Emirates a micro power

Magazine covers can often offer the best guide to the future – though upside down. I am thinking of the famous BusinessWeek cover of August 1979 that proclaimed ‘The Death of Equities’ before the beginning of the 1980’s bull market, the 2014 Time magazine cover with the headline ‘Can anyone stop Hilary ?’, or the Economist cover ‘Brazil takes off’ in November 2009 just before its markets collapsed, and then ‘Has Brazil blown it ?’ in September 2013 as the country was about to boom.

In this light, I was wary to recently read the Economist magazine (August) declare Ireland as an ‘unlikely diplomatic superpower’ because of the array of important policy seats it holds (UN Security Council, Chief economist ECB, etc). The Economist curse soon struck, and Ireland lost hold of the EU Trade Commission.

In many respects, Ireland is very powerful diplomatically, not least compared to other similar sized states. This largely due to the performance of its superb diplomatic service (which is very much underestimated in Ireland) and outward focused state organisations like the IDA (Industrial Development Authority). Also, Brexit has been an excellent proving ground for Irish diplomacy and in addition, should Joe Biden be elected as US President, this will significantly bolster Ireland’s place in Europe (Biden is likely the most fervent Irish American President).

However, the secret of Irish diplomatic success is that in general Irish people do not take themselves too seriously, and many would laugh at the notion of being a diplomatic superpower.

Maybe a ‘micro-power’ is a better term for a geopolitically influential small state. I’ve derived this from former French foreign minister and commentator on diplomacy, Hubert Vedrine’s term ‘hyper-puissance’ which means ‘hyper power’, or more than a superpower.

The idea of the ‘micro-power’ really came to mind when Israel and the United Arab Emirates recently normalised diplomatic relations. Both are powerful, small states. Israel’s power derives from its military, its diaspora and technology industry while the Emirates is politically powerful across the MENA region and financially and economically very influential (Indeed, one expert, Afshin Molavi, has described Dubai as the ‘Hong Kong of India, or the Singapore of the Middle East’).

While the deal between the two countries very much sidelines the cause of the Palestinians, it reflects the speed and complexity of political change across the Middle East, and, in my view the ambition of both states to be considered ‘micro-powers’. The deal means both Israel and the UAE will gain new markets, cement relations with the White House, and deepen their collective rivalry with Iran.  

In a world that is quickly leaving globalization behind, entering a multipolar world order, the idea of the ‘micro-power’ may be one of the new diplomatic constructs of the 21st century. Regular readers will know that I have written a lot about the small, advanced economy model (and David Skilling’s newsletter on this is worth a read https://davidskilling.substack.com/) but not all small, advanced states are micropowers – Austria, Finland and New Zealand all top the list in terms of socio-economic models, but their diplomatic reach is not overawing.

My criteria for a micro-power are that it must be regionally dominant, count upon a significant resource (in Ireland’s case its diaspora, in the Emirates’ case its wealth and reputation for vision), and must be durable (Switzerland is the best example here).

As the idea of the ‘micro-power’ takes hold (I hope), there will be a number of considerations to bear in mind. One is that like superpowers, we already have the first ‘micro-power’ cold war between the Emirates and Qatar (it has thawed in recent months). Another question is what micropowers are for, beyond bolstering their own influence in the world.

In general, in a world that is transitioning from being driven by geographical to values based alliances, micropowers such as Norway, Ireland and Switzerland can act against the denigration of the rule of law and democracy internationally, and can and in my view should take the lead in pushing the remaking of international institutions – from the UN to the World Health Organisation (WHO).

Some micro-powers in the making, like Singapore, may choose to dodge competing value systems – they risk being subsumed in the crush between the USA and China – and try to foster a form of regional neutrality. Others, like Scotland, have a long way to travel if they want to become micro-powers, but at least they have their history to guide them. Scotland was once the intellectual fulcrum and centre of innovation of Great Britain, and in time could again take on this role.

Have a great week ahead


A Change for Banking

The elevation of Jane Fraser as CEO of Citi bank is a welcome sign for women in finance, especially with the UN General Assembly discussing the status of women next week. She joins a growing roster of prominent women in finance – the head of the IMF, head economists at the OECD and World Bank, President of the ECB, former Chair of the Fed and amongst others, the very effective Governor of the Russian Central Bank.   

In general, the rise of women to the top of large institutions is a marker of social development, openness and the transition to the new economy – a debate that notably is also led by a number of female economists (the World Economic Forum Futures Council for the New Economy is my reference point). However, the top of the pyramid can often be misleading. For instance, there are numerous accounts by female economists of how they have been denigrated in the academic job markets or through their careers (have a read of some of the recent interventions by Claudia Sahm).

Back to Citi. Jane Fraser faces a considerable challenge running a legacy bank. Running an enormous bank in the context of low interest rates, potentially peaking markets, complex regulation and the legacy of past balance sheet accidents and IT projects (more of a problem for European than American banks) is a difficult ask and likely to test her patience.

However, at a time when the scope for transformative mergers in banking is very small (cost cutting seems to be the only rationale for consolidation), having a woman run a bank may itself be transformative.

Let me explain myself. Many years ago I was engaged in some work on behavioural finance, specifically so in terms of how people view risk, how much risk they take as investors and how they manage it. One research finding of note is that in finance, and other walks of life, women take less risk than men.

In fact, much of this phenomenon is due to a small group within the sample of males, who take very high levels of risk. The comparison of risk taking between men and women got a lot of interest and I ended up presenting it to groups of women as far away as Sydney and Singapore. In time, and with the benefit of feedback, this risk story became one about what ‘a bank for women’ might look like.

Here, there is a risk that some people consider a bank for women is one staffed entirely by women (Ellevest is an example). I am not so sure. The idea of a bank for women comes about largely because many women are more open about what they don’t like and understand about banking than men are.

To that end, a bank for women is one where there is clarity about the function of the services a bank offers, an absence of condescension and obfuscation, transparency over costs and transactions, encouragement of financial education and a general lack of jargon around products, and a bank where customers are not encouraged to buy products that are too costly or too risky. This somewhat idealized concept of a bank should also be one that men like.

At a time when the valuation of European banks has hit its lowest level since 1992, and where large US banks still trade close to the levels of this March, ‘a bank for women’ along the lines described above may be an interesting and viable alternative. To my knowledge, there have been a few attempts (at a ‘bank for women’) but none has yet been a great success (the Women’s World Bank and several microfinance initiatives stand out). However, fintech may help.

One attraction is that the algorithms that greet customers of digital banks can be set up to treat men and women the same way (some weeks ago I wrote about Joy Buolamwini’s Algorithmic Justice League). Another innovation is that the standard building blocks in portfolios (e.g. global equity portfolio) are now much cheaper and accessible because of the growth and competition in the ETF (exchange traded funds industry). Another trend to watch, which is more prevalent in China than say Europe is that the wealth of data on our consumption habits, should in principle make credit scoring more accurate.

If these trends continue, a ‘bank for women’ type approach might revitalize a tired sector.

Have a great week ahead,


Going West

Biggles, euro fighter?

Going West

‘A Camel (Sopwith Camel – first World War fighter plane), blue skies, and plenty of Germans is the height of my ambition…’ p. 362, ‘Biggles flies East’ Capt W.E. Johns.

The above quote from one of many ‘Biggles’ books, written in 1935, comes from a very different time with different sensibilities, but is worth dragging up because I feel it captures the spirit that Boris Johnson and his Brexiteers want to portray to their followers – a Britain that is superior, in charge and powerful.

If only Brexit could be as simple as ‘buzz across the Channel, give the foreigners a bloody nose…get home in time for tea’. It’s not.

The ‘Biggles’ quote strikes a chord for at least two reasons. Unlike say Germany and France – it seems to me that many British politicians (the majority on the Brexit side) are locked in history. Their reference points are manifestly not a coherent vision of what Britain will look like in future, but more an attachment to a Downton coated celebration of past victories (notably the two World Wars).

That helps us to understand that Brexit is a crisis of national identity, rather than say a quibble with the regulatory complexities of EU membership. This view may also help to explain the chaotic ‘Game of Thrones’ nature of the Brexit process. A crisis of identity will, like a financial crisis, burn its way through the body politic until leadership and clarity emerge. This is not yet the case. More political careers will be spent and arguably sterling has a few more convulsions left before this all ends.

Back to Biggles. One thread that comes through in the Biggles books is the importance of honour, bravery and sticking to the rules. In the books, Biggles is sound on these points, foreigners less so. This is now changing.

In a recent post entitled ‘Fantastic Corruption’ (July 25th) I cited the importance of the rule of law (and noted Tom Bingham’s book on this), and how in the post globalized age we have entered, this is being degraded in both Washington and London.

The latest crisis in the Brexit saga, the introduction of a bill in Parliament that contravenes the Brexit Withdrawal Act, exacerbates the trend of the degradation of the rule of law, which in the eyes of so many has historically been exemplified by Britain. That politics can trump the law is dangerous and distasteful.

Boris Johnson’s move may well be a negotiating ploy to force the EU to close a deal as the October deadline approaches, and the behavior of financial markets (notably sterling) suggests that this is the case. If ‘breaching international law’ is a tactic, it is a costly one, and will rob Britain of respect, trust and credibility – all of which it will need if it is to make a go of ‘Global Britain’ or whatever comes after Brexit.

I have resisted writing on Brexit for some months partly because it is so unpredictable, partly because it is difficult to find new things to say and partly because events elsewhere are equally mind grabbing. The overall pattern of these events, of which Brexit was the first, points to a post globalized world, where boundaries and ties are being broken, and where laws, institutions and ways of doing things are being challenged.

The implications of this are manifold.

One is that the fracturing of ties (NordStream 2 is next?) and the remaking of nations (i.e. Belarus, Lebanon?) will encompass Scotland and Ireland. Scotland will likely vote for independence within the next six years, and it is now a matter of conceiving how independence can be achieved in as successful and less disruptive way.

Equally, there is now much talk of a united Ireland, especially I find, in the US. The first step here must be an imaginative plan to reshape Northern Ireland’s economy and society. For all the talk about protecting the peace process, very little has been done to transform Northern Ireland.

Yet, one somewhat positive side-effect of the Brexit debate is to shine a light on many of these issues and illuminate the lack of appreciation many in Westminster have for Northern Ireland in particular and Irish history in general. Arguably, a film (‘Titanic’) and tv series (‘Game of Thrones’) have done more for Northern Ireland’s fortunes than its local and London based leaders.

What is coming is a transformation of the political realities of the two islands off the west coast of Europe to an extent not seen since perhaps the thirteenth century. Ireland and Scotland will be European, rule of law countries. Boris Johnson’s England may sadly be the odd man out.

In a better Brexit world of the 21st century, Biggles might fly a Euro-fighter, with an Austrian co-pilot, and alternately fly out of Dutch and German airbases. In the evening he would return home to his Norwegian wife, and drink Italian wine. That would be the height of his ambitions.

Have a great week ahead,


A Tax on Bullshit Jobs?

To the rescue?

In last week’s note I outlined how the financial and economic worlds exist under a heavy monetary shroud. The cover of central banks deprives fiscal policy, supply side reforms and financial market reforms of the urgency that is needed for them to activate and innovate.

In particular, fiscal policy is still very much in emergency mode – governments are focused on the need to restart economies, and less on their longer term structural needs, though the recently announced 100 bn Eur recovery plan in France is a step in the right direction.

However, with the monetary pendulum at an extreme, the post COVID policy environment might usher in a transition from a decade of (over) aggressive monetary policy to more inventive fiscal policy, and supply side reforms (changes to the rules, regulations and structure of the economy). There are several reasons for this.

Monetary policy is now arguably reaching its limits in terms of the deployment of central bank balance sheets, and also in the plain fact that many of the problems central bankers declare they are trying to fix – the climate, inequality and racism (there is a Democratic proposal in Congress to change the mandate of the Federal Reserve to reduce racial inequality)  – are much better left to politicians and policy architects than the blunderbusses of central banks.

Central to the problems of our day, productivity, will in my view remain suppressed by the inefficient investment caused by oversupply of liquidity, and can only be repaired (for instance productivity in the UK is at multi decade lows) by ongoing investment in education, technology and reskilling.

Against this background, the potential for the passing of the policy baton from central banks to finance ministers is made more interesting by at least two new trends. The first is the way in which the labour market in changing, and the second is the percolation of ‘values’ into policy making.

In continental Europe, the coronavirus policy response has shown the value of flexible work practices and has so far staved off large redundancies. In other countries it is not so kind and in recent years I have a sense that labour markets are becoming ‘tinder-ized’ in that workers are ready to sacrifice security for a sense of liberty. The worry here is that in atomised labour markets, aggregate wages will be depressed by competition, workers won’t have the level of pension and healthcare benefits they might enjoy in more traditional systems, and across the board there is less structured learning by workers.

The economic consequences of the coronavirus have made these risks clear, and the public emergency around the virus has also managed to illicit appreciation for public sector workers (nurses for example), many of whom have, in recent years, been consistently deprived of resources by the governments they serve. To a certain extent, one accomplishment of the coronavirus has made clear the social value of certain occupations.

This particular thought was reinforced by the sad death last week of the polemic American anthropologist David Graeber. He has many claims to fame – inspiring the Occupy movement in the early 2000’s, coining the phrase ‘we are the 99%’, author of ‘Debt – the first 5,000 years’ and also more recently the book ‘Bullshit Jobs’.

In the book he strips away the real social value of certain roles, to quote from one of his articles ‘A world without teachers or dock-workers would soon be in trouble, and even one without science fiction writers or ska musicians would clearly be a lesser place. It’s not entirely clear how humanity would suffer were all private equity CEOs, lobbyists, PR researchers, actuaries, telemarketers, bailiffs or legal consultants to similarly vanish’.

Graeber’s view is a relevant and provocative one. I will let readers do the ‘bullshit job’ test in the privacy of their own home, or office. What interests me is what governments can do about this, especially in the light of the lessons of the coronavirus crisis for public service.

I think that from this starting point, especially for the Anglo-Saxon countries and some emerging economies, there are broadly two things that can be done. The first, simply put, is to reintroduce the narrative around the importance of public projects in economies and societies, and back this with investment.  In the US and UK public projects like education, healthcare and the civil society in general are being devalued. For instance, the latest gossip in Washington is that Donald Trump is alleged to have asked his generals ‘why did you serve?’, ‘why didn’t you want to make money?’.

The second is to start a policy experiment that explicitly ties the social value of jobs to economic policy. One approach, though extreme, might be to have a tax reduction for doctors and a tax hike for derivatives traders.

A first, more subtle approach might be to grant greater incentives for workers to build up human capital in certain areas. This might be more relevant in countries where education fees are high and student debt burdensome.

An enlightened government might ask a body like the OECD to draw up a broad, internationally recognized code of job roles, categorized by social impact. Then governments could add (or subtract) a tax (or incentive) depending on the social relevance of specific jobs. In such a system, a plastic surgeon might pay higher taxes, but more young doctors might be incentivized to work as accident and emergency surgeons.

An example that is close to me is that Cork Fire Brigade have for the first time since 2012 begun a recruitment campaign – we can ask what incentives could be put in place (in a historically tight labour market) to attract suitable candidates, who might otherwise work as property brokers?

I don’t know of governments who are explicitly tying the social value of occupations to tax policy, but I expect that in the post COVID world, it is an experiment that will soon be taken up.

Have a great week ahead,