic and political debate. But having made the case we are now seeing an emerging consensus among business leaders, economic leaders, political leaders and even faith leaders.”

The ‘Numsa moment’ may be the first of many | BY AUBREY MATSHIQI, 10 NOVEMBER 2014,

WHAT A surprise! The National Union of Metalworkers of SA (Numsa) has become the first affiliate of the Congress of South African Trade Unions (Cosatu) to be expelled by the labour federation.

At the end of a long night of knives, or the night of long knives, just before the first cock crowed to announce the coming of Saturday, Cosatu’s central executive committee finally told Numsa to “vat julle goed en voetsek”. “Hit the road Jim, don’t you come back, no more, no more!” said the committee. And Numsa was heard humming a hit song by the Spinners, “Throwing a good love away, you don’t know it now, but you’ll know it someday.”

Who will rue the day Numsa was expelled? Will it be Cosatu, Numsa or the African National Congress (ANC)? Or, is it ordinary workers who will pay the highest price? In the weeks to come political animals like me are going to subject you to volumes of verbiage and high analysis in our attempts at pretending we know the answers to these questions when, in fact, a lot is still going to happen between Cosatu and Numsa, and within each formation, before we can fully understand the implications of Cosatu’s decision.

While there is inadequate space in a newspaper column, the answer lies in understanding the forces — historical, political, economic, ideological and otherwise — that shaped what some among us sometimes romantically refer to as the “Numsa moment”.

To some of these, the Numsa moment and the Marikana massacre are part of the same historical moment and turning point. Beyond this moment lie radical political and economic change born out of fundamental transformation in political and economic relations in SA.

In other words, the expulsion of Numsa will deliver political realignment and, therefore, constitutes the beginning of the end for the ANC and its ambivalence towards neoliberalism.

Some of the forces behind the internal Cosatu battle and the expulsion of Numsa are larger than both Numsa and the Cosatu central executive committee. To understand why the tripartite alliance has not been as adept as it should be in its response to the change in the relationship between the alliance and state power, we must start by accepting that 20 years in the life of any country is a very short time.

In Darkness at Noon, a book by Arthur Koestler, it is said that history has a long pulse. This suggests several things but I would like to highlight two.

First, the changes to the content of the historical forces that are going to shape events and decisions inside and outside the components of the alliance are both incomplete and continuous. In this regard the “Numsa moment” is but one among many future moments that will deliver a different, weaker or stronger alliance. The quality of leadership, strategic and tactical acumen, a sense of vision and values, moral and ideological courage and the clarity of thought available to the ANC, Cosatu and South African Communist Party (SACP) will ultimately be the difference between decay and regeneration.

Second, changes in political and economic reality since 1994 dictate that the ANC, Cosatu and the SACP ask whether current formulations of their National Democratic Revolution are still an appropriate response to these changes. This must happen given the possibility that, since 1994, the forces that have shaped the response are those that are hostile to change as conceived in different formulations of the National Democratic Revolution.

That said, there has never been a more important moment since 1994 for the ANC, Cosatu and SACP to be honest about the different configurations “the enemy within” has manifested itself in, especially during the past decade. Subjective interests have become the fuel that propels factional interests in alliance structures and the alliance itself. More unfortunate is the degree to which some, by foregrounding subjective interests, have become affiliates of members in positions of power.

Numsa’s expulsion is, therefore, the harbinger of things good or bad.

• Matshiqi is an independent political analyst.

Numsa sends simple struggle message | Nov 09 2014 | Terry Bell

Cape Town – A luta continua. The fight continues.

That was the simple message on Sunday from the press conference of the National Union of Metalworkers (Numsa).

What it means is that a special national congress will probably be fought for through the courts.

On Monday the seven Cosatu affiliates that remain in support of Numsa will stage their own press conference where they are likelyl, in line with the Cosatu constitution, to support this call. This will mean that Cosatu’s embattled general secretary Zwelinzima Vavi will then make his stand clear by making a public announcement on either Wednesday or Thursday.

His announcement will almost certainly follow a series of frantic, behind-the-scenes negotiations as it now seems to have dawned on many of the Cosatu leadership, who backed the expulsion of Numsa, that there is a groundswell of support for that union.

It is this that is credited with the peculiar statement by National Union of Mineworkers (NUM) general secretary Frans Baleni, that Numsa needs only to apologise to gain readmission to the federation.

The apology, he said in a radio interview Sunday morning, should relate to Numsa breaching the Cosatu policy of one industry, one union.

However, this policy has been observed in the breach over the nearly three decades of the federation’s existence. Cosatu, for example, houses two separate nursing unions, Denosa and Sadnu, while its large public sector affiliate, Nehawu, also organises nurses.

Numsa has traditionally organised in the mining industry, although mainly in the engineering, welding and smelting sectors. Similar “cross-overs” exist with almost every Cosatu union.

Baleni is fully aware — as are the rest of the executive members — that the only way an expulsion or suspension of an affiliate can, constitutionally, be revoked or ratified is via a national congress of delegates.

In previous years, NUM has had the lion’s share of such delegates, being, before the massacre at Marikana, the biggest union in Cosatu.

NUM is now a shadow of its former self, with many of the defecting members having gone to Numsa and others going to the Nactu-affiliated Association of Mineworkers and Construction Union (Amcu) or falling by the wayside. Numsa’s membership has ballooned from little more than 216 000 a year ago to probably close to 340 000 today.

Other affiliates supporting the majority on the Cosatu executive have also lost members. After the expulsion by the teachers’ union Sadtu of its president, a large section of the Eastern Cape membership in particular, is in rebellion. The major transport union, Satawu, has also suffered a split.

– Fin24

OBAMA: US CAN’T CUT ITSELF OFF FROM WEST AFRICA | October 18, 2014

AFP

WASHINGTON (AP) — President Barack Obama urged Americans on Saturday not to succumb to hysteria about Ebola, even as he warned that addressing the deadly virus would require citizens, government leaders and the media to all pitch in.

In his weekly radio and Internet address, Obama also pushed back against calls for the U.S. to institute a travel ban. Lawmakers have called it a common-sense step to prevent more people with Ebola from entering the U.S., but Obama said such a ban would only hamper aid efforts and screening measures.

“Trying to seal off an entire region of the world – if that were even possible – could actually make the situation worse,” Obama said.

Growing U.S. concern about Ebola and the three cases diagnosed so far in Dallas prompted Obama on Friday to tap a former top White House adviser to be his point person on Ebola. Striking a careful balance, Obama said there’s no “outbreak” or “epidemic” of Ebola in the U.S., but said even one case is too many.

“This is a serious disease, but we can’t give in to hysteria or fear-because that only makes it harder to get people the accurate information they need,” Obama said. “We have to be guided by the science.”

As Obama sought to reassure anxious Americans, U.S. officials were still working to contain the fallout from the Ebola cases identified in the U.S. so far, rushing to cut off potential routes of infection for those who may have come into contact with individuals who contracted Ebola. Obama said he was “absolutely confident” the U.S. could prevent a serious outbreak at home – if it continues to elevate facts over fear.

“Fighting this disease will take time,” Obama said. “Before this is over, we may see more isolated cases here in America. But we know how to wage this fight.”

AP

In a Changing Climate, We Can’t Do Conservation as Usual | October 17, 2014

By Valerie Hickey and Habiba Gitay

At the 12th Conference of the Parties to the Convention on Biological Diversity happening right now in Korea, there has been a lot of talk about adaptation. Most importantly, how can nature help countries and communities adapt to climate change?

Ecosystem-based adaptation (EBA), or using nature’s own defense characteristics to reduce the vulnerability of people and capital, is an essential component of climate-resilient development. EBA isn’t about how we can protect nature. It’s about how nature – through the ecosystem services that constitute EBA, be it flood protection, water provision during droughts, or wave energy attenuation, among other things – can protect people and their capital.

We already know that we can’t eradicate extreme poverty without investing in nature because of the safety net she provides to families in the stubborn pockets of poverty at the rural frontier. Nor can we truly share prosperity with the bottom 40 percent unless we help them reap the benefits of what is often the only capital they have access to – natural capital. And now, climate change has given us another truism: We can’t eradicate extreme poverty or protect the development gains of the bottom 40 percent in the face of climate change, without investing in nature in a different way. And this is the first lesson that we are learning about EBA – it is not conservation as usual.

The success of EBA must be measured in how effectively it has enhanced the resilience of communities and their capital assets. It is about nature helping communities sustain their hard-fought economic gains and climate-proofing future development wins. This is what our investments in EBA through the Pilot Program on Climate Resilience are doing in Samoa and Zambia – we are using EBA to build a protective shell around communities that are vulnerable to coastal erosion, floods, and the loss of scarce freshwater resources. Yes, EBA delivers biodiversity benefits; but first and foremost, it must deliver real and timely benefits for vulnerable people and communities who rely on natural capital.

EBA is not a new idea. In many ways it is the archetype of the triple bottom line in action. A

First and foremost, it provides vulnerable families and communities protection from the vicissitudes and cruelties of a world that is experiencing a rapidly changing climate and a multitude of climate extremes. In a world where most of the poor live in rural areas, and live in dispersed, often remote communities, we know that other types of adaptation measures and infrastructure may never reach them. Islands simply don’t have the resources to ring-fence their entire sovereignty with high concrete sea-walls. Water-stressed countries don’t have the resources to channelize their scarce freshwater resources to support all small-holder agriculture. EBA is a cost-effective way to protect people against climate change, which reduces fiscal pressures on governments while accruing economic and environmental co-benefits.

This is the second lesson of EBA: While hard infrastructure depreciates over time, the benefits of nature-based approaches accrue value. Mangrove forests dampen wave energy, delivering adaptation benefits to coastal and island communities during storms. But over time they also provide nursery grounds for many fish species and critical habitat for marine biodiversity, allowing communities and countries to reap the food security, economic benefits and jobs from improving artisanal and industrial fishing.

But EBA is not a cure-all. While we know a lot about how ecosystems function, we don’t know enough about how they provide ecosystem services, including those that are critical to climate resilient development. Under what conditions will EBA work best? What are the ecological tipping points beyond which ecosystems stop functioning and helping people adapt to climate change? As we learn more about how to optimize EBA, we must embed EBA approaches within broader development strategies. We must employ multi-stakeholder and multi-sectoral approaches at multiple scales across time and space. And most importantly, we must interweave traditional and indigenous knowledge about local ecosystems and how they work into development decisions. This is the third lesson about EBA: Since we don’t know enough about how they work, we must apply them only with the informed and active participation of those communities and countries we are asking to trust in them.

We are investing in EBA, and the delegates at the COP are discussing EBA, because it must be part of our adaptive response to climate change. This is the fourth lesson of EBA: It can and must co-exist with other approaches to adaptation to give countries and communities every opportunity to confront a world that is experiencing climate change. Each approach to adaptation strengthens the other. Greening hard infrastructure will make it last longer and go further. Engineering green infrastructure will make it more effective and help us optimize the delivery of adaptation benefits. In a rapidly changing world where the rural poor are heavily dispersed and countries and communities have limited resources, a full adaptation toolbox that includes EBA is the surest salve to reduce vulnerability and enhance resiliency.

BY VALERIE HICKEY, CO-AUTHORS: HABIBA GITAY

Two Views of Finance | September 29, 2014

WASHINGTON, DC – The International Monetary Fund’s annual meetings will be held on October 10-12 in Washington DC, and the world’s financial sector is a central item on the agenda. That will make for an interesting meeting, because two diametrically opposed views of the global financial system will face off against each other.

The first view is that “we have done a lot” since the global financial crisis erupted in 2008. According to this view, which is put forward on a regular basis by some US Treasury officials and their European counterparts, there may be a bit more to do in terms of implementing reforms, but our banks and other financial firms have already become much safer. The crisis of 2008 cannot soon be repeated.

The second view is that we are a long way from completing the far-reaching changes that we need. Even worse, on at least one key point, the very language used among policymakers and leading journalists to describe finance is badly broken.

The issues are complex and nuances abound, but much of what divides the two sides in this debate comes down to this: Is it acceptable to say that banks “hold” capital?

This is an expression used with great regularity among top finance reporters (though not, for example, by Bloomberg/BusinessWeek, which has long been much more careful on this point). “Banks will need to hold more capital” is a common refrain, describing efforts by regulators – and, in the United States, some legislators – to require that financial institutions fund themselves with relatively more equity and less debt.

Using “hold” in this way is both completely conventional and deeply misleading. In any other common English language usage, “hold” is an active verb or a noun with a similar connotation. You hold a baby in your arms. Please hold on tight to this rope. He had a strong hold over his colleagues.

This matters, because “holding” capital has become a disguised or implicit metaphor. The implication is that banks are being asked to sequester part of the asset side of their balance sheets – and this naturally leads to the perception that somehow “less is available” to lend, for example, to the real (non-financial) economy. I encounter this view frequently, even in sophisticated circles – for example, on Capitol Hill.

But this interpretation is a complete – and sometimes deliberate – misunderstanding of bank capital and the policies being pursued. (Anat Admati and Martin Hellwig have pointed out that there are many misperceptions in this area; but, of these, misconstruing capital is surely the most fundamental.)

Capital, in this context, is simply a synonym for equity, which is on the liability side of a bank’s (or anyone’s) balance sheet. It refers to how a bank (or other firm) finances its activities, not to how it uses the funds that it has available.

Higher capital requirements mean, in essence, more equity funding and – by implication, under any sensible definition – relatively less debt for a given balance-sheet size. This is an attractive and sensible policy, because today’s global banks have relatively small slivers of equity underpinning their operations.

The best comparable measures of bank capital are those found in the Global Capital Index produced by Thomas Hoenig, Vice Chairman of the Federal Deposit Insurance Corporation. Hoenig looks at how much equity banks have in the simplest and most transparent measure (also known as leverage). Six years after the world’s largest financial crisis, our megabanks have equity amounting to no more than 5% of their balance sheets. (In fact, some banks have not much more than 3% equity.) That means that 95% of their operations are financed by debt – and thus that only a small negative shock would be needed to push them toward insolvency.

Many measures are still needed to address this vulnerability, including the formalization of international cooperation to handle failing financial firms. We need these firms to be able to fail without causing a global panic. They should prepare meaningful “living wills,” to show how this will be possible; in fact, such plans are a requirement – still unimplemented – of the 2010 Dodd-Frank financial reforms in the US.

But there is a much simpler step that would make a big difference: A senior policymaker, such as a member of the Federal Reserve’s Board of Governors or the president of the New York Fed, should make a speech that explains clearly what bank capital is (and what it is not).

Journalists who ignore the guidance on terminology in this speech should be called – in private – by the Fed. The Fed devotes considerable effort to ensuring that the public understands its monetary policy; officials should devote similar effort to communicating regulatory policy precisely.

And Hoenig’s index should be picked up and publicized by a major organization, such as the IMF. We need not only more precise use of language, but also timely and accurate measurement of banks’ capital levels.

Project Syndicate

SIMON JOHNSON
Simon Johnson, a former chief economist of the IMF, is a professor at MIT Sloan, a senior fellow at the Peterson Institute for International Economics, and co-founder of a leading economics blog, The Baseline Scenario. He is the co-author, with James Kwak, of White House Burning:

Calculating the Grim Economic Costs of Ebola Outbreak | By ANDREW ROSS SORKIN | OCTOBER 13, 2014

Lagarde, the I.M.F. head, cautioned against scaring the world away from all of Africa. Reuters photo

The topic everyone on Wall Street is discussing urgently but quietly isn’t the volatile stock market.

It is Ebola.

While thousands of health care workers seek to control the deadly virus in West Africa, and the Centers for Disease Control and Prevention and other medical professionals seek to prevent its outbreak in the United States, financial analysts and others have been trying to estimate — or “model,” in Wall Street parlance — the potential effect on the global economy.

The math is not pretty.

The most authoritative model, at the moment, suggests a potential economic drain of as much as $32.6 billion by the end of 2015 if “the epidemic spreads into neighboring countries” beyond Liberia, Guinea and Sierra Leone, according to a recent study by the World Bank.

That estimate is considered a worst-case scenario, but it does not account for any costs beyond the next 18 months, nor does it assume a global pandemic.

Over the weekend, the topic of Ebola was front and center at the annual meeting of the International Monetary Fund and World Bank in Washington, where central bankers, world leaders and some of Wall Street’s senior executives held a series of meetings and dinners.

Christine Lagarde, the managing director of the I.M.F., was seen wearing a button that read: “Isolate Ebola, Not Countries.” She implored the audience: “We should be very careful not to terrify the planet in respect of the whole of Africa.”

That’s because the economic cost of fear, far more than medical costs, may be the most expensive outcome.

“Economic consequences also result when fear and concern change behavior,” David R. Kotok, the chairman and chief investment officer of Cumberland Advisors, wrote in a report late last week, addressing the potential fallout on gross domestic products. “If consumers and businesses retrench by reducing flights on airplanes, changing vacation plans or altering business connections in a globally interdependent world, G.D.P. growth rates will fall farther. We do not know how much, at what speed, or for how long.”

Shares of airline stocks like United and American fell on Monday as some investors began to worry about the prospect of travel bans for airlines from West Africa to Europe and the United States.

Andrew Zarnett, an analyst at Deutsche Bank, wrote a recent report that examined the potential effects of Ebola and compared it to the economic toll of the SARS epidemic, which cost Asian airlines about $6 billion in 2003.

“History has shown us that should the Ebola epidemic spread domestically, it will have a significant impact on the airline and the entire hospitality sector,” he wrote, according to FXStreet, a financial news service.

And nobody has yet fully calculated the numbers on the cost to the health care system: training, testing, treatment, waste disposal — and all the hospital beds that are sitting unused in isolation areas. (Perversely enough, many of the health care costs could conceivably help that industry in the short term because additional money is being spent.)

Of course, the greatest economic danger is in the economic isolation of countries. “By default or design, it really is an economic embargo,” Kaifala Marah, finance minister of Sierra Leone, said over the weekend about his country, which has been all but cut off from the outside world.

The newest estimates about the economic cost of Ebola, conducted by John Panzer and Francisco Ferreira of the World Bank, may be the deepest look at the problem by any analyst or economist. The report notes that in the very short term, assuming that the spread of Ebola is contained, the economic costs should be low, about $359 million.

The study gets more worrying as the authors examine the economic prospects 18 months out.

The authors developed the “Ebola Impact Index.” As one of their advisers, Marcelo Giugale, senior director of the World Bank’s global practice for macroeconomics and fiscal management, wrote of the index: “It roughly tells you how likely countries in Africa, Europe and the U.S. are to be affected by Ebola. They then used some pretty sophisticated statistical tools to model the economic links between West Africa and the rest of the world. And finally, they built two ‘scenarios’ for how governments and people might behave.”

One scenario contemplates containment of the virus with no more than 20,000 cases. That’s the good version. The bad version is this: Governments make a series of mistakes that lead to 200,000 cases of Ebola.

It is that scenario that they estimate would cost $32.6 billion. (This may sound cynical, but that is still lower than one-quarter of Apple’s annual revenue.)

“What makes all this very interesting is that the final economic toll of Ebola will not be driven by the direct costs of the disease itself — expensive drugs, sick employees and busy caregivers. It will be driven by how much those who are not infected trust their governments,” Mr. Giugale wrote.

Wall Street has long built spreadsheets trying to estimate employment, economic growth figures and the values of businesses. But the economic variables of a true pandemic are almost incalculable. It becomes a series of guesstimates about the psychology of global citizens.

Right now, the economic challenges of the outbreak of Ebola are minimal. Let’s hope they remain that way.

The New York Times

Who Killed the Nokia Phone? October 14, 2014

HELSINKI – It seems to be a law in the technology industry that leading companies eventually lose their positions – often quickly and brutally. Mobile-phone champion Nokia, one of Europe’s biggest technology success stories, was no exception, losing its market share in the space of just a few years. Can the industry’s new champions, Apple and Google – not to mention titans in other tech sectors – avoid Nokia’s fate?

In 2007, Nokia accounted for more than 40% of mobile-phone sales worldwide. But consumers’ preferences were already shifting toward touch-screen smartphones. With the introduction of Apple’s iPhone in the middle of that year, Nokia’s market share shrunk rapidly and revenue plummeted. By the end of 2013, Nokia had sold its phone business to Microsoft.

What sealed Nokia’s fate was a series of decisions made by Stephen Elop in his position as CEO, which he assumed in October 2010. Each day that Elop spent at Nokia’s helm, the company’s market value declined by €18 million ($23 million) – making him, by the numbers, one of the worst CEOs in history.

Elop’s biggest mistake was choosing Microsoft’s Windows Phone as the only platform for Nokia’s smartphones. In his “burning platform” memo, Elop compared Nokia to a man on a burning offshore oilrig, facing a fiery death or an uncertain leap into the frigid sea. He was right that business as usual meant certain death for Nokia; he was wrong to choose Microsoft as the company’s life raft.

But Elop was not the only person at fault. Nokia’s board resisted change, making it impossible for the company to adapt to rapid shifts in the industry. Most notably, Jorma Ollila, who had led Nokia’s transition from an industrial conglomerate to a technology giant, was too enamored with the company’s previous success to recognize the change that was needed to sustain its competitiveness.

The company also embarked on a desperate cost-cutting program, which included the elimination of thousands of jobs. This contributed to the deterioration of the company’s once-spirited culture, which had motivated employees to take risks and make miracles. Good leaders left the company, taking Nokia’s sense of vision and direction with them. Not surprising, much of Nokia’s most valuable design and programming talent left as well.

But the largest impediment to Nokia’s ability to create the kind of intuitive, user-friendly smartphone experiences that iPhones and Android devices offered was its refusal to move beyond the solutions that had driven its past success. For example, Nokia initially claimed that it could not use the Android operating system without including Google applications on its phones. But, just before its takeover by Microsoft, Nokia actually built a line of Android-based phones called Nokia X, which did not include Google apps, but instead used Nokia maps and Microsoft search.

Why didn’t Nokia choose Android earlier? The short answer is money. Microsoft promised to pay billions of dollars for Nokia to use Windows Phone exclusively.

Given that Google gives away its Android software, it could not match this offer. But Microsoft’s money could not save Nokia; it is not possible to build an industrial ecosystem with money alone.

Elop’s previous experience at Microsoft was undoubtedly also a factor. After all, in difficult situations, people often turn to what is familiar. In Elop’s case, the familiar just happened to be another sinking company. After hearing that Nokia had chosen Windows, Google director Vic Gundotra tweeted: “Two turkeys do not make an eagle.”

Apple and Google should not rest easy. Like Nokia in the mobile-phone industry – not to mention Microsoft and IBM in the computing industry – one day they will lose their leading position. But there are steps they can take to prolong their success.

First, companies must continue to innovate, in order to improve the chances that disruptive technologies emerge from within. If market leaders implement a system for discovering and nurturing new ideas – and create a culture in which employees are not afraid to make mistakes – they can remain on their industry’s cutting edge.

Second, major firms should keep track of emerging innovators. Instead of forming partnerships with smaller companies that suit their current business model, major firms should work with inventive startups with disruptive potential.

Finally, though successful companies must constantly innovate, they should not be afraid to imitate. If Nokia had immediately begun to develop products modeled after the iPhone, while addressing related patent issues effectively, the mobile-device business would look very different today.

Nokia’s experience also carries an important lesson for regulators, particularly in the European Union. Attempting to quell disruptive technologies and protect existing companies through, for example, antitrust crusades, is not an option. Indeed, that approach would ultimately hurt the consumer, both by impeding technological progress and eliminating price competition – like that from Samsung’s Android devices, which forced Apple to lower iPhone prices.

Herein lies the most important lesson in Nokia’s fall. Technology companies cannot achieve success simply by pleasing their board of directors or even striking multi-million-dollar deals with partners. Whichever company makes the consumer happy – whether a well-established multinational or a dynamic startup – will win. Companies that lose sight of that are doomed.

Project Syndicate

Authors: PEKKA NYKÄNEN
Pekka Nykänen is co-author of the book Operaatio Elop, about Nokia’s rise and decline, which was recently published in Finland.

MERINA SALMINEN
Merina Salminen is co-author of the book Operaatio Elop, about Nokia’s rise and decline, which was recently published in Finland.

The Prime Minister of Finland Blames Apple for the Country’s Economic Woes | By Lily Hay Newman | Oct 14, 2014

Prime minister Alexander Stubb in August.
Photo by THIERRY CHARLIER/AFP/Getty Images

Finland’s economy has been struggling for the last few years, and on Friday, Standard & Poor downgraded the country’s debt rating from AAA to AA+. But in an interview with CNBC on Monday, Finnish Prime Minister Alexander Stubb posited an explanation for the decline: Apple.

Stubb pointed out that two of Finland’s biggest industries, mobile innovation in Nokia and paper manufacturing/products, were hobbled by the success of Apple devices like the iPhone and iPad.

“We have two champions which went down,” he said. “A little bit paradoxically I guess one could say that the iPhone killed Nokia and the iPad killed the Finnish paper industry, but we’ll make a comeback.”

Phew, that’s rough. It doesn’t really seem like a paradox … but whatever, the man is clearly upset. Microsoft bought Nokia in April, and CNBC reports that the Finnish Forest Research Institute said there was a “poor situation” for the paper production business in 2013. Perhaps the trauma of layoffs at Rovio, the Finnish company behind the mobile game Angry Birds, was too fresh for Stubb to talk about.

Stubb put a brave face on though and added some positive comments. “Forest is coming back in terms of bio energy and other things. And actually a new Nokia is emerged in terms of (Nokia) Networks,” he said. “Usually what happens is that when you have dire times you get a lot of innovation and I think from the public sector our job is to create the platform for it.”

Hopefully he can make it happen before Apple is in the market for a country-sized, curved-glass campus headquarters.

Lily Hay Newman is lead blogger for Future Tense.

Future Tense is a partnership of Slate, New America, and Arizona State University.