Just One Word – ‘Plastics’

One of the memorable moments in the 1967 film ‘The Graduate’ is where the main character 21-year-old Benjamin Braddock is taken aside by a Mr. Maguire, who says ‘One word Ben  ‘plastics’, there is a great future in plastics!’

If the film was remade today, it is hard to know what might replace ‘plastics’ because there is such a mind boggling array of new technologies and technological applications bursting through. For example, a recent report by McKinsey on top technology trends flagged areas like ‘the future of programming’, ‘the bio revolution’ and ‘applied AI’ as the trends to watch.

I could add many more, but the point is that one characteristic of the post COVID economy is a bewildering array of new sub-industries, ESG related norms and consumer areas, that bring the future to our doorsteps almost to the point of exaggeration (e.g driverless flying taxis).

This wave of innovation is accompanied by a surge in entrepreneurship, and a noticeable improvement in the formation of entrepreneurs (one example is the entrepreneur incubator Entrepreneurs First). An important question for large companies is how to think about this array of innovation, how to gain exposure to it and relatedly how to defend business models against its disruptive effects.

One interesting schematic on disruption was recently published in the Harvard Business Review by three management consultants and looks at the vulnerability of different industries to ‘disruption’. More traditional industries like ‘plastics’ (diversified chemicals and rubber) are less prone to disruption, and in many cases tend to buy up brand innovators before they become disruptive (the beer industry is a case in point).

According the HBR schema, industries that are vulnerable to disruption are utilities, energy trading, consumer technologies and banking (investment and asset management). My personal view is that incumbent European banks have, with a few exceptions, failed to innovate and continue to be hampered by poor corporate governance and incentive structures, and unambitious governments and regulators. In some respects the best that can happen is that government and regulators aid the rise of digital banking, though again I am not optimistic that this will happen.

The case of fintech and the rise of digital money, banking and asset management illustrates the nexus between states, corporations and regulators, and helps to show why large corporations need to pay great attention to not only new trends in technology, but also new frameworks and ecosystems (see my May note).

The task of looking into and plotting the future, may be just a little too much for many CEO’s. In recent years the debate on the role of the corporation in socio-economic life has been re-ignited, and there is a consensus that corporations need to play a greater socially responsible role.

A good number are true to this – in the US social causes have been pioneered by progressive corporate leaders, though in Europe company heads are far more shy. While there is a very strong case to be made for corporates that have a more balanced contribution to their social, physical and financial environments there is also a sense that CEO’s now have multiple demands on their attention.

Still, apart from avoiding disruption there are good reasons for corporations to become ‘more involved’ in the future, if I can put it like that.

One is that the institutions, laws and frameworks that will marshall new areas like cyber security, climate damage and digital money will not only involve governments in their construction but other players from corporations, large cities, citizens assemblies and universities. Notably, some of the most interesting thinking I have seen on how to best police cyber security comes from corporates like Microsoft.

Another reason is that, as emphasized here, many of the new technologies that are mentioned in reports like that of McKinsey, have acquired a strategic value and in reality will be developed by tandem relationships of states and corporates – this will be the case with digital currencies, cyber security and artificial intelligence. Plastics never had this problem.

A third and perhaps yet underappreciated reason for corporates to think very hard about issues like the future of democracy, institutions and society is that changes in trust and how we capture identity are undergoing huge shifts. First of all, trust in democracy, politics and institutions in the Western world is falling and to a certain extent is being replaced by new forms of money, corporate brands and radical. This trend places a premium on companies that can build trust with consumers, and on the responsiveness of companies to events that threaten this trust.

The second element here is identity, specifically digital identity. Soon, a combination of cyber security, digital money and data protection will usher in the arrival of secure digital identities or passports. Theoretically this should contribute to more secure e-commerce and banking and potentially better online behaviour through reduced anonymity, but it also means that the channels through which companies interact with consumers will be more formalized and potentially better policed.

Few companies are ready for this.

Have a great week ahead,


Two Jabs

I have thankfully gotten my ‘two jabs’ and theoretically at least should be free to roam the world. Before I do that, a quick detour to John Prescott, once the UK’s Deputy Prime Minister from 1997 to 2007, who being attacked (an egg was thrown) whilst on an election canvas, responded with his fists against his assailant. As a result he was nicknamed ‘Two Jabs Prescott’. Prescott came to mind when I read of the physical attack on French President Emmanuel Macron.

What was noteworthy was not the stupidity of the attacker but Macron’s response afterwards – he stated that his role was to get out and meet people, hear their concerns and rebuild trust with them. With that, he has put his finger on one of the essential political issues of our time – that people no longer trust their governments and the institutions that rule over them. In France there is speculation (misplaced I think) that Marine Le Pen will sweep to power, and in the UK and beyond a growing realization that Boris Johnson individually is untrustworthy.

More broadly, a few surveys sketch a worrying picture. The PEW Centre in the US shows that trust in government is very low – only 24% of Americans trust their government (the low point was 17% during the Trump administration), compared to 50% after 9/11 and 77% during the Kennedy era.

The OECD Trust in Government project shows a similar picture – globally only 45% of people trust their governments and have a much higher level of trust in education and healthcare systems (in the USA healthcare and military personnel are amongst the most trusted professions – with politicians, banker and journalists at the low end of the trust spectrum).

Across societies, an interesting picture emerges. The World Values Survey shows that in smaller advanced economies – the Nordics and Switzerland for instance – people have a high (60%) level of trust in each other (this may be due to country size, culture and proximity of populations), but in many emerging countries with weak institutions and rule of law (i.e Colombia, Brazil, Ecuador and Peru), trust across societies is far lower (10%). What is striking is that trust levels in China are high, underlying a cohesive society and one where the ‘contract’ between the government and its people is still intact, something that is vastly underappreciated in the West.

Still, this generalized lack of trust in government and high variance in trust across societies has many implications for politics and commerce. The PEW Centre also report that in the US, France and the UK, a majority of people desire a major change in their political system (with citizens assemblies and referendums amongst the solutions proposed here, a la Ireland and Switzerland).

It suggests that in the democratic world (which according to many surveys such as one by the EIU, is shrinking), governments need to invest more in transparency, and in new ways of giving voice to their citizens – either at a local level or for example using social media to gather feedback.

At an institutional level, many institutions are not at all well understood by the people they oversee, central banks being prime amongst them. One example I often flag is the EU, whose leaders now speak of ‘European values’ but who at the same time have not thought out what this means in a tangible sense to the diverse nationalities that make up the Union, and how in a pragmatic way, it might bring them closer together.

Moreover, with respect to the new institutions of the 21st century, be they the guardians of the climate or cyber activity or bodies that will marshal new forms of money, public trust will be one of the most important criteria that drives their construction.

In commerce, there are two trends worth keeping an eye on.

The first is the rise of blockchain, and blockchain enabled means of exchange such as bitcoin. The theory behind blockchain is that its protocol works to bind two parties in a technologically trustworthy transaction or contract. More particularly, the idea of decentralized finance is that it operates outside the ambit of governments and central banks – bodies that are increasingly less trusted. We might even interpret the decision of Ecuador – a country where trust and institutional quality are very low – to adopt bitcoin as a money, as an affirmation of the above.

If you draw a graph of the decline in trust in government and the market value of crypto currencies there is good (inverse) fit, albeit with only eight years of data. So, a provocative way for governments to curb the use of bitcoin might be to boost the credibility of their own actions!

Relatedly, banking systems – which are in many cases too battered or too ill formed to be trusted – are being replaced by other more trustworthy brands. In Kenya for example, the mobile payments system MPensa is widely used and trusted, in part because it is operated by a brand (Vodafone) that is (anecdotally) trusted by Kenyans.

The idea of trust in the economy is a vast and complicated issue, my own preference is that we have governments and institutions we can trust and admire, but the reality is that there is little innovation and dynamism in today’s institutions. I suspect that instead, the next ten years will see a wave of entrepreneurship in money and democracy, some of it ugly and I hope, the sum of it constructive.

Have a great week ahead,


Transparency International

In his book ‘On China’ Henry Kissinger states that “What distinguishes Sun Tzu from Western writers on strategy is the emphasis on the psychological and political elements over the purely military.”

In that context, President Biden’s commissioning of a report on the origins of the coronavirus is more than just a fact finding project, with respected scientists like Francis Collins of the National Institutes of health as well as partisan politicians such as Sen. Tom Cotton calling for an inquiry into the possibility that the virus was generated in a laboratory. In recent days Anthony Fauci the NIAID Director has added to these calls.

There are plenty of reasons to consider the possibility that the coronavirus could have emanated from bio-experiments, not least the hitherto inability of researchers to decisively pinpoint its precise natural origins. What is striking however, is the lack of cooperation shown by the Chinese authorities in such investigations – either by the World Health Organisation or other bodies (notably calls by Australia for an inquiry have been met with an aggressive reaction from China).

It is this lack of transparency that may condition China’s relations with the rest of the world in coming years, and upon which the USA may choose to focus the ‘psychological and political elements’ of its Asia geopolitical strategy.

As a starting point on transparency, the ‘West’ is not sufficiently curious nor well informed about China, its workings and not sufficiently recognisant of the fact that China has its own deeply rooted political economy. At the same time, China is not ‘open’ to Westerners in the sense that there are linguistic, cultural and strong political barriers to Westerners living in China.

For instance, there are close to 174,000 registered foreigners living in Shanghai (a city of 26 million), compared to the fact that there are at least 5 million Chinese living in the USA. Another perspective is to consider students – in 2018 there were over 120,000 Chinese studying in the UK alone, but only 20000 Americans and 10000 French (the two biggest groups of Westerners in China) studying in China. To my mind this lack of proper two way flow in people between China and the West is one of a number of factors that severely curtail globalization.

So, China is something of a mystery to outsiders, and to a degree to its own citizens (the Tiananmen Square massacre never happened and now any consideration of it in Hong Kong is off limits). China’s economic data is also a case in point. The official line is that Chinese GDP trips along at a rate of 6-7%, though a recent paper from the Brookings Institution suggests that trend GDP is close to 2% lower than official figures, and equally the rate of investment is 7% lower.

Despite a manifest rebound in growth across the world, the health of China’s economy will come into sharper focus in coming months. There are growing signs that credit growth is beginning to slow, and many of the underlying indicators of its economy – industrial production, services activity, economic surprise indicators, car sales, freight activity and electricity generation, land activity and cement production are dropping from recent highs. This comes at a time when inflation in China is rising.

What is most interesting is that the Chinese authorities’ response to this mixed economic data is uncharacteristically (compared to the West) sensible. China is actively trying to prune back excesses in its banking and property sectors, trim crypto activity and halt the rise in its currency. In that respect it is a model for others to follow.

Diplomatically this is not the case – most of China’s neighbours tire of its needling, be it border skirmishes with India, air space incursions over Taiwan, Japan and South Korea, or trade pressure on Australia.

Against this background, the Biden administration may have a greater aim – ‘transparency’ based diplomatic pressure. By seeking to – controversially through Wuhan – shine a light on the lack of openness and transparency in Chinese politics the US may diminish any soft power China has, sow doubt in its intentions and potentially turn the economic screw against China. There are two ways it which this could happen.

The first obvious one is by undermining the broad Belt and Road initiative, whose momentum has slowed badly and is increasingly contested in Europe and parts of Africa. Another, second approach is to set the rules of global corporate governance. By raising the bar on corporate governance globally, the US may make it more onerous for Chinese companies to grow more aggressively and expand overseas, not to mention to limit their access to international capital markets. A global corporate tax agreement could be followed by further measures to improve disclosures on accounting and their enforcement, effectively beefing up governance and oversight. In casting the Chinese economy and its corporates as untransparent the US could impose a capital market penalty on China.

If that is the plan, what then should President Biden do about Tesla, AMC and other market darlings?

Have a great week ahead,