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Innovation and its Discontents

2017

Volume 21|22


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Contents 6 Overview Cover Story 10 Interview with Hutchison Global Communications 12 Catherine Szeto wins IAIR Award for IR Manager of the Year - Conglomerates 14 CEO Summit Cover Story

56 The China Delusion 60 Desperate Central Bankers Economics

World Affairs

64 Who Has Space for Renewables?

16 Reversing Brexit

68 Brexit and the Pound in Your Pocket

20 A Strategy to Unite and Safeguard Europe 24 The EU’s Bold New Strategy

72 The Perils of Debt Complacency 76 The Case Against Cash

26 Building a Progressive International 80 Overhauling China

Iair Awards 30 CEO & Top Executives of the Year

84 Can South Korea Make More Babies? 88 Escaping the New Normal of Weak Growth

32 Corporate Awards

Innovation & Technology

37 Broker Awards

92 Innovation and its Discontents

38 Legal Awards

96 The Perils of Planned Extincion

Business & Finance 44 InstaForex: Barometer of Forex Development

99 Micromata Wins Excellence of the Year for Innovation - Software Solution in London

46 Will Brexit Break London’s Place as FinTech Capital?

100 Tech Jobs For Africa

48 Probing the Productivity Paradox

102 Internet or Splinternet?

50 Growth in a Time of Disruption

106 On the Cusp of an Al Revolution

52 Hundt Legal Consultancy, an international legal advisor in UAE

110 How Scary is Disruptive Technology?

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Publisher/Director Guido Giommi Chief Editor Imani Nicole Jones Editor, America Scarlett Williams Editor, Asia Eric Davide Editors Claudia Chiari Alessia Rosa

International Subscription Kate Rios Art Director Nick Lowen Graphic Design Mary Thompson

International Alternative Investment Review (WorldExcellence) Volume 21-22

E d i t o r i a l O f f i c e s : London, Milan, New York, Singapore, Dubai and Hong Kong

Copyright © 2017 International Alternative Investment Review. All rights reserved. Reproduction in whole or in part is prohibited without prior written permission of IAIR Review. Information is based solely on sources believed to be reliable, though the accuracy has not been verified by IAIR Review. Neither the information in IAIR Review nor the opinions expressed should be taken as a solicitationfor investment. IAIR Review accepts no liability for actions based on the information herein.

© Project Syndicate 2017

ISSN 2037-5735


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OVERVIEW

Regional Slowdown

Politics Take Center Stage

Expected in the Wake of Brexit

Outside of the UK, the economic damage from the United Kingdom’s vote to leave the EU is expected to be most profound in the Eurozone. In the aftermath of the decision, FocusEconomics panelists have significantly altered their forecasts for the Eurozone economy and many of its constituent countries. Before the vote, our panel had considered the region’s recovery to be firmly on track as steady domestic demand had fueled growth in the first quarter of the year and the bloc had showed resilience to external headwinds. Our panelists projected that economic activity would pick up steam in 2017 and they saw GDP growth remaining broadly steady over the long-term horizon. Now, the Eurozone economy is expected to slow down in 2017 as contagion from Brexit hits the region, and the long-term growth outlook has soured. Brexit will continue to dominate the headlines in the coming months, sidelining other economic events. Brexit could also fuel political instability in the bloc through possible contagion effects and it will likely have ramifications for migration and the EU budget. 6

The Eurozone economy started 2016 on a high note, growing at the fastest pace seen since Q1 2015. GDP picked up from Q4 2015’s 0.4% expansion over the previous quarter to a robust 0.6% increase in Q1 on the back of firm domestic demand. However, the pick-up in momentum seems short-lived and the FocusEconomics panel expects the economy to have slowed to a 0.3% expansion in Q2. Brexit threw the EU into unchartered territory with economic and political ramifications for the bloc and political risks have sharpened. Spain remains in political limbo as no political party or likely coalition holds enough seats to form a majority government. In Italy, Renzi has promised to resign if the referendum fails and the country could see a period of political gridlock akin to that of Spain. Furthermore, across the Eurozone rising Euroscepticism is threatening the political status quo. Meanwhile, Ireland’s Statistical Institute stunned analysts this month when it revised 2015’s GDP growth from 7.8% to a jaw-dropping 26.3%. The figure was attributed to a surge in fixed investment and export growth due to the country’s success in attracting multi-national companies, however, the figure will have ramification affects and Ireland will have to increase its contributions to the EU budget.

International Alternative Investment Review 2017


OVERVIEW

GERMANY

Growth Expected to Lose

Brexit Drives Bonds Yields

Steam in 2016

into Negative Territory

Despite starting the year on a solid footing, growth in the Eurozone economy is expected to moderate this year. After growing 1.6% in 2015, the Consensus Forecast is for 1.5% growth this year, which is unchanged from last month’s projection. Ultra-loose monetary policy and an improving labor market should provide a cushion to the bloc’s economy amid poorer confidence and increased downside risks due to Brexit. Next year, the effects of Brexit will be more pronounced in the region and the Eurozone economy is seen as slowing to a 1.4% increase. Regarding the economies in the Eurozone, forecasts for almost half of the economies in the region were revised down, partly due to Brexit. Analysts revised down their 2016 GDP projections for 8 of the 19 countries in the region, including major players  France  and  Italy. Meanwhile, analysts’ forecasts were left unchanged for 8 countries including  Spain  and Germany. The panel revised upwards the forecasts for Cyprus, Finland and Malta.

Early signs are pointing to a slowdown in the German economy in Q2, following solid growth in Q1. Exports and industrial production both contracted in May, a month prior to the Brexit vote. More recent indicators have sent mixed signals regarding the impact of the Brexit vote on Germany’s economy. While the Ifo Business Climate Index—one of the first major releases taking into account the UK’s referendum—moderated in July in the wake of the Brexit vote, in the same month the composite PMI increased to its highest level so far this year. Further consequences of the Brexit vote were felt in the financial markets, where the German government issued its first ever 10-year bond with a negative yield, highlighting how growing uncertainty is spurring investors across the continent to purchase safe-haven bonds. Germany’s economy  should grow fairly robustly this year thanks to its solid economic fundamentals and increasingly domestic-demand-led growth. Nevertheless, the heightened uncertainty following the Brexit vote poses downside risks to GDP growth in the coming years as Germany has close economic and financial ties with Britain: it sends some 7% of its exports to the UK and both countries account for large shares of each other’s FDI in and outflows. The current Consensus Forecast is for GDP to grow at a pace of 1.6% this year, which is unchanged from last month’s forecast. For 2017, panelists forecast a 1.4% expansion.

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OVERVIEW

FRANCE

SPAIN

Government Passes

At Risk of Penalty for

Labor Reform

Breaking EU Fiscal Rules

Following months of strikes against a controversial labor reform bill, the Socialist government passed the law using special constitutional powers to bypass both houses of parliament. The bill, staunchly opposed by labor unions and some members of the governing party, aims to liberalize the highly-rigid labor market. The bill makes it easier to lengthen working hours, reduce severance pay and weaken the unions’ power. Meanwhile, the result of the Brexit referendum  is expected to have a limited impact on French  confidence indicators  and financial markets in the short term, though a decline in exports and investment could weigh on growth in the medium term. The problem of terrorism, however, continues to pose downside risks to the economy. France was struck in mid-July by another deadly terror attack, this time in the major tourist destination of Nice. The recent spate of attacks could have a significant impact on the tourism industry and reduce tourism investment.      While the government’s labor reforms aim to rekindle growth in the medium term, the outcome of the Brexit vote might nevertheless weigh on economic activity. Furthermore, Brexit could fuel Euroscepticism and the threat of recurrent terror attacks could increase political uncertainty ahead of next year’s presidential election. Analysts expect the economy to expand 1.4% in 2016, which is down 0.1 percentage points from last month’s forecast. Panelists expect GDP to grow.

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Spain’s economy continued to perform well in Q1, even though the expansion was slightly weaker compared to the final quarter of last year. Once again, an acceleration in private consumption was the main factor behind the expansion. Conversely, the external sector faltered and exports swung to contraction. Following  two inconclusive general elections in seven months, the country is far from forming a new government. However, the political uncertainty has had little impact on the economy so far. Growth in retail sales decelerated in May, but business conditions in the manufacturing sector improved in June and the PMI hit its highest level in ten months. Nevertheless, Spain’s macroeconomic imbalances remain a concern and the country is at risk of being sanctioned for breaching EU fiscal rules. The European Commission is expected to make a proposal on possible fines by the end of July but will likely postpose its decision on any suspension of structural and investment funds until after the summer. Spain’s growth prospects are stable despite the cloudy political backdrop. An improving labor market should fuel healthy growth this year. Looking beyond 2016, how Brexit plays out will cast a shadow over the country’s prospects as it could impact Spain’s exports and tourism sector. Our panelists expect the economy to grow 2.8% in 2016, which is unchanged from the previous month’s estimate. For 2017, the panel sees growth moderating to 2.0%.

International Alternative Investment Review 2017


OVERVIEW

ITALY

INFLATION

Financial Market Jitters Following

Prices Pressure Rises

Brexit Hit Banking Sector

Slightly in June

While the economy accelerated slightly in the first quarter, the latest high-frequency data for Q2 suggest that growth remained weak. The UK’s vote to leave the EU prompted high tension in the Italian equity markets, hitting Italy’s most vulnerable banks especially hard and adding to an already serious banking crisis. Italy’s thirdlargest bank by assets, Banca Monte dei Paschi di Siena (BMPS), is in the eye of the storm due to its large stock of non-performing loans (NPLs). Prime Minister Matteo Renzi is trying to organize a government rescue of BMPS to avoid imposing losses on bank depositors and junior bondholders, since that could fuel political discontent ahead of the October constitutional referendum. However, the EU prohibits using public funds for a bank rescue unless bondholders and depositors take their share of the burden. The results of the 29 July stress tests on several banks within the EU will shed light on the Italian banks’ financial needs and might trigger public intervention in support of the bank recapitalization, risking a possible clash with the European authorities. The re-emergence of tensions in the financial markets and the ongoing weakness in global demand pose downside risks to Italy’s already weak growth prospects. FocusEconomics Consensus Forecast expects the Italian economy to expand 0.9% this year, which is down 0.1 percentage points from last month’s forecast. For 2017 the panel also sees economic growth at 0.9%.

Harmonized inflation returned in June, tallying 0.1% (May : -0.1% year-on-year). The reading marked the first increase in prices since January. Despite efforts by the European Central Bank to spur prices higher, low energy prices have caused inflation to linger in what ECB President Mario Draghi called the “danger zone” of below 1.0%. Inflation is expected to return to the common-currency zone this year, although it will remain subdued overall. Inflation projections for the region were unchanged this month. The Consensus view from our panel is that inflation in the Eurozone will average 0.3% in 2016. Looking forward, the majority of analysts agree that inflation will rise gradually and the average forecast for 2017 is 1.3%.

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COVER STORY

Interview with Hutchison Global Communications HUTCHISON GLOBAL COMMUNICATIONS

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You recently won an award as Company of the Year for Innovation and OTT Leadership. What are the qualities that differentiate HGC from other competitors in serving OTT players? Hutchison Global Communications Limited (HGC) is proud to win Company of the Year for Innovation and OTT Leadership at the IAIR Awards. This is a great endorsement of our relentless efforts in developing the diversity of innovative products and services for OTT players. HGC demonstrates innovation by adding value to existing offerings and continuous product advancement. Its long involvement in OTT business, combined with CK Hutchison Group’s 11 mobile operations, illustrate HGC’s capability in helping OTT players to reach a rich audience, and position HGC as a leader in innovation and OTT business. The CNX solution facilities coverage expansion and covers network design, platform setup, voice and data equipment management, local loops, service provisioning, ordering, billing and fault handling, efficiently extends carriers and enterprises’ service coverage overseas, and even into niche markets. This one-stop solution frees enterprises and OTT players from complexity that goes with building and owning a network to focus on core business. By concentrating on the best assets from our fixed and mobile capability and working with industry partners, HGC is able to offer customers tailor-made solutions with a high degree of flexibility that best suit their needs. For instance, we are able to offer last mile service in niche markets - this is hard to achieve in many

hard-to-enter countries due to communication difficulties and variation in standards. Rich experiences in serving OTT players and first-hand involvement in OTT business, we believe, are also the vital qualities that define HGC’s OTT leadership status. Our full understanding of OTT players’ unique requirements, from service level agreement (SLA), respond time to telecom infrastructure, allows us to deliver solutions that exceed expectations, differentiating us from other telecommunication operators. By customizing solutions that cater to OTT players’ needs, HGC bridges traditional telecommunications providers and OTT players and gains new revenue streams, cultivating a mutually beneficial ecosystem. What are your future projects? Looking ahead, HGC will continue to expand into different hard-to-enter regions while strengthening its leadership positions and deepening market penetration in niche markets by delivering total solutions and multilayered services as well as continuous development of local infrastructure. We will also further enhance our involvement in application development through working with various systems integrators. To meet the rising needs of OTT content providers, HGC will continue to develop OTT solutions that extend OTT’s presence across the world. This strategic move will push OTT content to mobile audiences, while pulling their audience closer to OTT players’ services, cultivating a win-win business environment.

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COVER STORY

Catherine Szeto wins at the Le Fonti IAIR Award as IR Manager of the Year in the Conglomerate category CATHERINE SZETO

You recently won an award as IR Manager of the Year in the Conglomerates field. How would you comment on your victor y? I would like to thank IAIR and the business community for their vote of confidence on our work. The award not only demonstrates my team’s commitment to excellence, but also bears solid testimony to our disciplined approach in establishing a credible system over the past 10 years with the support of our senior management. Our team will continue to maintain clear and consistent communication with shareholders and the investment community. As a founding member of Hong Kong Investor Relations Association, I remain committed to promoting the best practices in the IR industry of Hong Kong, and shall continue to help raise the bar for our profession. Q2: Which strengths and visions of your company make working in IR interesting? Shun Tak Group is a household brand across Hong Kong, Macau and the Pearl River Delta region, participating in property development, transportation and tourism related projects. Underpinning many of its flagship en-

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deavors, including One Central Macau, Nova Collection in Taipa and SkyPier and SkyCity Marriott Hotel for instance, are management’s foresight in staying ahead of every market turn and creating demand where no one else has perceived. With close to 60 years of experience operating at the pulse of the region, we have our distinct understanding of the intricacies in this economy, and have built a well-rounded portfolio and the necessary internal capabilities to enter markets early. Our forthcoming integrated developments in Beijing Tongzhou and Zhuhai Hengqin, as well as the establishment of Artyzen Hospitality Group which offers four premium in-house hotel brands with unique Asian DNAs, are again testimonies to our innovative spirit. Our IR team at Shun Tak has the remarkable opportunity to bring such exciting news to the market and translate them into real tangible values for our investors. We are also fortunate that our senior management is liberal and open-minded towards constructive suggestions to improve the Group’s IR practice, which has allowed us to be one of the forerunners in Asia. I think that is very rewarding work for us. Q3: Following up on the notion of innovation, what are some of the initiatives

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in place a seamless network of ports and a tag-through system in partnership with major airlines. It has also upgraded its fleet of 38 ferries in order to cater for the fast-expanding business and luxury travel segments. Today, we have significantly transformed the dynamics and flow of activities within the region.

Catherine Szeto Bio (as of 15 Mar 16)

driven by Shun Tak Group? We see innovation as ways to create value for consumers by changing existing marketbehaviors. The Group’s renowned TurboJET ferry service is a good case in point. In anticipation of closer economic integration within the Pearl River Delta and a surge in international travel demand, the company conceived and implemented a revolutionary air-sea intermodal transportation system, using its ferry fleet to connect the three largest airports in the region. Within the span of a decade, it has put

Catherine Szeto is currently the Director, Head of Investor Relations at Shun Tak Holdings Limited (“The Company”). She joined the company in 2005, leading a professional team, looking after investor relations, and assisting in corporate finance strategies for the Group. Prior to Shun Tak, Catherine has solid track records in the area of investor relations and corporate finance in other major listed companies in Hong Kong. She has also previously worked at Deutsche Bank assisting Global Corporate Finance. She is a Founding Member of Hong Kong Investor Relations Associations Limited. She is also a Chartered Financial Analyst and holds a Master’s Degree in Business Administration from University of Cambridge.

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COVER STORY

CEO SUMMIT COVER ARTICLE IMANI JONES The future is now. 2016 has seen the rise of artificial intelligence, robotics, and disruptive innovation. Old business models are being challenged and new players have shaken up the industry from banking to automotive. Robots are rapidly being introduced to society to fill in for human incapacities and provide companionship. Artificial intelligence is replacing tasks previously conducted by humans cutting costs for companies. Start-ups have taken over industries and created new entry points for emerging companies and ideas. During a time of constant change and evolution, it is important to acknowledge industry leaders, whom have been the pioneers of industrial and social change. The Le Fonti IAIR Awards since 2011 have been a platform for highlighting industry excellence, highlighting leaders in the fields of banking, business, economics, finance, sustainability, law, healthcare, insurance and ecommerce. The full day event provides an opportunity for intellectual debate on current issues that face CEO’s and top executives and insight on solutions to future challenges we will inevitably encounter. Leaders from around the world gather to witness and partake in this global roadshow, which stops in all of the major economic cities – Singapore, New York, Dubai, Milan, Hong Kong and London. This year’s London event will take place this month, on October 14th, 2016 and will incorporate debates on a range of topics from political instability to cyber-crime. Renowned experts will take the stage, such as Abbey King Khawaja – Director of the British Eco Power Group, Nassib Boueri – Wunderman CEO, Andrew Fitzmaurice

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–CEO of Templar Executives and Susanne Chishti – CEO of Fintech Circle. Led by the influential financial journalist and Sky TV presenter, Jenny Hammond, the debate will inspire in-depth narrative on issues such as financing, political threats in the Middle East, the marketing industry, cyber security and how they are being influenced by technology and innovation. Taking place in the historic, Church House Westminster, this CEO Summit round table will prove to be just a start to an evening of monumental events. The CEO Summit will be proceeded by the IAIR Award Ceremony, recognizing these influencers with prestigious honours awarded by the IAIR scientific committee. IAIR’s editorial staff of over 120 journalists from around the world are currently evaluating the winners. The following shows will be held on November 15th in Milan and December 15th in Dubai.

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WORLD AFFAIRS

Reversing Brexit ANATOLE KALETSKY

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LONDON – How should the European Union respond to the narrow decision by voters in the United Kingdom to leave? European leaders are now focusing, rightly, on how to prevent other countries from leaving the EU or the euro. The most important country to be kept in the club is Italy, which faces a referendum in October that could pave the way for the anti-euro Five Star Movement to take power. Europe’s fear of contagion is justified, because the Brexit referendum’s outcome has transformed the politics of EU fragmentation. Before, advocates of leaving the EU or euro could be ridiculed as fantasists or denounced as fascists (or ultra-leftists). This is no longer possible. Brexit has turned “Leave” (whether the EU or the euro) into a realistic option in every European country. Once Britain gives the Union formal notice (by invoking Article 50 of the Treaty of Lisbon), that option will enter the mainstream of political debate everywhere. Research by the European Council on Foreign Relations has found 34 anti-EU referendum demands in 18 other countries. Even if each of these challenges has only a 5% chance of success, the probability of at least one succeeding is 83%. Can the genie of disintegration be put back in its bottle? The EU’s breakup may well prove unstoppable once Britain leaves; but Britain has not yet invoked Article 50. The bottle could still be sealed before the genie escapes. Unfortunately, Europe is using the wrong threats and incentives to achieve this. France is demanding that Britain accelerate its exit. Germany is playing the “good cop” by offering access to the single market, but only in exchange for immigration rules that Britain will not accept. These are exactly the wrong

sticks and carrots. Instead of rushing Brexit, Europe’s leaders should be trying to avert it, by persuading British voters to change their minds. The aim should not be to negotiate the terms of departure, but to negotiate the terms on which most British voters would want to remain. An EU strategy to avoid Brexit, far from ignoring British voters, would show genuine respect for democracy. The essence of democratic politics is responding to public dissatisfaction with policies and ideas – and then trying to change the judgment of voters. That is how numerous referendum outcomes – in France, Ireland, Denmark, the Netherlands, Italy, and Greece – have been reversed, even when deeply emotional issues, such as abortion and divorce, were involved. If European leaders tried the same approach with Britain, they might be surprised by the favorable response. Many Leave voters are already having second thoughts, and Prime Minister Theresa May’s uncompromising negotiating position will paradoxically accelerate this process, because voters now face a much more extreme version of Brexit than they were promised by the Leave campaign. May has stated unequivocally that immigration control is her over-riding priority and that Norway or Switzerland can no longer be models for Britain’s relationship with the

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EU. Her new “Brexit Ministry” has defined Britain’s main objective as tariff-free access to Europe and free-trade agreements with the rest of the world. That means abandoning the interests of Britain’s financial and business services, because services are unaffected by tariffs and are excluded from most free-trade deals. As a result, the new government will soon be politically vulnerable. In fact, most British voters already disagree with its negotiating priorities. Post-referendum polls show voters giving priority to single-market access over immigration restrictions by a two-to-one margin or more. Making matters worse for May, her slender parliamentary majority depends on disgruntled “Remain” rivals. As the British economy sinks into recession, trade deals prove illusory, and legal and constitutional obstacles proliferate, May will find it hard to maintain the parliamentary discipline needed to deliver Brexit. A strategy to avert Brexit therefore has a good chance of success. The EU could advance this strategy by calling May’s bluff on “Brexit means Brexit.” May should be told that only two outcomes are possible: either Britain loses all single-market access and interacts with Europe solely under World Trade Organization rules, or it remains an EU member, after negotiating reforms that could persuade voters to reconsider Brexit in a general election or a second referendum. This binary approach, provided EU leaders showed genuine flexibility in their reform negotiations, could transform public attitudes in Britain and across Europe. Imagine if the EU offered constructive immigration reforms – for example, restoring national control over welfare payments to non-citizens and allowing for an “emergency brake” on sudden population movements – to all members. Such reforms would demonstrate the EU’s respect for democracy in Britain – and could turn the tide of anti-EU populism across northern Europe. The EU has a long history of adapting in re-

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sponse to political pressures in important member states. So why is this strategy not being considered to counter the existential threat of Brexit? The answer has nothing to do with supposed respect for democracy. The Brexit vote is no more irreversible than any other election or referendum, provided the EU is willing to adopt some modest reforms. The real obstacle to a strategy of persuading Britain to remain in the EU is the EU bureaucracy. The European Commission, once the EU’s source of visionary creativity, has become a fanatical defender of existing rules and regulations, however irrational and destructive, on the grounds that any concessions will beget more demands. Concessions to British voters on immigration would inspire the southern countries to demand fiscal and banking reforms, eastern countries would seek budget changes, and non-euro countries would demand an end to their second-class status. The Commission is right to believe that demands for EU reform would extend well beyond Britain. But is this a reason to resist all change? That type of rigidity broke up the Soviet Union and nearly destroyed the Catholic Church. It will destroy the EU if the bureaucracy remains incapable of reform. It is time for Europe’s politicians to overrule the bureaucrats and re-create a flexible, democratic EU capable of responding to its citizens and adapting to a changing world. Most British voters would be happy to remain in that kind of Europe.

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A Strategy to Unite and Safeguard Europe FEDERICA MOGHERINI

BRUSSELS – The purpose – and even the survival – of the European Union is being questioned as never before. In fact, Europe’s citizens and the world need a strong EU now more than ever. Europe’s wider region has become less stable and more insecure in recent years. Moreover, the crises within and beyond the EU’s borders are directly affecting the lives of all European citizens. In challenging times such as these, a strong EU is one that thinks strategically, shares a vision, and acts together. In the wake of the United Kingdom’s vote to “Brexit” the EU, we Europeans will indeed have to rethink how our Union works; but we know very well what we need to work for. We know what our principles, interests, and priorities are. This is no time for political uncertainty. The EU needs a strategy that marries a shared vision to common action. None of the EU’s member states, acting alone, has the strength to address the threats that Europe faces. Nor can they seize the opportunities presented by today’s global economy alone. But as a Union of more than a half-billion citizens, Europe’s potential is unparalleled. Our diplomatic network is broad and deep, covering every corner of the globe. Economically, we are in the world’s G3, alongside China and the United States. We are the top trading partner and foreign investor for almost every country in the world.

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Together, the EU’s member states invest more in development cooperation than the rest of the world combined. It is also clear, though, that we in Europe are not making full use of this potential, at least not yet. A vast majority of our citizens understands that we need to take collective responsibility for our role in the world. Our partners, too, expect the EU to play a major role, including as a global security provider. The EU can deliver on its citizens’ needs and make its partnerships work only if we all act together – EU institutions and national governments, at all levels, united. This is exactly the aim of the Global Strategy for European Foreign and Security Policy, which I recently presented to the leaders of the member states and to the European Commission and European Council. This Strategy, the EU’s first in over a decade, focuses on defense capabilities and anti-terrorism as much as on job opportunities, social inclusion, and human rights. It deals with peace building and the resilience of states and societies in and around Europe. The EU has always prided itself on its soft power – and it will continue to do so, because we are the best in this field. But the idea that Europe is an exclusively “civilian power” does not do justice to an evolving reality. For example, the EU currently con-

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ducts 17 military and civilian operations around the world. In places as far afield as Afghanistan and Congo, Georgia and the Sahel, Moldova, Somalia, and the Mediterranean, thousands of men and women serve under the European flag. For today’s Europe, soft and hard power go hand in hand. The Strategy nurtures the ambition of strategic autonomy for the EU, which is necessary to promote our citizens’ common interests, as well as our principles and values. Yet we know that such priorities are best served when we are not alone, and in an international system based on multilateralism and rules, not on global policemen and lone warriors. This is why the EU will continue to deepen the transatlantic bond and our partnership with NATO, while also connecting to new players and exploring new formats to advance our Strategy. The EU will invest in regional institutions, and in cooperation within and among regions. And we will promote global governance reforms that can meet this century’s challenges. As we do this, we will engage in a practical and principled way, sharing global responsibilities with our partners and contributing to their strengths. Two decades of spreading global uncertainties have taught us a clear lesson: my neighbor’s weaknesses and my partner’s weaknesses are my own weaknesses. So we will move beyond

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the illusion that international politics can be a zero-sum game. Acting with resolution in this way will make each of the EU’s member states – and each citizen of our Union – better off. But all the goals outlined here can be achieved only by a truly united and committed Europe. Joining all our cultures together to achieve our shared goals and serve our common interests is a daily challenge, but it is also our greatest strength: diversity is what makes us strong.

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The EU’s Bold New Strategy JAVIER SOLANA

BRUSSELS – When problems accumulate, as in Europe – where the failed coup in Turkey comes hard on the heels of the United Kingdom’s decision to leave the European Union – attention is often focused on the most recent issue to arise. Earlier problems, now seeming less urgent, are neglected. For many years, we Europeans have seen how this plays out: in the end, none of the problems ever seems to be resolved. The Turkish coup appears now to be resolving itself, though no one yet knows what long-term implications it will have for that vital country. Brexit is, without doubt, a veritable blow to the European project. A member state has regrettably chosen to move ahead alone. But this mustn’t lead the EU into the most damaging situation of all: paralysis. The many issues that the Union must still resolve won’t disappear merely with the passage of time. And one of the most urgent is Europe’s security: each day that passes without taking joint action is an oppor-

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tunity lost and leads to greater risk. Addressing such issues effectively, rather than falling into the trap of the immediate, requires adhering to accepted strategies. By identifying challenges, establishing long-term objectives, and designing collective action to achieve those objectives, strategies provide a framework for initiatives to address problems in a more far-sighted, coherent way. With this in mind, Federica Mogherini, the EU’s high representative for foreign affairs, and her team have designed and presented a Global Strategy for European security that has clearly defined aims befitting conditions both within and beyond our borders. Many observers have indicated that now is not the best time to elaborate a vision that assumes that all Europeans are united by common interests. But, as the strategy clearly declares, cooperation is no longer a question of principle; it is an existential imperative. That is why I disagree with those who call the Glob-

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al Strategy ill-timed and even useless. Even though it was presented to the European Council a week after the Brexit referendum, its aim is to implement the provisions foreseen in the Treaty of Lisbon, seven years after the treaty entered into effect. It is also the result of a June 2015 mandate from the European Council itself. And it aims to develop a policy to strengthen the EU, which many citizens want. To remain immobile would have been a grave error. The Global Strategy defines clear objectives, considers the mistakes of the past, and is deeply anchored in the EU’s present-day reality. It calls for a more responsible, united, and credible EU – the only response capable of overcoming Euroskepticism. It defines the actions Europe must take and the capacities it must have for its own defense and security. It takes into account the long-term effects of its actions and understands that the development of the EU’s member states is essential to conflict prevention. And it recognizes that only greater unity will enable Europe to confront the challenges of terrorism, migration, and climate change. A fundamental fact should be borne in mind when assessing the Global Strategy’s usefulness: The threats to Europe’s security are not common because some treaty or intergovernmental consensus has said so. They are common because we are neighbors, and because, like it or not, the world around us is irremediably global. One consequence of a document like the Global Strategy is the creation of a common discourse. In 2003, Europeans also needed to unite behind a common foreign policy, following the differences created by the intervention in Iraq. But the problem today is on a very different level: the European project itself is being questioned. Revealing the EU’s capacity to act effectively would help to confirm the necessity of its existence. The Global Strategy can be useful here. European citizens perceive terrorism and the refugee tragedy as questions of vital importance and want the EU to play a greater role in addressing them and other global issues. A Pew Research Center study in ten

European countries (including supposed bastions of Euroskepticism like the UK, Poland, and Hungary) found that an average of 74% of those polled supported more decisive action by the EU abroad. In recent years, we have seen how internal and external security conditions are closely linked. That is why, in the interest of safeguarding internal security, the Global Strategy emphasizes the need for more and improved external action. It is also why the EU requires an integral approach to conflicts and crises that uses every available instrument and policy. Moreover, the manner in which we conduct external action characterizes us as Europeans. In the field of human security, few organizations can deploy missions and operations as complete as the EU’s, combining military and civilian elements, such as police or judges. Much has changed since the European Security Strategy of 2003: Europe must now find its place amid the competition of great powers and negotiate the conflicts and instability on its eastern and southern flanks. There have been important changes within Europe as well, and opposition to strengthening the EU seems to be on the rise, as evidenced by the Brexit vote and the position recently expressed by the Visegrad Group (the Czech Republic, Hungary, Poland, and Slovakia). With the presentation of the Global Strategy, those in favor of moving the European project forward have placed an initiative on the table. Without it, only proposals for less Europe would have been heard. Over the coming months, we must move our foreign and security policy forward, in order to implement the strategy’s objectives. Those of us who are in favor of continuing to advance cannot remain silent.

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WORLD AFFAIRS

Building a Progressive International YANIS VAROUFAKIS

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ATHENS – Polit ics in t he advance d e conomies of t he West is in t he t hro es of a p olit ic a l sha keup uns e en since t he 1930s. The Gre at D ef l at ion now g r ipping b ot h sides of t he At l ant ic is re v iv ing p olit ic a l forces t hat had l ain dor mant since t he end of World War II. Passion is retur ning to p olit ics, but not in t he manner many of us had hop e d it wou ld. The r ig ht has b e come animate d by an ant i-est ablishment fer vor t hat was, unt i l re cent ly, t he pres er ve of t he lef t. In t he Unite d St ates, D ona ld Tr ump, t he R epublic an president i a l nomine e, is t a k ing Hi l l ar y C linton, his D emo crat ic opp onent, to t ask – quite cre dibly – for her clos e t ies to Wa l l St re et, e ager ness to invade foreig n l ands, and re adiness to embrace f re e-t rade ag re ements t hat have under mine d mi l lions of workers’ liv ing st and ards. In t he Unite d Kingdom, Brexit has c ast ardent Thatcher ites in t he role of ent husi ast ic defenders of t he Nat iona l He a lt h S er v ice. This shif t is not unpre ce dente d. The p opu list r ig ht has t radit iona l ly adopte d qu asi-lef t ist rhetor ic in t imes of def l at ion. Anyone w ho c an stomach re v isiting t he sp e e ches of le ading fas cists and Nazis of t he 1920s and 1930s w i l l f ind app e a ls – B enito Muss olini’s p ae ans to s o ci a l s e c ur it y or Jos eph G o ebb els’ st ing ing cr it icism of t he f inanci a l s e c-

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tor – t hat s e em, at f irst g l ance, indist inguishable f rom prog ressive go a ls. What we are exp er iencing to d ay is t he natura l rep erc ussion of t he implosion of cent r ist p olit ics, ow ing to a cr isis of g lob a l c apit a lism in w hich a f inanci a l crash le d to a Gre at R e cession and t hen to to d ay’s Gre at D ef l at ion. The r ig ht is simply rep e at ing its old t r ick of drawing up on t he r ig hte ous anger and f r ust rate d aspirat ions of t he v ic t ims to advance its ow n repug nant agend a. It a l l b egan w it h t he de at h of t he internat iona l monet ar y system est ablishe d at Bretton Wo o ds in 1944, w hich had forge d a p ost-war p olit ic a l cons ensus b as e d on a “mixe d” e conomy, limits on ine qu a lit y, and st rong f inanci a l regu l at ion . That “golden era” ende d w it h t he s o-c a l le d Nixon sho ck in 1971, w hen Amer ic a lost t he sur plus es t hat, re c ycle d inter nat iona l ly, kept g lob a l c apit a lism st able. R emarkably, Amer ic a’s hegemony g re w in t his s e cond p ost-war phas e, in p ara l lel w it h its t rade and budget def icits. But to ke ep f inancing t hes e def icits, b an kers had to b e unle ashe d f rom t heir Ne w D e a l and Bretton Wo o ds rest raints. On ly t hen wou ld t he y encourage and manage t he inward c apit a l f lows ne e de d to f inance Americ a’s t w in f is c a l and c ur rent-account def icits. Financi a lizat ion of t he e conomy was t he go a l, ne olib era lism was its ide olog ic a l clo a k, t he Pau l Volcker-era Fe dera l R es er ve’s interest-rate hi kes were its t r ig ger, and President Bi l l C linton was t he u lt imate clos er of t he Faust i an b argain. And t he t iming cou ldn’t have b e en more congeni a l: t he S ov iet empire’s col l aps e and C hina’s op ening generate d a surge of l ab or supply for g lob a l c apit a lism – a bi l lion addit iona l workers – t hat b o oste d prof its and st if le d wage g rowt h t hroug hout t he West. The resu lt of ext reme f inanci a lizat ion

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was enor mous ine qu a lit y and profound vu lnerabi lit y. But at le ast t he West’s work ing cl ass had access to che ap lo ans and inf l ate d hous e pr ices to of fs et t he imp ac t of st ag nant wages and de clining f is c a l t ransfers. Then c ame t he crash of 2008, w hich in t he US and Europ e produce d a massive excess supply of b ot h mone y and p e ople. Whi le many lost j obs, homes, and hop es, t r i l lions of dol l ars in s avings have b e en sloshing around t he world’s f inanci a l centers e ver since, on top of more t r i llions pump e d out by desp erate cent ra l b an ks e ager to repl ace t he f inanciers’ toxic mone y. Wit h comp anies and inst itut iona l pl ayers to o f r ig htene d to invest in t he re a l e conomy, share pr ices have b o ome d, t he top 0.1% c an’t b elie ve t heir luck, and t he rest are helplessly watching as t he g rap es of w rat h are “… f i l ling and g row ing he av y, g rowing he av y for t he v int age.” And

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s o it was t hat l arge chun ks of humanit y in Amer ic a and Europ e b e c ame to o indebte d and to o exp ensive to b e anyt hing ot her t han dis c arde d – and re ady to b e lure d by Tr ump’s fe ar-monger ing , French Nat iona l Front le ade r Mar ine L e Pen’s xenophobi a, or t he Brexite ers’ shimmer ing v ision of a Br it anni a r u ling t he waves again. As t heir numb er g rows, t radit iona l p olit ic a l p ar t ies are fading into ir rele vance, suppl ante d by t he emergence of t wo ne w p olit ic a l blo cs. One blo c repres e nts t he old t roi ka of lib era lizat ion, g lob a lizat ion, and f inanci a lizat ion. It may st i l l b e in p ower, but its sto ck is fa l ling fast, as D av id C ameron, Europ e’s s o ci a l demo crats, Hi l l ar y C linton, t he Europ e an C ommission, and e ven Gre e ce’s p ost-c apitu l at ion Sy r iza gover nment c an attest. Tr ump, L e Pen, Br it ain’s r ig ht-w ing Brexite ers, Pol and’s and Hungar y’s i llib era l gover nments, and Russi an President Vl adimir Put in are for ming t he s e cond blo c. Theirs is a nat iona list inter nat iona l – a cl assic cre ature of a def l at ionar y p er io d – unite d by contempt for lib era l

demo crac y and t he abi lit y to mobi lize t hos e w ho wou ld cr ush it. The cl ash b et we en t hes e t wo blo cs is b ot h re a l and misle ading . C linton vs. Tr ump const itutes a genuine b att le, for example, as do es t he Europ e an Union vs. t he Brexite ers; but t he t wo comb atants are accomplices, not fo es, in p erp etu at ing an end less lo op of mutu a l reinforcement, w it h e ach side def ine d by – and mobi lizing its supp or ters on t he b asis of – w hat it opp os es. The on ly way out of t his p olit ic a l t rap is prog ressive inter nat iona lism, b as e d on s olid ar it y among l arge maj or it ies around t he world w ho are prep are d to rek ind le demo crat ic p olit ics on a pl anet ar y s c a le. If t his s ounds Utopi an, it is wor t h emphasizing t hat t he raw mater ia ls are a lre ady avai l able. B er nie Sanders’s “p olit ic a l re volut ion” in t he US, Jeremy C orby n’s le adership of t he UK’s L ab our Par t y, DiEM25 (t he D emo crac y in Europ e Movement) on t he cont inent: t hes e are t he harbingers of an inter nat iona l prog ressive movement t hat c an def ine t he intel le c tu a l ter rain up on w hich demo crat ic p olit ics must bui ld. But we are at an e arly st age and face a remarkable b ack l ash f rom t he g lob a l t roi ka: w it ness Sanders’ t re at ment by t he D emo crat ic Nat iona l C ommitte e, t he r un against C orby n by a for mer phar maceut ic a l lobby ist, and t he attempt to have me indic te d for d ar ing to opp os e t he EU’s pl an for Gre e ce. The Gre at D ef l at ion p os es a g re at quest ion: c an humanit y desig n and implement a ne w, te chnolog ic a l ly advance d, “g re en” Bretton Wo o ds – a system t hat ma kes our pl anet e colog ic a l ly and e conomic a l ly sust ainable – w it hout t he mass p ain and dest r uc t ion pre ce ding t he or ig ina l Bretton Wo o ds? If we – prog ressive inter nat iona lists – won’t answer t hat quest ion, w ho w i l l? Neit her of t he t wo p olit ic a l blo cs now v y ing for p ower in t he West e ven wants it to b e p os e d.

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LE FONTI IAIR AWARDS

Photo Credit: Nick Zonna

CEO & TOP EXECUTIVES OF THE YEAR Executive Chairman of the Year Wealth Management Europe

Fritz Kaiser (Kaiser Partner) For the sustainable approach to wealth management that makes Mr. Kaiser a point of reference in the market, a respectful champion of responsible investment and a forward-looking thinker and business leader.

CEO of the Year Electronics Industry Sweden

Lena Olving (Mycronic) For being a leader in the electronics industry for more than 30 years. Furthermore, for creating additional value through perpetual monitoring and development of modern technologies, for the development of a team spirit and an competitiveinnovative environment, as well as the substantial development and improvement of necessary knowledgeable skills and especially for the added value provided by the founder.

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CEO of the Year Digital Certification Italy

Danilo Cattaneo (Infocert) For leading InfoCert since he joined the company in 2010 into succeeding in the world of dematerialization, with a focus on innovative digitalization services. For the important contribution to the company’s strategy of internationalization and his broad skills that greatly contributed to the company becoming a leading Certification Authority.

Chief Marketing Officer of the Year OTT Europe

Brynhild Vinskei (Xstream) For her invaluable contribution in the strengthening and launching of Xstream’s brand strategy, as well as her results-driven and proactive approach. Her drive, public relation and organizational skills coupled with several years of experience from various industries has enabled her to lead the company to becoming an international leader in the OTT sector, empowering digital and traditional channels while promoting new partnerships.

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LE FONTI IAIR AWARDS

CORPORATE AWARDS Best Multi-Banking Solutions Company of the Year Global

Fides Treasury Services For its undisputed leadership that led it to this recognition for the fourth consecutive year. For being a landmark in global treasury payments and information reporting aggregation. For enabling, thanks to its connectivity model, over 3’000 corporate clients to connect to banks worldwide, with a streamlined channel and format of their choice.

Best Promotions & Events Team of the Year Asia

Melco Crown Entertainment For having organized one of the most glamorous events of the year, the Studio City Grand Opening Ceremony in Macau with Hollywood and Asian guest stars like De Niro, Scorsese and DiCaprio. For being a global symbol in the entertainment field for unique resort experiences and spectacular performances.

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LE FONTI IAIR AWARDS

Healthcare Company of the Year Innovation & Leadership USA

MDxHealth For providing epigenetic information to personalize the diagnosis and treatment of cancer. For contributing to the increased adoption of ConfirmMDxÂŽ for Prostate Cancer testing solution within the U.S. urology community.

Company of the Year for Innovation Gaming Sector Southern Europe

B2B Gaming Services For being a leader in the market. For providing clients with a unique cost-eective platform for their betting business, which integrates management and monitoring in one place.

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Excellence of the Year for Innovation Wholesale Distributions Ireland

Barry Group For being a pioneer leader in the wholesale distribution market. For the key role in consolidating the market’s leading position in Ireland, growing through diversification, and for placing the customer at the core of the business. For the founder’s contribution to the company’s success.

Excellence of the Year for Innovation & Leadership Confectionary

Katjes International For being a leader in the confectionery market. Their entrepreneurial capacity, successful expansion investments, and their focus on quality, has allowed Katjes International to become one of the most prestigious brands, obtaining very important recognitions. They are a true leader in their field.

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LE FONTI IAIR AWARDS

Excellence of the Year for Innovation Software Solutions Germany

Micromata For being an excellence in the individual software solutions market, since 1996. In particular, for the commitment to creating additional value and the ability to be responsive to clients’ needs, thanks to a dynamic approach and a complete range of software solutions for individual business processes.

BROKER AWARDS Forex Broker of the Year Asia

InstaForex For being one of the most recognized forex brokers trusted by over 2,000,000 traders from 120 countries around the globe, for cutting-edge services and new products, as well as a wide range of trading conditions and instruments, reliability and custom-tailored approach.

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Forex Broker of the Year United Kingdom

ActivTrades For the full range of financial instruments that make trading a simple and eective way to gain access to markets. Through the innovative platforms MetaTrader 4 and MetaTrader5, ActivTrades confirms itself to be a leader in the field.

Broker of the Year Latin America

FBS For maintaining your standards of honesty and continuously developing as a broker with hundreds of thousands of profitable orders executed daily. For its team of highly-qualified professionals that support customers in their native language around the clock.

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LE FONTI IAIR AWARDS

LEGAL AWARDS Lawyer of the Year Italy

Filippo Troisi (Legance) For leading the firm in a record-breaking year in terms of sales, profits and prestige of clientele, including Cybersonics-Sorin mergers, Fiat-Chrysler and the IPO of Ferrari. For its ability to engage with customers in a personalized way, ensuring the maintenance of their competitive advantage and progressive international vocation.

Lawyer of the Year Criminal Law Italy

Giuseppe Iannaccone (Studio Legale Avv. Giuseppe Iannaccone e Associati) For the fluidity of his excellence throughout every facet of his practice; his ability to masterfully manage not only criminal, but also bankruptcy, corporate and tax cases; for being credited as a reference for the market by both customers and colleagues; for being an advisor to major financial institutions as well as businesses, and ensuring assistance in all critical phases of economic activity.

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Lawyer of the Year Tax Criminal Law Italy

Fabio Cagnola (Cagnola & Associati) For the extensive expertise gained within tax crimes related to transnational relations between companies belonging to multinational groups, and the strong ability to manage complex matters resulting from corporate crimes. His clientele includes leading Italian and foreign banks.

Lawyer of the Year Labour Italy

Gabriele Fava (Fava & Associates) For his successful assistance to Italian and foreign companies in all aspects of labour law, with a particular attention to the field of restructuring. For the many accolades, he has received during the year in the field of labour law, thanks to the assistance he has provided to major financial companies, insurance agencies, and the energy and food sector.

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LE FONTI IAIR AWARDS

Tax Law Firm of the Year Wealth Management Italy

Loconte & Partners For the ability to support customers eectively in making investment choices in Italy and abroad, by identifying the most efficient tools and the most appropriate strategies for planning and asset protection, thus specializing in asset management from every angle.

Law Firm of the Year Finance Criminal Law Italy

Orlando e Fornari For being a leader in criminal litigation, in particular in the financial and tax sector, alongside major banking institutions and Italian and foreign companies to whom they are more than a law firm, but an advisor in all respects.

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Boutique of Excellence of the Year Criminal Law Italy

Studio Giordanengo Avvocati Associati For the extensive preparation on criminal law that allows the firm, which is composed by a cohesive team, to provide a consolidated work method that both satisfies and assists customers in every way.

Boutique of Excellence of the Year Corporate Criminal Law Italy

Studio Legale Padovani For the accuracy, expertise, independence and confidentiality that characterize the firm and its founder, Attorney Chiara Padovani. The vitality and the punctuality of her direct intervention have guaranteed eďŹƒcient and eective results to all of their customers.

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LE FONTI IAIR AWARDS

Boutique of Excellence of the Year Administrative Law Italy

Studio Legale Avvocati Michele Bonetti e Santi Delia For the useful advising on all matters concerning the relationship between private and public administrations. The firm’s services, organized by a flexible and modern concept of the professional relationship, allows the firm to fully satisfy the customer’s needs.

Boutique of Excellence of the Year Labour Litigation Italy

Boursier Niutta & Partners For the experience and the specialized knowledge of the five partners and over twenty-five professionals who have made Boursier Niutta & Partners an esteemed reference point, both nationally and internationally, in the field of labour law. The dedicated and prompt advice and the continuous education ensure competitive solutions to customers.

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InstaForex: barometer of Forex development INSTAFOREX

Looking back on the history of the forex market, let’s focus on milestones, which determined basic principles of the currency market’s performance. To begin with, the Bretton Wood system which used to peg the US dollar’s value to gold for many years was eventually abandoned. Second, most of global central banks adopted the use of floating exchange rates of their national currencies, which would be managed by the central banks themselves. Finally, the currency market gave up telegraph and telephone communication means and settled on the global network. All these events belong to the history. Nowadays only few people are familiar with the Forex evolution. However, over the recent 10-15 years, the forex market has been developing and expanding at the fastest pace due to modern technologies. Contemporary traders are still using these technologies. The future of the currency market will also depend on technologies. InstaForex, one of the leading brokerage companies, will celebrate its 10th anniversary next year. So let’s trace the currency market development for the recent decade as the broker mirrors all changes in Forex. After the currency market entered the World Wide Web, its further development was predetermined by technologies. In particular, a trading platform is the basic one. Owing to this PC application, a trader enters the market and earns money. In 2005, MetaTrader4 was launched in the segment of analytical trading platforms. Over a year, it became the most popular trading application around the world. Exercising exclusive rights to this trading software, InstaForex offered its clients an original

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version of the application. Further cooperation with the software developer bore fruit. In 2010, InstaForex was the first among brokerage companies to introduce traders to a demo version of the more advanced MetaTrader5 platform and later its full version. Nowadays, apart from MetaTrader4 and 5, InstaForex suggests its own software, the web trading platform and mobile application. Importantly, InstaForex WebTrader and InstaForex MobileTrader have gained the international recognition more than once and won prestigious awards in special categories. In 2000s, thanks to the Internet, a number of traders have been swelling at a great pace all over the world. In parallel, an increasing number of brokers and dealing centers were springing up. They all were offering clients their online trading services. However, when the number of clients and the volume of their deals reached a critical level for technical facilities of these companies, traders faced delayed execution of their orders, frozen charts, and other glitches, which came as a terrible blow and caused massive losses. The period from 2008 until 2012 is considered to be a barometer for the whole currency market. Dealing with an accelerating number of clients, small brokers and dealing centers were incapable and unwilling to make efforts to develop their technical facilities, in particular to expand a network of trading servers and data centers. As a result, a client decided in favor of that brokerage company, which could ensure instant and quality execution of orders no matter how many traders it had to serve. Being a start-up in the currency market, InstaForex foresaw such de-

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opted for large brokers. Besides, beginners applied to trade with reputable brokerage companies. So, only the strongest brokers were able to survive and reliable companies strengthened their leadership. A boom of brokers calmed down, the market cleared up, and brokerage companies entered into fair competition, when all players in essence offer the same product, access to the market, but with some original features. So brokers invented their own services and conditions to attract clients. Interestingly, modern clients are quite smart, they are not pleased just to enter Forex under convenient conditions. Modern clients need new technologies and trading solutions! velopments. Therefore, the company invested a big part of its net profits in the technical advance on a regular basis. So, trading servers have been installed in the most populated and busiest regions worldwide, assuring jet speed of orders execution wherever clients enter the market. Eventually, InstaForex has created one of the most powerful trading networks, which embraces over 2,000,000 traders. At present, the network of InstaForex trading servers comprises 13 servers and over 50 data centers. Network of InstaForex trading servers 2006 — 50,000 clients — 2 trading servers and 6 data centers 2013 — 1,000,000 clients — 9 trading servers and 30 data centers 2015 — 2,000,000 — 13 trading servers and 50 data centers In 2011/2013, the international currency market went through a kind of natural selection when professional traders left small dealing centers and

InstaForex grasped this sentiment and set about developing cutting-edge trading services to facilitate trading. The company enlarged its personnel and increased investments. As a result, InstaForex was one of five brokers, which launched the unique PAMM system at that time, the service of joint investments in managing traders’ deals. Traders understood straight away advantages of the PAMM system. Thus, InstaForex specialists were keen to develop other innovative products. After the PAMM system, InstaForex introduced its clients to the ground-breaking ForexCopy system, enabling them to copy deals of successful traders. The trading system of binary options followed later. A client is required to foresee one of the possible directions of a particular currency pair. InstaForex owes its success mainly to its timely and innovative trading solutions. The company has gained reputation as one of the most reliable and advanced brokers, which always meets clients’ expectations of new services, products, and ideas.

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Will Brexit break London’s place as FinTech Capital? JENNY HAMMOND

Fintech, it’s described as the disruption in financial services pushed by consumer needs and the adaptation to advancing technologies but while most institutions and banks are developing to embrace the new innovations, concerns are surfacing in the Financial technology capital, London as to whether it can hold onto its crown as the leading Fintech city post Brexit. Global consultancy EY named London as the most fintech-friendly city last year, generating £6.6bn in revenues and employing 61,000 people in 2015. However, the new figures put the UK on course for a full year decline in funding. It’s a real mixed picture, said Lawrence Wintermeyer, CEO of Innovate Finance. “Venture capital investment in the US and UK has really slowed in the first half of 2016 but it is racing ahead in China.”

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In the first half of this year, China for the first time attracted more venture capital funding than the US, boosted by a $4.5bn investment in Chinese headquartered Alipay. But it is hard to tell if the UK slowdown is a direct result of the country’s desire to leave the EU or the cyclical nature of business. “12 weeks on from the Brexit vote and there are anecdotal signs that investments are not being made in financial technology but that doesn’t look like it has had a material impact. Lots of UK fintech companies are domestic plays and not involved in international scaling. So although there is not as much new funding there is still a lot of follow on” explained Wintermeyer. William Bain, Head of Fintech and Financial Services at Inline policy however has also seen a shift in investment in Europe. “The fintech sector has

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grown rapidly over the last 5 years. EY reports show that London has been leading the way in terms of the the level of investment but with other pockets such as Manchester also showing real growth. However, in the last quarter Germany – who has recognised the sectors potential - has overtaken the UK.” The uncertain business environment following a Brexit vote earlier in the year has been attributed to the capitals slowdown. ACCA (the Association of Chartered Certified Accountants) said in its ‘Fintech – transforming finance’ report that the potential regulatory and business challenges posed by Britain leaving the EU risks losing ground to Asia Pacific rivals. Bain explained the Brexit concerns for Fintech companies based in the UK come down to two things, finding and retaining talented staff, with a third of London’s Fintech personnel coming from Europe and passporting. “It’s about attracting and retaining the most dynamic people who are engaged in this rise of Fintech.” As many Fintech companies today are involved in payments cross Euro many companies are concerned about whether that will be sustainable when article 50 is evoked explains Bain who also heads up the Brexit advisory unit. “I have heard people liken it to ether being a citizen or someone with a temporary position to stay. In reality that temporary position can be revoked with just 30 days’ notice and that is exactly what people in the finance sector are worried about.” However, it’s too early to really tell the impact said Theo Priestly, CEO of Cronycle. “Brexit will affect everyone and there is an amount of uncertainty around the start-up ecosystem. What will happen to sales, funding for example? But it is not prudent to guess or panic.” London has long been seen as the gold standard when it comes to regulation for the fledgling sector alleviating long term concerns for the capital. The Financial Conduct Authority has provided a model for regulation which has helped nurture innovative technologies. Combined with London’s status as an international finance centre, the UK has proven to be a highly attractive location

for businesses, investors and innovators. Moving forward despite times of global uncertainty Fintech remains an active force set to change the finance sector dramatically and will lead to greater efficiency and competition. Both regulators and end customers will benefit as it will help drive pricing to be more affordable and products to be value added. It will also help to bridge the gap in this global world. Businesses, especially banks, are by nature more global and they are looking for scalable and far reaching products. Over the next couple of years, the landscape is going to change considerably said Priestly. “I see fintech coexisting with current banking institutions. I don’t see banking failing or falling, it is just waking them up to the way people want to approach their daily lives. It’s about service and convenience, and will be built up from the phone rather than the bank branch.” An example of this will be seen from January 2018 when PSD2 (the payment services directive 2) will be implemented, meaning that banks will need to offer an open banking API app to enable consumers to have access to all competing products and it will give the fintech sector a real boost. Already banks are responding. Deutche Bank has employed over 300 people to develop their own app in time for the 2018 deadline. “Brexit or no Brexit, for China, the US and Europe, open API will be a big fintech megatrend over the next decade. That and regulatory interoperability”, predicts Wintermeyer. Ultimately, London is one of the premier cities to work, driven by its commitment to finance, technology, talent and creativity. Regardless of Brexit, these qualities are not going anywhere for the foreseeable future.

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Probing the Productivity Paradox KEMAL DERVIS, ZIA QURESHI

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WASHINGTON, DC – Over the last decade or so, productivity growth has slowed considerably in most major developed economies, even as impressive advances have been made in areas like computing, mobile telephony, and robotics. All of these advances ostensibly should have boosted productivity; and yet, in the United States, a world leader in technological innovation, business-sector labor productivity growth in 20042014 averaged less than half the rate of the previous decade. What is going on? One theory that has gained a lot of traction lately is that the so-called productivity paradox does not actually exist. Productivity growth only seems  to be dropping, the logic goes, because the statistics we use to measure it fail to capture fully recent gains, especially those from new and higher-quality information and communication technology (ICT). If prices do not reflect quality improvements in the new products, price deflators are overestimated, and real output is underestimated. Moreover, the skeptics point out, standard measures of productivity are based on GDP, which, by definition, includes only output produced. Consumer surplus – which is growing fast, as Internet-based services like Google search and Facebook generate substantial utility to consumers, at a market price of close to zero – is ignored. There is some logic to this argument. Indeed, a recent review of research on productivity by the Brookings Institution and the Chumir Foundation confirmed that gains from new technologies are underestimated, owing to measurement issues relating to both product quality and consumer surplus. But these two types of mismeasurement, the report continues, explain only a relatively small share of the slowdown in economic gains. Furthermore, these lapses have existed for a long time, and they do not seem to have increased substantially in recent years. The conclusion is

clear: the productivity-growth slowdown is real. Perhaps, then, we must look at the other component of the paradox: technological innovation. Many have argued that the real issue is that recent technological innovations have been less consequential than their predecessors. New ICT technologies, the “techno-pessimists” claim, simply do not bring the kind of economy-wide benefits that were brought by, say, the internal combustion engine and electrification. “Techno-optimists,” for their part, believe that ICT advances do have the potential to drive rapid productivity growth; their benefits are merely subject to lags and come in waves. What do the numbers say? Firm-level data show that productivity growth has held up relatively well for firms that are at the technological frontier. It is the less technologically advanced firms, which are often smaller, that have experienced the major growth slowdowns. This suggests that the problem may not be the technology itself, but rather its slow diffusion. There is also a macroeconomic element to the decline in productivity growth, rooted in deficient aggregate demand. According to former US Treasury Secretary Larry Summers, when the desired level of investment is below the desired level of savings despite a nominal interest rate of zero, chronically deficient demand constrains GDP and productivity growth, producing socalled “secular stagnation.”

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Growth in a Time of Disruption MICHAEL SPENCE

FORT LAUDERDALE, FLORIDA – Developing countries are facing major obstacles – many of which they have little to no control over – to achieving sustained high growth. Beyond the headwinds generated by slow advanced-economy growth and abnormal post-crisis monetary and financial conditions, there are the disruptive impacts of digital technology, which are set to erode developing economies’ comparative advantage in labor-intensive manufacturing activities. With the reversal of these trends out of the question, adaptation is the only option. Robotics has already made significant inroads in electronics assembly, with sewing trades, traditionally many countries’ first entry point to the global trading system, likely to come next. As this trend continues, the imperative to build supply chains based on the location of relatively immobile and cost-effective labor will wane, with production mov-

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ing closer to the final market. Adidas, for example, is already building a factory in Germany, where robots will produce high-end athletic shoes, and is planning a second one in the United States. Given all of this, developing countries need to act now to adapt their growth strategies. A sensible framework for doing so must account for several key factors. First, the problems in advanced countries – from slow economic growth to political uncertainty – are likely to persist, reducing potential growth everywhere for an extended period. In this context, developing countries must not succumb to the temptation to try to boost demand through unsustainable means, such as the accumulation of excess debt. Instead, developing countries, particularly those in the earlier stages of economic development, must find new external markets for their goods, by maximizing trade opportunities with their counter-

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parts in the developing world, many of which have considerable purchasing power. While such demand will surely not off set the drop in advanced-country demand completely, it can help to soft en the blow. Second, investment, both public and private, remains a powerful growth engine. In economies with excess productive capacity, targeted investment can yield a double benefit, generating short-run demand and boosting growth and productivity thereafter. Given this, shortfalls in investment that promises high social and private returns must be reduced, and even eliminated. These growth and productivity enhancing investments should be financed primarily from domestic savings, though some can also be financed with debt. Long-term, stable infrastructure investments can be financed at least partly by international development institutions. Third, it is critical to manage the capital account in a way that protects and enhances the real economy’s growth potential. Large inflows of capital from countries with low interest rates can easily push up exchange rates, putting the tradable part of the economy under pressure. At the same time, the prospect of a capital flow reversal adds risk, deters investment, and can produce sudden credit-tightening events. In this context, selective capital controls and careful reserve management can help to stabilize the balance of payments and ensure that the terms of trade do not change too fast to be off set by productivity growth. In fact, successful developing countries were pursuing such policies even before the global economic crisis hit. Fourth, a realistic approach to the digital revolution is needed. On one hand, developing countries should recognize that disruption, while happening fast, will not render their growth models obsolete overnight. China’s continued growth and rising household income are creating opportunities for lower-income economies in low-cost manufacturing. On the other hand, developing countries must accept the inevitability of changes to their growth models caused by digital technologies. Instead of viewing these changes

as a threat, and trying to resist them, developing economies should be getting ahead of them, by embracing disruptive innovations. This means investing in the capacity – physical and human – to support their use. Beyond upgrading manufacturing, developing countries should be preparing for the shift toward services that they will inevitably undergo as incomes rise (though the precise timing is hard to predict). Indeed, they should be seeking ways to exploit opportunities to boost their trade in services, much like India and the Philippines have done. Fifth, the distribution of gains from economic growth cannot be ignored. The advanced economies tried that, and the result has been rising political polarization, intensifying antiestablishment sentiment, declining policy coherence, and weakening social cohesion. In a low-growth environment, in particular, developing countries cannot afford to make the same mistake. Sixth, it is important to establish sustainable growth patterns early on. A “green” approach would not only stimulate additional growth; it would also be likely to increase the quality of growth, not to mention the lives of ordinary people. Moreover, it will lead to a far more resilient economy in the long run. Finally, entrepreneurial activity is vital to translate economic potential into reality. Policies that support such activity, such as by removing obstacles to new business creation and enhancing financing opportunities, cannot be left out of growth strategies. Opening channels for flows of information, ideas, expertise, and talent from abroad can only enhance these efforts. Developing economies may not have much control over the headwinds that they face today, but that does not mean that they are powerless. Much can be done not just to sustain moderate growth, but also to secure a more prosperous and resilient future..

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Hundt Legal Consultancy, an international legal advisor in UAE JOCHEN HUNDT

First of all, I would like to congratulate you for the IAIR award, as Law Firm of the Year 2015 for Litigation (UAE). I am sure, it an exciting award for Hundt Legal Consultancy and hope you will keep up with the good work to triumph many more awards in the coming years. Jochen Hundt (46) who is a native German from Bavaria, began his humble law education from France and second masters from the UK before embarking on a legal career in the UAE. Since 1993, his humble career began in Dubai, for the past 17 years or so, he has been practicing in the Kingdom of Saudi Arabia through many local firms as a senior litigator, arbitrator and counsel to many EU embassies in Riyadh. One of the key expertise of Jochen is his ability to communicate and deal with foreign and GCC clients in German, Arabic, French and English languages. AA: Jochen, what made you to start a legal consultancy firm in the UAE, though you were successfully working and settled in Saudi Arabia? JH: Since completing my Masters in Law at the University of Sussex in the United Kingdom, I was determined to start my own law firm. I said to myself “I should have good experience and a decent number of clients before starting my own.” For me the time was never right, until about 2011, then I realised there is a true plea from my clients to provide this sort of service where conventional law firms are unable to facilitate matters in Saudi Arabia, maybe even within the GCC. I did not just decide, one morning: That’s it, I am going to start my own law firm. I spoke to my clients, colleagues and friends for their input on how I could be different but at the same time provide inter-personal legal service in all disciplines instead of just focusing on billable hours. AA: You have stated earlier that Hundt Legal is different from other conventional local law

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firms. What sort of differences were you referring to? JH: Everybody knows what a law firm stands for and most of the small to medium size firms are general legal practitioners. Maybe a few are specialising in certain areas of the law and that’s all they are able to do. I wanted it to be a different kind of a law firm, a one stop shop for all my client’s needs. It’s probably fair to say that the aim of Hundt Legal Consultancy’s ser-

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vices is to focus on commercial clients, so in a way we are a fairly specialised law firm. However, on a commercial and legal perspective we do almost everything. AA: Where do you get your customers from, are they predominately local or a mixture of foreign clients? JH: We are not a Saudi registered fully-fledged law firm. We have a variety of clients, however predominately our clients are from the European Union. Having said that, we are an international legal advisor, so we have clients across the globe. Sometimes, we have a single client from a particular destination with legal services rendered across multiple international locations, especially within the GCC countries. AA: Something I meant to ask earlier: Why did you register your legal practice in the UAE? Can you just elaborate a bit about your organisation setup? JH: Yes, no problem. It’s very simple: Hundt Legal Consultancy has been incorporated as a non-domiciled company under at the Ras Al Khaimah Investment Authority (RAKIA). There are many advantages and disadvantages, it’s all based on the nature of the business. In these circumstances, the benefits outweigh the disadvantages. First of all, this setup is befitting to our clients’ needs greater than ours. We are not a ‘run of the mill’ law firm. We are ethically and legally as good as other law firms except we are not subject to certain local regulations in UAE. We pride ourselves with very high ethical and legal standards. We are subject to RAKIA rules and they have a very high standard as to how one can conduct business under their registration. AA: Then how do you practice in other countries, or even mainland UAE. JH: As I said earlier, we have a legal entity (company) registered in RAKIA that’s all. Our business practice extends beyond that, we have

cooperation partnerships with locally licenced legal practices. Therefore, we are subject to local lawyers’ code of conduct or subject to individual countries’ jurisdictions to practice as a law firm. Hundt Legal is very serious about our local partners, how they represent our clients to our ethical and business values. We have our own standards to follow before we associate with a partner in another country. For instance, we have occasions that our local partner is working with one of our other international partners through us. This makes it a bit complicated, thus far the clients and our partners are exceptionally happy. This sort of cooperation doesn’t happen often. That’s why we are different. We don’t pass on our clients or our partners’ clients around. We pride ourselves as a different kind of law firm, everybody gets the best outcome. AA: Let me ask you about skills. I know you are multilingual, is that all or there is more to it than that? JH: I do speak and write in all those mentioned languages. However, my Arabic fluency is not as good as my native German tongue but I am constantly improving and trying to learn new languages, too. If you are a lawyer in the Middle East, the Arabic language is a must. In Saudi Arabia, all legal documents ought to be written in Arabic to be recognised by the relevant authorities. Since I have been professionally working as a lawyer within the GCC countries for the past two decades, I have become proficient in Sharia law, various local legislations and taxations to address our clients with most up-to-date information. AA: Where is your base and how do you personally organise your work across many countries? JH: I live and work in Riyadh, Saudi Arabia. Having said that I travel between cities across

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the GCC countries predominantly, Dubai and Bahrain more often than others. No doubt, Dubai is the international business hub and there are plenty of customers with specialist financial and other legal works which needs to be carried out. This is not Hundt Legal’s cup of tea. Nowadays, technology is capable of dealing with clients’ needs without a local presence or satellite location outside of their main offices. Actually, it suits better for me and my client, because it’s extremely cost effective and efficient. Our main operational offices in Saudi Arabia are located in Bahrain Tower, King Fahad Road, Riyadh and in Al-Rajhi Centre, King Abdul-Aziz Road, Jeddah. AA: That means you are predominantly working in Saudi Arabia? Is it correct to say most of your clients are based in Saudi? JH: I wouldn’t like to say that I am just located in Saudi, so probably to a certain extent you are correct. I travel a lot, between cities across many continents. Saudi Arabia has the largest share within the GCC’s industrial, manufacturing and trade market. Therefore, there are many local legal and regulatory issues faced by our international clients who are trading in Saudi Arabia. Sometimes, issues as trivial as submitting a translated document to an adherence to a complex tax treaty or Zakat. Therefore, my experience and knowledge of the Saudi Arabian market demands most of my time which I am very proud of. AA: Give me an example of typical work you do at Hundt Legal Consultancy? If I may ask, what sort of work Hundt Legal generally undertakes? JH: There is no typical day in legal work. We always have foreign clients requiring to solve their local company registration issues in Saudi Arabia. If a foreign company has a direct local presence they need to register their business with the Saudi Arabian General Investment Authority (SAGIA). There is a complex but straightforward system of documentations, attestations, articles of associations and registrations to obtain to have local company status. Most foreign investors and strategic partners with local business in

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Saudi Arabia under-estimate the complexity and adherence. I have been doing it for over a decade and I can say Hundt Legal prides itself on having true hands-on success with its clients. We at Hundt Legal are experts in providing expert solutions in terms of local taxation, zakat, litigations, arbitrations, negotiations and dispute resolution, contractual drafting, labour law and related matters, sharia compliances, Islamic finance and insurance, government tenders and limited amount of intellectual property works. AA: Your reply entails me to ask you the question, how a UAE registered company can operate in Saudi Arabia without a local licence or anywhere else? JH: I have a very strong cooperation partnership with a locally licenced legal firm, called Alattas Law Offices, the cooperation being called Alattas & Hundt. Under Saudi Law, very similar to other GCC countries, a foreign law firm can cooperate with a licenced law firm as long as the licensed local law office is overall responsible of the operation of the legal activities. This is nothing new, in legal practices these sort of arrangements are very common. AA: Finally let me ask you, what do you think Hundt Legal’s future would be and what sort of role do you intend to play? JH: I am absolutely delighted to win the IAIR award, as Law Firm of the Year 2015 for Litigation in the UAE on behalf of the Hundt Legal law firm. We are a small firm but with a big global footprint. We already have offices in the most of the GCC countries, along with EU countries such as Germany, France, Luxemburg and Algeria. I am in constant lookout and in negotiations with many international partners for various levels of cooperation partnerships. For example Singapore, India, China and Malaysia are from my potential key areas of interests where we are beginning to see clients trickling through. I am always attracted to niche markets with specialist blue chip clients. They demand a lot, but at the same time they expect sheer professionalism and good results. AA: Thank you for your time and insight into you and Hundt Legal’s shared success.

International Alternative Investment Review 2017


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BUSINESS & FINANCE

The China Delusion ROB JOHNSON

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NEW YORK – China’s management of its exchange-rate peg continues to rattle global financial markets. Ongoing uncertainty about renminbi devaluation is fueling fears that deflationary forces will sweep through emerging markets and deliver a body blow to developed economies, where interest rates are at or near zero (and thus cannot be lowered to defend against imported deflation). Fiscal gridlock in both Europe and the United States is heightening the angst. But the current bout of exchange-rate anxiety is really just a symptom of the fact that China’s transition from an export-led growth strategy to one propelled by domestic consumption is proceeding far less smoothly than hoped. For some people, visions of the wonders of capitalism with Chinese characteristics remain undiminished. They are certain that, after more than three decades of state-directed growth, China’s leaders know what to do to turn their slumping economy around. The optimists’ unreality is rivaled by that of supply-siders, who would apply shock therapy to China’s slumping state sector and immediately integrate the country’s underdeveloped capital markets into today’s turbulent global financial system. That is a profoundly dangerous prescription. The power of the market to transform China will not be unleashed in a stagnant economy, where such measures would aggravate deflationary forces and produce a calamity. The persistent downward pressure on the renminbi reflects a growing fear that Chinese

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policymakers have no coherent solution to the dilemmas they face. Floating the renminbi, for example, is a dangerous option. After all, with the Chinese economy undergoing wholesale economic transformation, estimating a longterm equilibrium exchange rate that will anchor speculation is virtually impossible, particularly given persistent doubts about data quality, disclosure, and opaque policymaking processes. But if the current exchange-rate peg to a basket of currencies fails to anchor the renminbi and prevent sharp depreciation, the deflationary consequences for the world economy will be profound. Moreover, they will feed back on the Chinese export sector, thus dampening the stimulative impact of a weakened currency. The key to stabilizing the exchange rate lies in creating a credible development policy. Only then will the pressure on the renminbi, and on China’s foreign-exchange reserves, subside, because investors both within and outside the country will see a clear way forward. Establishing policy credibility will require diminishing the muddled microeconomic incentives of state control and guarantees. It will also require reinvigorating aggregate demand by targeting fiscal policy to support the emerging economic sectors that will underpin the new growth model. But, as usual with China, such a strategy is riddled with contradictions. For example, reducing the size of the state-enterprise sector is necessary, yet would be certain to depress aggregate demand at a time when demand is already soft. Likewise, cutting fiscal support (via government-directed bank lending) to zombie firms would free up fiscal capacity and enable resources to be redirected to new sectors that facilitate services and urban employment; but this would exacerbate – at least at first – today’s demand shortfall. Slashing the state sector abruptly and expecting to achieve transformation through austerity is not the way forward. Economic historians, notably Michael A. Bernstein in his study of the Great Depression in the United States, have convincingly shown that an economy in

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transition requires strong aggregate demand to pull resources into new sectors. If both the old and new sectors of an economy are in a slump, capital formation will sputter, investment in upgrading human capital will decline, and structural adjustment will stall. Robust aggregate demand is always essential to successful transformation. An equally large obstacle to China’s economic transition – the problem that almost dare not speak its name – is the widespread worship of China’s hybrid market economy. Simply put, today’s muddled market incentives impede transformation by favoring state-owned enterprises. In early 2012, when the Chinese leadership moved toward stronger private ownership, stocks in the private-sector sub-index outperformed the state-owned sector sub-index on both the Shanghai and Hong Kong stock exchanges. But since the spring of 2014, this trend has reversed, and the state-owned sector sub-index has outperformed the private-sector sub-index. As the Chinese economy slows and default risk grows, the value of state guarantees rises, directing capital away from privatesector growth. This hybrid system clearly impedes credit allocation from catalyzing development, while creating and sustaining vested interests opposed to reform. This holding pattern is particularly harmful because profound transformation will surely depend on financing from a sound sovereign bond market, which cannot function properly until uncertainty related to the government’s contingent liabilities – all those implicit guarantees – has been resolved. China has it within its power to stabilize its exchange rate via credible reforms, particularly policies that redirect resources to invigorate domestic demand and pull resources toward the newer high-value sectors. The reforms China needs cannot be accomplished in a slump, or by a large exchange-rate depreciation that deflates the world in a vain effort to turn back the clock to an era of export-led growth that stagnant demand in the West has rendered nonviable.

International Alternative Investment Review 2017


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Desperate Central Bankers STEPHEN S. ROACH NEW HAVEN – The final day of the summer marked the start of yet another season of futile policymaking by two of the world’s major central banks – the US Federal Reserve and the Bank of Japan. The Fed did nothing, which is precisely the problem. And the alchemists at the BOJ unveiled yet another feeble unconventional policy gambit. Both the Fed and the BOJ are pursuing strategies that are woefully disconnected from the economies they have been entrusted to manage. Moreover,

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their latest actions reinforce a deepening commitment to an increasingly insidious transmission mechanism between monetary policy, financial markets, and asset-dependent economies. This approach led to the meltdown of 2008-2009, and it could well sow the seeds of another crisis in the years ahead. Lost in the debate over the efficacy of the new and powerful tools that central bankers have added to their arsenal is the harsh reality of anemic econom-

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ic growth. Japan is an obvious case in point. Stuck in what has been essentially a 1% growth trajectory for the last quarter-century, its economy has failed to respond to repeated efforts at extraordinary monetary stimulus. Whatever the acronym – first, ZIRP (the zero interest-rate policy of the late 1990s), then QQE (the qualitative and quantitative easing launched by BOJ Governor Haruhiko Kuroda in 2013), and now NIRP (the recent move to a negative inter-

est-rate policy) – the BOJ has over-promised and under-delivered. In fact, with Japan’s real annual GDP growth slipping to 0.6% since Shinzo Abe was elected Prime Minister in late 2012 – one-third slower than the sluggish 0.9% average annual rate over the preceding 22 lost years (1991 to 2012) – the so-called maximum stimulus of “Abenomics” has been an abject failure. The Fed hasn’t fared much better. Real GDP growth in the US has averaged only 2.1% in the 28 quar-

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ters since the Great Recession ended in the third quarter of 2009 – barely half the 4% average pace in comparable periods of earlier upturns. As in Japan, America’s subpar recovery has been largely unresponsive to the Fed’s aggressive strain of unconventional stimulus – zero interest rates, three doses of balance-sheet expansion (QE1, QE2, and QE3), and a yield curve twist operation that seems to be the antecedent of the BOJ’s latest move. (The BOJ has just announced that it is targeting zero interest rates for ten-year Japanese government bonds.) Notwithstanding the persistent growth shortfall, central bankers remain steadfast that their approach is working, by delivering what they call “mandatecompliant” outcomes. The Fed points to the sharp reduction of the US unemployment rate – from 10% in October 2009 to 4.9% today – as prima facie evidence of an economy that is nearing one of the targets of the Fed’s so-called dual mandate. But when seemingly solid employment growth is juxtaposed against weak output, the story unravels, revealing a major productivity slowdown that raises serious questions about America’s long-term growth potential and an eventual buildup of cost and inflationary pressures. The Fed can’t be faulted for trying, argue the counter-factualists who insist that only unconventional monetary policies stood between the Great Recession and another Great Depression. That, however, is more an assertion than a verifiable conclusion. While policy traction has been notably absent in the real economies of both Japan and the US, asset markets are a different story. Equities and bonds have soared on the back of monetary policies that have led to rock-bottom interest rates and massive liquidity injections. The new unconventional monetary policies in both countries are obviously missing the disconnect between asset markets and real economic activity. This reflects the aftermath of wrenching balancesheet recessions, in which aggregate demand, artificially propped up by asset-price bubbles, collapsed when the bubbles burst, leading to chronic impairment of overleveraged, asset-dependent consumers (America) and businesses (Japan). Under such circumstances, the lack of response at the zero bound of policy interest rates is hardly surprising. In fact,

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it is strikingly reminiscent of the so-called liquidity trap of the 1930s, when central banks were also “pushing on a string.” What is particularly disconcerting is that central bankers remain largely in denial in the face of this painful reality check. As the BOJ’s latest actions indicate, the penchant for financial engineering remains unabated. And as the Fed has shown once again, the ever-elusive normalization of policy interest rates continues to be put off for yet another day. Having depleted their traditional arsenal long ago, central bankers remain myopically focused on devising new tools, rather than owning up to the destructive role their old tools played in sparking the crisis. While financial markets love any form of monetary accommodation, there can be no mistaking its dark side. Asset prices are being manipulated across the board – stocks and bonds, long- and short-duration assets, as well as currencies. As a result, savers are being punished, the cost of capital is repressed, and reckless risk taking is being encouraged in an income-constrained climate. This is especially treacherous terrain for economies desperately in need of productivity-enhancing investment. And it is not dissimilar to the environment of asset-based excess that incubated the 2008-2009 global financial crisis. Moreover, frothy asset markets in an era of extreme monetary accommodation take the pressure off fiscal authorities to act. Failing to heed one of the most powerful (yes, Keynesian) lessons of the 1930s – that fiscal policy is the only way out of a liquidity trap – could be the greatest tragedy of all. Central bankers desperately want the public to believe that they know what they are doing. Nothing could be further from the truth.

International Alternative Investment Review 2017


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ECONOMICS

Who Has Space for Renewables? ADAIR TURNER

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ECONOMICS

LONDON – This summer, an electrical power auction in Chile attracted successful bids by wind generators willing to provide electricity at $0.04 per kilowatt hour and solar generators at $0.03 per kwh, easily beating fossil-fuel competitors. That success reflects dramatic cost reductions over the last six years, with the cost of solar power falling about 70% and wind-power costs down more than 30%. Further reductions are inevitable. Of course, the sun doesn’t always shine, and the wind doesn’t always blow, but intermittency problems are increasingly solvable as the cost of batter y and other energy storage falls, and as smart meters and control systems make it possible to shift the timing of some electricity demand. It is now certain that, within 20 years, many countries could get most of their electricity from renewable sources at an easily affordable price. To be sure, solar and wind farms require large land areas. But at the global level, there is plenty of space. Solar energy reaching Earth totals more than 5,000 times today’s human consumption. Demand will likely double if the world population grows (as United Nations forecasts suggest) from 7.2 billion today to 11 billion by 2100, and if all 11 billion people attain standards of living now enjoyed only in developed economies. And today’s solar panels can turn only about 20% of solar energy into electricity (though that ratio will increase over time). But even allowing for these factors, estimated space requirements for solar energy sufficient to power the entire world are reassuringly trivial, at 0.51% of global land area. For individual countries however, the

challenges var y greatly, reflecting dramatic differences in population density. Chile has 24 people per square kilometer, the United States 35, and India 441 – a figure likely to rise to around 570 by 2050 – while Bangladesh’s is already above 1,200. Uganda’s population density today is 195 per square kilometer, but could grow to around 1,000 by 2100. China’s level will remain stable, at a moderate 145 people per square kilometer, with its densely populated coastal regions offset by large expanses of desert and mountains to the west. Land allocated to wind power is not lost to agricultural production, because crops can be grown and animals grazed between the turbines. But higher population density makes it more difficult and expensive to rely on renewables alone. If South Korea, with a population density of 517, tried to meet all its energy needs with wind power, it would have to cover its entire land area with wind farms. And in countries rich enough to care about landscape beauty, higher population density makes clean energy more expensive. In the UK, where the overall

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population density is 267 per square kilometer, but 413 in England, the current government opposes new onshore wind farms because of their adverse aesthetic impact. As a result, Britain will have to rely also on offshore wind and nuclear electricity to build a low-carbon economy, adding some 2-3 cents per kilowatt hour to the cost of electricity. But the far bigger challenges are those some emerging economies already face, and that several African countries will confront in the future. With population densities eight and 22 times the global average, respectively, India would have to devote 4% of its land to solar parks to meet all of its energy needs, and Bangladesh more than 10%. Moreover, in India, unlike in Chile or the US, competition between alternative land uses is already intense in some areas. For example, India’s ambition to develop a large manufacturing sector has sometimes been hampered by contentious and even violent disputes over land allocation. In some parts of the country, such as the Rajasthan desert, it will be possible to develop large solar facilities; elsewhere, land availability might limit feasible renewables development. And while solar panels can and must be deployed on roof tops and in other urban locations, the costs will be higher than in countries where land is easily available. That means that while renewables must play a major role in decarbonization everywhere, in some countries other technologies such as nuclear power or carbon capture and storage may have to carry more of the burden. And improvements in energy productivity – via better urban design, for example – that enable income growth while limiting required energy input become more important in more densely populated countries where decarbonization will be more difficult. Indeed, some of the world’s most densely

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populated countries face a double disadvantage; they are often the most exposed to the adverse effects of climate change, and building low carbon economies may be more difficult. Conversely, already-rich and lightly populated countries – such as the US, Australia, and Chile – are blessed with enough space to build low-carbon energy systems at very low cost and with trivial consequences for agricultural land availability or landscape aesthetics. This may have important implications for global trade. The shale-gas revolution has already increased the prospect that energy-intensive manufacture may return to the US; and, as automation makes differences in labor costs less important, low-cost renewable energy may drive still more “onshoring.” But that would further complicate emerging economies’ ability to generate sufficient employment for rapidly growing populations. Dramatic progress in renewable electricity is a hugely positive development; but the benefits are most easily grasped in developed, relatively sparsely populated countries. Many other technologies and well-designed policies – both domestic and international – will be needed to enable less-endowed countries to build successful low-carbon economies.

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Brexit and the Pound in Your Pocket BARRY EICHENGREEN

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BERKELEY – The early returns on Brexit are in, and, contrary to what some have been claiming, they’re not good. In July, following the referendum, consumer confidence collapsed at its most rapid rate since 1990. Surveys of manufacturing and construction dropped precipitously. While August’s data were better, it is too soon to say whether the improvement was just a “dead cat bounce.” In this topsy-turvy post-referendum world, the one piece of good news is sterling’s fall on the foreign exchange market. A lower exchange rate will make British exports more competitive. Faced with higher import prices, consumers will shift their spending toward domestic goods. This, too, will give a boost to the British economy. The question is how big a boost. Skeptics caution that Britain relies heavily on exports of financial services, which are not especially price-sensitive, and that the scope for growth of merchandise exports is limited by the subdued global demand. Britain has been here before, so this is a question of which history can shed light. In 1931, when the UK abandoned the gold standard, sterling plummeted by 30%. Like now, the country relied heavily on exports of services – not just banking services but also shipping and insurance. And the external environment was even more unfavorable than it is now. Yet, despite these headwinds, the merchandise trade deficit fell by a quarter between 1931 and 1932. By 1933, the services balance was strengthening as well. At this point, the economy was on the road to recovery. Three circumstances made this possible.

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First, excess capacity enabled companies to ramp up production. Second, Britain was able quick to put in place a set of favorable trade deals, negotiated with Commonwealth countries at the Ottawa Conference in 1932. Third, political uncertainty fell sharply, as the Labour government, widely blamed for the 1931 crisis, was replaced by a Conservative-dominated cabinet with broad popular support. Clearly, none of these conditions is present today. Excess capacity in traded-goods sectors is low. In today’s more complicated legal environment, it will take years to negotiate trade deals with the EU and then other partners. Political uncertainty is high, and there is no prospect of a general election to resolve it anytime soon. Investors have every reason to adopt a wait-and-see attitude. In 1949, Britain found itself in the same position, with a trade deficit vis-à-vis the United States and weak investor confidence. In September of that year, sterling was again devalued, as it had been 18 years before, by 30%. Because pressure for higher wages was subdued, British exports became more competitive. The trade deficit with the dollar area, made up of the US and other countries that used its currency to settle international payments, contracted sharply. The current account of the balance of payments swung from deficit in 1949 to surplus in 1950, and GDP rose strongly. Again, three things made this possible. First, there was robust demand in the US, which was recovering from its 1948-1949 recession. Second, the outbreak of the Korean War in 1950 created demand for exports of all kinds. Third, with the creation of the European Payments Union, the UK and its European partners agreed to dismantle controls on trade with one another. Here, too, the current situation could not be more different. US growth is far from robust, and EU countries have made clear that they are in no hurry to negotiate a trade deal with the UK. A third precedent

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is the 1967 devaluation of sterling, again after an interval of 18 years. The balanceof-payments crisis of 1966-7 reflected the tendency of British wages to grow faster than productivity, the consequent trade deficits, and foreign investors’ reluctance to finance a position they saw as unsustainable. This time, however, it took two years for the external accounts to improve. With unemployment already low, that much time was needed to reallocate resources from nontraded- to tradedgoods sectors. In the interim, foreign investors remained reluctant to finance Britain’s deficits. Seeing the difficulty of the adjustment, they worried that sterling would collapse. The UK, unable to attract short-term capital inflows, was forced to borrow from the International Monetary Fund. This history suggests that exchange rates matter for competitiveness, and that sterling’s depreciation should help by enhancing the competitiveness of British exports. But policymakers shouldn’t expect too much. The external environment is unfavorable. It will take time to reallocate resources toward the production of traded goods. And a new set of trade deals will not be concluded overnight. Meanwhile, British leaders must resolve the lingering political and policy uncertainty. They must use not just monetar y policy, but also fiscal tools, to support spending and strengthen the incentive to invest. Until now, they have shown little awareness of the urgency.

International Alternative Investment Review 2017


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ECONOMICS

The Perils of Debt Complacency CARMEN REINHART CAMBRIDGE – “What a government spends the public pays for. There is no such thing as an uncovered deficit.” So said John Maynard Keynes in A Tract on Monetary Reform. But Robert Skidelsky, the author of a magisterial three-volume biography of Keynes, disagrees. In a recent commentary entitled “The Scarecrow of National Debt,” Skidelsky offered a rather patronizing narrative, in a tone usually reserved for young children and pets, about his aged, old-fashioned, and

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financially illiterate friend’s baseless anxiety about the burden placed on future generations by the rising level of government debt. If Skidelsky’s point had been that some economies, including the United States, would benefit from higher infrastructure spending, even at the cost of more debt, I would agree wholeheartedly. Compelling reasons for boosting US public investment include deteriorating infrastructure, tepid growth, low interest rates, and limited scope for further mon-

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etary stimulus. For the US, such an impetus might be especially welcome as the Federal Reserve raises interest rates (albeit gradually) while other countries ease further or hold rates steady and thedollar likely strengthens. But that was not the route Skidelsky took. Instead, in his critique of a commentary by Kenneth Rogoff, he argued that it is silly and passé for a country that can issue debt in its own currency to fret over medium-term debt levels. Call me old-fashioned, but that

argument smacks of complacency and is not supported by evidence. On this score, Skidelsky confuses two different papers on debt and growth, a 2012 paper of mine, in which there were some alleged data concerns, with one that I co-authored with Rogoff and Vincent Reinhart, in which there were none. Coming from an author who knows Keynes so well, such complacency disappoints. I cannot read How to Pay For the War and conclude that Keynes thought that high war debts were a “scarecrow” for the United Kingdom. In fact, the apparatus of the Bretton Woods arrangements that Keynes subsequently helped to craft were designed to ease a difficult transition out of debt. The case for near-term fiscal stimulus, even if in the form of increased infrastructure outlays, cannot ignore the medium-term outlook for economies with already large debt obligations, major entitlement burdens, aging populations, and what appears to be a steady downward drift in potential output growth. As Skidelsky notes, debts have risen significantly in the UK and the US (among others) since 2008, while interest rates have remained low or declined. Should we therefore conclude that high debt is not linked to low growth via high interest rates (which crowd out private spending)? Reading a little further into my study with Rogoff and Reinhart, one would find that there was ‘‘little to suggest a systematic mapping between the largest increases in average interest rates and the largest (negative) differences in growth during the individual debt overhang episodes.” Our research considered 26 high-debt episodes between 1800 and 2011, looking both at growth rates and at levels of real (inflation-adjusted) interest rates. In 23 of these high-debt episodes, growth was lower, and in eight growth slowed even as real interest rates remained about the same or edged lower. Japan’s debt overhang (entirely domestic currency debt), which we trace back to 1995, illustrates this pattern. Why do high debt and slow growth coexist, despite

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cheap financing? High debt levels can and do constrain a country’s abilities to cope with adverse events. For example, some of Italy’s largest banks have been diagnosed as approaching insolvency and requiring substantial recapitalization. Not surprisingly, the confidence of Italian households and firms has been shaken, and capital flight has ensued. If Italy’s debt were not already 130% of GDP, might its government have been better positioned to provide the resources to tackle decisively its lingering banking and confidence problems? Our 2012 study identified three ongoing public-debt overhangs that began in the mid-1990s – Greece, Italy, and Japan. Relative to other advanced economies, these three economies are the worst growth performers (see chart). To be sure, a country’s economic performance depends on many factors. But the view that it is low growth that causes debt to rise, though important when assessing the cyclical feedback effects, can hardly explain the two-decade experience of these three countries. It is difficult to imagine a sustained revival of Greek growth without another round of haircuts and debt forgiveness from Greece’s official creditors, which now hold most of its debt. Italy depends critically on the

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continued large-scale purchases of its bonds by the European Central Bank (its Target 2 balances have recently climbed, reflecting capital flight). The Bank of Japan is going to greater and greater lengths to orchestrate an increase in inflation expectations and price growth, which can help erode the value of outstanding debts. (“For inflation is a mighty taxgatherer,” as Keynes observed.) Other countries, like Portugal, are also struggling with low growth and weak fiscal positions. Concerns about debt levels (public and private) have now extended beyond the advanced economies to many emerging markets. I cannot recall an instance of a government that is concerned about having too low a level of debt. Perhaps, it is because the debt scarecrow has teeth. Skidelsky needs no reminder of the historical record, but it bears noting that more than a dozen advanced economies received debt relief in one form or another during the depression of the 1930s. The approach to unwinding current debts is likely to vary considerably across countries, but it is time to place greater emphasis on debt restructuring (which comes with a menu of options) than on accumulating more debt.

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The Case Against Cash KENNETH ROGOFF

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CAMBRIDGE – The world is awash in paper currency, with major countr y central banks pumping out hundreds of billions of dollars’ worth each year, mainly in ver y large denomination notes such as the $100 bill. The $100 bill accounts for almost 80% of the US’s stunning $4,200 per capita  cash supply. The ¥10,000 note (about $100) accounts for roughly 90% of Japan’s  per capita  cash holdings at almost $7,000. And, as I have been arguing for  two decades, all this cash is facilitating growth mainly in the underground economy, not the legal one. I am not advocating a cashless society, which will be neither feasible nor desirable anytime soon. But a less-cash society would be a fairer and safer place. With the growth of debit cards, electronic transfers, and mobile payments, the use of cash has long been declining in the legal economy, especially for medium and large-size transactions. Central bank surveys show that only a small percentage of large-denomination notes are being held and used by ordinar y people or businesses. Cash facilitates crime because it is anonymous, and big bills are especially problematic because they are so easy to carr y and conceal. A million dollars in $100 notes fits into a briefcase, a million dollars in €500 notes (each worth about $565) fits into a purse. Sure, there are plenty of ways to bribe officials, engage in financial crime, and evade taxes without paper currency. But

most involve ver y high transaction costs (for example, uncut diamonds), or risk of detection (say, bank transfers or credit card payments). Yes, new-age cr ypto-currencies such as Bitcoin, if not completely invulnerable to detection, are almost so. But their value sharply fluctuates, and governments have many tools with which they can restrict their use – for example, by preventing them from being tendered at banks or retail stores. Cash is unique in its liquidity and nearuniversal acceptance. The costs of tax evasion alone are staggering, perhaps $700 billion per year in the United States (including federal, state, and local taxes), and even more in high-tax Europe. Crime and corruption, though difficult to quantify, almost surely generate even greater costs. Think not just of illegal drugs and racketeering, but also of human trafficking, terrorism, and extortion. Moreover, cash payments by employers to undocumented workers are a principal driver of illegal immigration. Scaling back the use of cash is a far more humane way to limit immigration than building barbed-wire fences. If governments were not so drunk from the profits they make by printing paper currency, they might wake up to the costs. There has been a little movement of late. The European Central Bank recently announced that it will phase out its €500 mega-note. Still, this long overdue change was implemented against enormous resistance from cash-loving Germany and Austria.

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Yet even in northern Europe, reported per capita  holdings of currency are still quite modest relative to the massive outstanding supply in the eurozone as a whole (over €3,000 per capita). Southern European governments, desperate to raise tax revenue, have been taking matters into their own hands, even though they do not control note issuance. For example, Greece and Italy have been trying to discourage cash use by capping retail cash purchases (at €1,500 and €1,000, respectively). Obviously, cash remains important for small everyday transactions, and for protecting privacy. Northern European central bankers who favor the status quo like to quote Russian novelist Fyodor Dostoevsky : “Money is coined liberty.” Of course, Dostoevsky was referring to life in a mid-nineteenth century czarist prison, not a modern liberal state. Still, the northern Europeans have a point. The question is whether the current system has the balance right. I would argue that it clearly does not. A plan for reining in paper currency should be guided by three principles. First, it is important to allow ordinary citizens to continue using cash for convenience and to make reasonable-size

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anonymous purchases, while undermining the business models of those engaged in large, repeated anonymous transactions on a wholesale level. Second, any plan should move ver y gradually (think a decade or two), to allow adaptations and mid-course corrections as unexpected problems arise. And, third, reforms must be sensitive to the needs of low-income households, especially those that are unbanked. In my new book, The Curse of Cash, I offer a plan that involves ver y gradually phasing out large notes, while leaving small notes ($10 and below) in circulation indefinitely. The plan provides for financial inclusion by offering low-income households free debit accounts, which could also be used to make government transfer payments. This last step is one that some countries, such as Denmark and Sweden, have already taken. Scaling back paper currency would hardly end crime and tax evasion; but it would force the underground economy to employ riskier and less liquid payment devices. Cash may seem like a small, unimportant thing in today’s high-tech financial world, but the benefits of phasing out most paper currency are a lot larger than you might think.

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Overhauling China KEYU JIN

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LONDON – Pessimism about China has become pervasive in recent months, with fear of a “China meltdown” sending shock waves through stock markets worldwide since the beginning of the year. And practically everyone, it seems, is going short on the country. There is certainly plenty of reason for concern. GDP growth has slowed sharply; corporatedebt ratios are unprecedentedly high; the currency is sliding; equity markets are exceptionally volatile; and capital is flowing out of the country at an alarming pace. The question is why this is happening, and whether China’s authorities can fix it, before it is too late. The popular – and official – view is that China is undergoing a transition to a “new normal” of slower GDP growth, underpinned by domestic consumption, rather than exports. And, as usual, a handful of economic studies have been found to justify the concept. But this interpretation, while convenient, can provide only false comfort. China’s problem is not that it is “in transition.” It is that the state sector is choking the private sector. Cheap land, cheap capital, and preferential treatment for state-owned enterprises weakens the competitiveness of private firms, which face high borrowing costs and often must rely on family and friends for financing. As a result, many private firms have turned away from their core business to speculate in the equities and property markets. Chinese households are also squeezed. In just 15 years, household income has fallen from 70% of GDP to 60%. Unless Chinese households are able to reap their fair share of the benefits of economic growth, it is difficult to imagine how a consumption boom is supposed to happen. Clearly, China must take bold steps to unleash the dynamism of the private sector and boost household demand.

China has proved its capacity to implement radical reforms that eliminate major distortions, thereby boosting growth and absorbing excess debt. In the late 1980s, falling GDP growth (the annual per capita  rate reached a  low of 2%  in 1989) and a rising volume of non-performing loans (NPLs) fueled expectations of an economic implosion. It never came. Instead, the Chinese government launched a raft of radical reforms, including large-scale privatization of industry and elimination of price controls and protectionist policies and regulations. As the state’s share of non-agricultural employment fell – from 30% in the mid-1990s to 13% by 2007 – private-sector productivity rose at an average annual rate of 3.7% from 1998 to 2007. State-sector productivity grew even faster, at 5.5% per year. This productivity growth contributed about one-third of China’s total GDP growth – which accelerated to double-digit rates – over this period. China’s entry into the World Trade Organization in 2001 – another bold step – was a major factor in this success. This time around, however, the task facing China’s government is complicated by political and social constraints. The economic reforms China needs now presuppose political reform; but those reforms are hampered by fears of the social repercussions. If China is to avoid economic decline, it will have to overhaul its governance system – and the philosophy that underpins it – without triggering excessive social instability. The good news is that China has a promising track record on this front. After all, it was a fundamental ideological shift that enabled China’s 35-year-long economic boom. That shift emphasized economic development above all else, with the champions of growth being protected, promoted, and, if necessary, par-

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doned. A similar ideological shift is needed today, only this time the focus must be on institutional development. Sustainable long-term growth – based on efficiency improvements, productivity gains, and innovation – is possible only with an effective institutional framework, and that requires fundamental changes to the political and regulatory systems. Only by overcoming vested interests and building a more efficient bureaucracy, bound firmly by the rule of law, can the reforms China needs be pushed through. Complicating matters further are mounting social conflicts, such as between urban and rural populations, among industries, and between the private and state sectors. The potential for mass protests and civil

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unrest is now hampering the government’s determination to create change. But with a concerted effort to create a level playing field that gives more people a bigger piece of the economic pie, not to mention more transparent governance and a stronger social safety net, China’s government could reinforce its legitimacy and credibility. That, in turn, would strengthen the authorities’ capacity to ensure stability. China’s experience in the 1990s suggests that the country can bounce back from its current struggles. With major reforms only half-complete, there are significant opportunities for stable growth based on efficiency and productivity gains, rather than merely on consumption. Once key distortions are eliminated and resources – including labor, capital, and talent – are being allocated more efficiently, China will be able to continue its march toward high-income status.China’s government may struggle at first; after all, performing surgery on oneself is difficult to initiate and even more difficult to get right. But if economic conditions worsen, as seems plausible, action will become unavoidable. Good times may breed crises in the West; in China, it is crises that bring better times.

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Can South Korea Make More Babies? LEE JONG-WHA

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SEOUL – South Korea is facing major demographic challenges. The total fertility rate (the number of children per woman), at 1.24, is one of the lowest in the world, and well below the level – 2.1 children per woman – needed to sustain a population without immigration. As a result, the population is aging fast, and the government, despite its best efforts, seems to have no answer. A low birthrate is common in industrialized countries. Before South Korea’s economic boom – a time when having more children was viewed as a source of security in old age – the fertility rate was much higher, averaging more than six until 1960. But, as South Korea’s economy advanced, child-rearing costs rose, and female labor-force participation increased, the fertility rate declined dramatically, dropping below two in the 1980s. At first, falling fertility rates were an economic blessing, as households saved more and invested in children’s development. In 2015, the college enrollment rate for women  hit  81%, compared to just 6% in 1980. But the decline of the prime working-age population has lately been undercutting economic growth, and threatens to place excessive pressure on the public pension system down the road. South Korea’s government has attempted to address these challenges with a series of measures aimed at boosting fertility rates. A recent package includes more paternity leave, priority enrollment in public childcare facilities for third children, and subsidies for infertility treatment. But whether these measures will lead to higher fertility rates is dubious, for a sim-

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ple reason: they fail to tackle sufficiently the high economic hurdles that are causing South Koreans to delay or forego having children. One of those hurdles is the cost of education. South Korean parents are willing to invest heavily in giving their few children the best chance of prospering. In 2015, they spentalmost 7% of their disposable income on private tutoring for their children in primar y and secondar y education. They also pay an absurdly high price for their children’s college education, which no longer guarantees prosperity in life. In fact, South Korea’s share of private spending for college education is the highest among OECD countries, even ahead of the United States. That limits how many children parents may feel they can afford to raise. For many young South Koreans, even

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marriage is economically unfeasible nowadays, owing to factors like high housing costs and youth unemployment, even among university graduates. The number of weddings in South Korea plunged from 435,000 in 1996 to 302,800 in 2015. In a countr y where only 2% of children are born outside marriage, this trend has a powerful impact on fertility rates. Women confront the highest barriers to increased fertility. Per vasive gender inequality, together with a lack of affordable, high-quality childcare, causes many South Korean women to withdraw from the labor market after marriage or childbirth. While men work long, inflexible hours, women assume the lion’s share of the responsibility for family care. A 2014 survey  indicated that South Korean women spent, on average, three hours and 28

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minutes daily on household activities and family care, compared to just 47 minutes for men, who also accounted for only 5.6% of those who took parental leave in 2015. Though the new measures aim to boost this share, it will not be enough. After all, women are not just struggling to cope with uneven parental leave; many are leaving their jobs altogether after childbirth. And many of them do not wish to do so. In a recent sur vey  by the Federation of Korean Industries, 38% of the single female respondents said that they do not want children, mostly because they fear that they will struggle to keep up at work or lose their jobs. Only one-third responded positively to the government’s program for promoting fertility. South Korea’s government must pursue a more comprehensive policy package aimed at lowering some of the barriers to childbirth. Women, in particular, need greater support, in order to eliminate the binar y choice between career and family. The key is to provide more flexible work arrangements, to build a more accepting corporate culture, and to ensure accessible childcare, both public and private. To this end, allowing the migration of foreign housekeepers and caregivers could be ver y helpful. South Korea remains conser vative about offering permanent residency to foreign nationals. But the reality is that, in advanced economies where market ser vices for childcare and households are available, highly educated women tend to  have more children, especially at older ages. Japan, for its part, has managed to boost its ultra-low fertility rate – which  bottomed out  in 2005 at 1.26 – to 1.46 in 2015, through consistent efforts to reduce childrearing costs and change the corporate culture. To sustain this recover y, it has recently decided to take initiatives to attract more foreign housekeepers. These changes reflect Prime Minister Shinzo

Abe’s commitment to prevent the population from falling below 100 million. Even where foreign household workers do not raise the fertility rate, they enable more women to continue working after having children. In Singapore, for example, families often hire live-in maids from neighboring countries, including the Philippines and Indonesia, to take care of the housework and childcare. Though Singapore’s fertility rate stands at just 1.3 – one of the lowestin the world – this policy enables the countr y to attract foreign talents to fill the population gap and sustain the economy. To some extent, demographic change is inevitable, as is its transformative economic impact. But there are steps that governments can take to shape demographic trends and blunt their negative effects. If South Korea creates an environment in which families can live and work happily, those families will grow larger.

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Escaping the New Normal of Weak Growth MICHAEL SPENCE

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MILAN – There is no question that the recover y from the global recession triggered by the 2008 financial crisis has been unusually lengthy and anemic. Some still expect an upswing in growth. But, eight years after the crisis erupted, what the global economy is experiencing is starting to look less like a slow recover y than like a new low-growth equilibrium. Why is this happening, and is there anything we can do about it? One potential explanation for this “new normal” that has gotten a lot of attention is declining productivity growth. But, despite considerable data and analysis, productivity’s role in the current malaise has been difficult to pin down – and, in fact, seems not to be as pivotal as many think. Of course, slowing productivity growth is not good for longer-term economic performance, and it may be among the forces holding back the United States as it approaches “full” employment. But, in much of the rest of the world, other factors – namely, inadequate aggregate demand and significant output gaps, rooted in excess capacity and underused assets (including people) – seem more important. In the eurozone, for example, aggregate demand in many member countries has been constrained by, among other things, Germany’s large current-account surplus, which amounted to 8.5% of GDP in 2015. With higher aggregate demand and more efficient use of existing human capital and other resources, economies could achieve a significant boost in medium-term growth, even without productivity gains. None of this is to say that we should ignore the productivity challenge. But the 2017 International Alternative Investment Review

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truth is that productivity is not the principal economic problem right now. Tackling the most urgent problems confronting the world economy will require action by multiple actors – not just central banks. Yet, thus far, monetar y authorities have shouldered much of the burden of the crisis response. First, they inter vened to prevent the financial system’s collapse, and, later, to stop a sovereign-debt and banking crisis in Europe. Then they continued to suppress interest rates and the yield cur ve, elevating asset prices, which boosted demand via wealth effects. But this approach, despite doing some good, has run its course. Ultra-low – even negative – interest rates have failed to restore aggregate demand or stimulate investment. And the exchange-rate transmission channel won’t do much good, because it does not augment aggregate demand; it just shifts demand around among countries’ tradable sectors. Inflation would help, but even the most expansionar y monetar y measures have been struggling to raise inflation to targets, Japan being a case in point. One reason for this is inadequate aggregate demand.

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Monetar y policy should never have been expected to shift economies to a sustainably higher growth trajector y by itself. And, in fact, it wasn’t: monetar y policy was explicitly intended to buy time for households, the financial sector, and sovereigns to repair their balance sheets and for growth-enhancing policies to kick in. Unfortunately, governments did not go nearly far enough in pursuing complementar y fiscal and structural responses. One reason is that fiscal authorities in many countries – in particular, in Japan and parts of Europe – have been constrained by high sovereign-debt levels. Furthermore, in a low interest-rate environment, they can live with debt overhangs. For highly indebted governments, low interest rates are critical to keep debt levels sustainable and ease pressure to restructure debt and recapitalize banks. The shift to a high sovereign-debt-yield equilibrium would make it impossible to achieve fiscal balance. In the eurozone, the European Central Bank’s commitment, announced in 2012, to prevent debt levels from becoming unsustainable is politically conditional on fiscal restraint. There are also political motivations at play. Politicians simply prefer to keep the burden on monetar y policy and avoid pursuing difficult or unpopular policies – including structural reforms, debt restructuring, and the recapitalization of banks – aimed at boosting market access and flexibility, even if it means undermining medium-term growth. The result is that economies are stuck in a so-called Nash equilibrium, in which no participant can gain through unilateral action. If central banks attempt to exit their aggressively accommodative policies without complementar y actions to restruc-

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ture debt or restore demand, growth, and investment, growth will suffer – as will central banks’ credibility, or even their independence. But exit they must, because expansionar y monetar y policies have reached the point at which they may be doing more harm than good. By suppressing returns to savers and holders of assets for a protracted period, low interest rates have spurred a frantic search for yield. This takes two forms. One is rising leverage, which has increased globally by about $70 trillion since 2008, largely (though not entirely) in China. The other is capital-flow volatility, which has driven policymakers in some countries to pursue their own monetar y easing or to impose capital controls, in order to prevent damage to growth in the tradable sector. It is past time for political leaders to show

more courage in implementing structural and social-security reforms that may impede growth for a time, but will stabilize their countries’ fiscal position. More generally, fiscal authorities need to do a much better job of cooperating with their monetar y counterparts, domestically and internationally. Such action will probably have to wait until the political consequences of low growth, high inequality, mistrust of international trade and investment, and the loss of central-bank independence become too great to bear. That probably won’t happen right away ; but, given the rise of populist leaders seizing on these adverse trends to win support, it may not be too far off. In this sense, populism can be a beneficial force, as it challenges a problematic status quo. But the risk remains that, if populist leaders do secure power, they will pursue policies that lead to even worse results.

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INNOVATION & TECHNOLOGY

Innovation and Its Discontents CALESTOUS JUMA

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CAMBRID GE – Technological innovation is often extolled for its power to overcome major development challenges, fuel economic growth, and propel societies forward. Yet innovations f requently face high barriers to implementation, with governments sometimes banning new technologies outright – even those that could bring far-reaching benef its. C onsider the printing press. Among other things, the new technolog y was a boon to world religions, which suddenly had an ef f icient means of reproducing and disseminating sacred texts. Yet the Ottoman Empire forbade the printing of the Koran for nearly 400 years. In 1515, Sultan S elim I is said to have decreed that “occupying oneself with the science of printing was punishable by death.” Why oppose such a beneficial technolog y? As I argue in my book Innovation and Its Enemies: Why People Resist New Technologies, the answer is not simply that people are afraid of the unknown. R ather, resistance to technological progress is usually rooted in the fear that disr uption of the status quo might bring losses in employment, income, power, and identity. Governments often end up deciding that it would be easier to prohibit the new technolog y than to adapt to it.

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By banning the printing of the Koran, Ottoman leaders delayed employment losses for scribes and calligraphers (many of whom were women who were glorified for their master y of the ar t). But protecting employment was not their main motivation; after all, beginning in 1727, they did allow non-religious texts to be printed, despite protests by calligraphers, who responded to the edict by putting their inkstands and pencils in coffins and marching to the High Porte in Istanbul. Religious knowledge was a dif ferent matter. It was both the glue that held society together and a pillar of political power, so maintaining a monopoly over the dissemination of that knowledge was critical to maintaining the authority of Ottoman leaders. They feared going the way of the Catholic pope, who lost considerable authority during the Protestant Reformation, when the printing press played a key role in spreading new ideas to the faithful.

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Of course, the erection of barriers to technological innovation does not always star t with the government. Those with a vested interest in the status quo may push their governments to impose bans. They may do so through protest, as the Ottoman calligraphers did, and as Irish opponents of genetically modif ied potatoes did in 2002, by marching in Dublin to express their opposition to the “death of good food.” Opponents of new technologies may also employ slander, misinformation, and even demonization – an approach that has certainly succeeded in the past. In 1674, English women issued a petition against coffee, alleging that it caused sterility and thus should be consumed only by people over 60 – a ver y small market at the time. The following year, King Charles II ordered the suppression of cof feehouses, though he was probably motivated more by the desire to protect the market share of local beverages, such as alcoholic

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drinks and then-newly introduced tea, than by the infertility rumors. In the 1800s, the American dair y industr y spearheaded a similar misinformation campaign about margarine, claiming that it caused sterility, stunted growth, and male baldness. Derided as “bull butter,” opponents claimed that margarine contained “diseased and putrid beef, dead horses, dead hogs, dead dogs, mad dogs, and downed sheep.” In response, the federal government introduced new restrictions on margarine, covering ever ything from labeling (as with genetically modified foods today), the use of artificial coloring, and interstate movement. New taxes reinforced butter’s primac y further. In 1886, a Wisconsin congressman declared outright his “intent to destroy the manufacture of the noxious compound by taxing it out of existence.” Resistance to tractors in the early 1900s took a slightly different form. Producers and traders of draft animals feared mechanization, which threatened their way of life.

But they knew that they could not improve their product faster than engineers could improve theirs, and thus that blocking the spread of tractors would be impossible. Instead, they sought to prevent the displacement of farm animals, by pursuing a campaign touting their vir tues. The Horse Association of America issued leaf lets declaring that, “A mule is the only fool-proof tractor ever built.” The group also pointed out that horses could reproduce themselves, whereas tractors depreciated. People almost never reject technological progress out of sheer ignorance. R ather, they f ight to protect their own interests and livelihoods, whether that be operating a dair y farm or r unning a government. As we continually attempt to apply new technologies to improve human and environmental wellbeing, this distinction is vital. Avoiding barriers to technological progress requires understanding and addressing its downsides. For example, as machines become increasingly capable, robots are replacing a growing number of workers. It will not be long before those robots will be able not only to perform more complex tasks, but also to learn faster than workers can be trained. The notion that some workers will not go the way of the draft animal is irrational. But if we recognize these losses and address them head-on, we can avoid a backlash against potentially benef icial technological innovations, including advances in robotics. The key will be to focus on “inclusive innovation,” ensuring that those who are likely to lose from the displacement of old technologies are given ample oppor tunity to benef it f rom new ones. Only then can we make the most of human creativity.

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The Perils of Planned Extinctions CLAIRE HOPE CUMMINGS

HONOLULU – A cynical move is underway to promote a new, powerful, and troubling technology known as “gene drives” for use in conservation. This is not just your everyday genetic modification, known as “GMO”; it is a radical new technology, which creates “mutagenic chain reactions” that can reshape living systems in unimaginable ways. Gene drives represent the next frontier of genetic engineering, biology, and gene editing. The technology overrides the standard rules of

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genetic inheritance, ensuring that a particular trait, delivered by humans into an organism’s DNA using advanced gene-editing technology, spreads to all subsequent generations, thereby altering the future of the entire species. It is a biological tool with unprecedented power. Yet, instead of taking time to consider fully the relevant ethical, ecological, and social issues, many are aggressively promoting genedrive technology for use in conservation. One proposal  aims to protect native birds on

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Hawaii’s Kauai Island by using gene drives to reduce the population of a species of mosquito that carries avian malaria. Another plan, championed by a conservation consortium that includes US and Australian government agencies, would eradicate invasive, bird-harming mice on particular islands by introducing altered mice that prevent them from producing female offspring. Creating the “daughterless mouse” would be the first step toward so-called Genetic Biocontrol of Invasive Rodents (GBIRd), designed to cause  deliberate extinctions  of “pest” species like rats, in order to save “favored” species, such as endangered birds. The assumption underlying these proposals seems to be that humans have the knowledge, capabilities, and prudence to control nature. The idea that we can – and should – use human-driven extinction to address humancaused extinction is appalling. I am not alone in my concern. At the ongoing International Union for the Conservation of Nature (IUCN) World Conservation Congress in Hawaii, a group of leading conservationists and scientists issued an open letter, entitled “A Call for Conservation with a Conscience,” demanding a halt to the use of gene drives in conservation. I am one of the signatories, along with the environmental icon David Suzuki, physicist Fritjof Capra, the Indigenous Environmental Network’s Tom Goldtooth, and organic pioneer Nell Newman. The discussions that have begun at the IUCN congress will continue at the United Nations Convention on Biological Diversity in Mexico this December, when global leaders must consider a proposed global moratorium on gene drives. Such discussions reflect demands by civil-society leaders for a more thorough consideration of the scientific, moral, and legal is-

sues concerning the use of gene drives. As I see it, we are simply not asking the right questions. Our technological prowess is largely viewed through the lens of engineering, and engineers tend to focus on one question: “Does it work?” But, as Angelika Hilbeck, President of the European Network of Scientists for Social and Environmental Responsibility  (ENSSER) argues, a better question would be: “What else does it do?” When it comes to the GBIRd project, for example, one might ask whether the “daughterless mouse” could escape the specific ecosystem into which it has been introduced, just as GMO crops and farmed salmon do, and what

would happen if it did. As for the mosquitos in Hawaii, one might ask how reducing their numbers would affect the endangered hoary bat species. Ensuring that these kinds of questions are taken into account will be no easy feat. As a lawyer experienced in US government regulations, I can confidently say that the existing regulatory framework is utterly incapable of assessing and governing gene-drive technology. Making matters worse, the media have consistently failed to educate the public about the risks raised by genetic technologies.

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Few people understand that, as MIT science historian Lily Kay explains, genetic engineering was deliberately developed and promoted as a tool for biological and social control. Those driving that process were aiming to fulfill a perceived mandate for “science-based social intervention.” Powerful tools like genetic modification and, especially, gene-drive technology spark the imagination of anyone with an agenda, from the military (which could use them to make gamechanging bio-weapons) to well-intentioned health advocates (which could use them to help eradicate certain deadly diseases). They certainly appeal to the hero narrative that so many of my fellow environmentalists favor. But the fact is that we have not created the intellectual infrastructure to address the fundamental challenges that gene drives – not to mention other powerful technologies – raise. And now we are supposed to suspend our critical faculties and trust the techno-elites’ promise to use gene drives responsibly in the service of seemingly positive environmental goals. No open public discussion is needed, apparently. But why should we blindly believe that everything is under control? In my view, the focus on using gene-drive technology for conservation is a ruse to gain public

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acceptance and regulatory cover. Why expose something to public scrutiny and possible restraints when you can usher it in through the back door by pretending it will do some good? The risks are too obvious for gene-drive advocates to risk talking about them. In my 20-plus years of researching and reporting on transgenic technologies, I thought I had seen the worst of the false promises and hype that they engender. But gene drives are unlike anything we have witnessed, and amount to the ultimate test of our self-control. Can we really trust science to guide us, or do we recklessly throw in our lot with technological “silver bullets” as the way forward? Fortunately, we still have a choice. The fact that gene drives can change the basic relationship between humanity and the natural world is both a challenge and an opportunity. We can do now what we should have done a long time ago, with regard to both nuclear and transgenic technologies: start paying more attention to the dangers of human ingenuity – and more respect to the genius of nature.

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Micromata Wins Award as Excellence of the Year for Innovation – Software Solutions in London SIMONA VANTAGGIATO Micromata is a leader in the development of custom software solutions for move companies in the logistics, automotive, medical, and production fields. Micromata’s continuous growth coupled with its revolutionary care and dedication to their client’s needs have enabled Micromata to create highly functional, intelligent software, optimizing the daily work needed to maintain and increase commercial success. In our interview, we spoke with Micromata’s CEO, Dr. Kai Reinhard, on the company’s future goals, innovations, and cultivating young talent in order to meet old and new challenges. Mr. Kai Reinhard, your company has recently been selected as a winner for the Excellence of the Year for Innovation - Software Solutions sector for Germany, for excelling in the individual software solutions market, since 1996. In particular, for the commitment to creating additional value and the ability to be responsive to clients’ needs, thanks to a dynamic approach and a complete range of soft ware solutions for individual business processes. • How would you like to comment on this prestigious award? We feel highly honored to have been chosen an awardee for the prestigious Excellence of the Year award. It not only makes us proud to be in such top-class company with other well-known successful corporations, it also tells us we are on the right path with what we do and how we do it. • What are the major future projects your company is working on right now? We will continue doing what we do best: developing intelligent soft ware solutions for industrial core processes in the

fields of logistics, automotive, medical care, and energy. Doing so we will keep focusing on the needs of our customers and highly innovative technologies. In addition, we will keep up our research and development efforts - for example VAMINAP, a technology to detect contaminations in our water cycle. • Micromata believes in innovation and in investing in young talent. How do you help further develop the youth working for your company? We are involved in several projects to support young people and improve their future prospects - in and outside our company. The main ingredient in doing so is a vivid and broad know-how transfer - towards and between our own employees as well as in nonprofit partnerships with educational institutions like for example the Schülerforschungszentrum (Student Research Center) of Kassel or the participation in the so called Girls’ Day which addresses the female offspring especially. Inside our own company we run a variety of training programmes and internships and offer support for university exams. Furthermore, we (co-)founded and host several educational projects such as the CoderDojo Kassel (for kids), the Java User Group Hessen (for prospective and professional programmers), the Web Monday Kassel (for prospective and professional frontend developers), and the list goes on. To put it briefly: we consider young people the future of progress and do our best to help them on their way. Micromata’s team of over 100 employees has accepted this award with a goal to continue optimizing the technology of today’s workforce. Micromata is also certified as a Great Place to Work™ and has locations in both Bonn and Kassel.

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Tech Jobs for Africa JONATHAN LEDGARD AND BRUCE KROGH

KIGALI – What value does the digital economy provide Africa? The largest technology companies all have strategies for getting their products into African markets, but few have plans to provide what Africans truly need: jobs in the economy of the future. Africa’s population is projected to soar from 1.2 billion today to 2.4 billion by 2050. Over the same period, the tech titans of Silicon Valley and other hubs will be using their stockpiles of cash to transform the global econo-

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my, through innovations such as self-driving vehicles, genetic modification, and even the colonization of space. And yet the prospects are bleak for Africans interested in playing any sort of role in shaping how these technologies influence their lives. Everywhere one looks, the technology picture is the same. Free digital products have been useful. In some cases – such as email, mapping, and social media – they have been transformative.

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But it hardly ever translates into local ownership. Even as tech revenues soar on the continent, almost no tech jobs are being created for Africans. Indeed, Silicon Valley could soon face a backlash similar to the reaction to Hollywood’s failure to promote black talent. Tech companies recognize the importance of Africa, which will soon account for a quarter of the world’s young people. Asian companies like Samsung and Huawei are active on the continent and likely to outpace their flashier American competitors in the contest to introduce the much-vaunted Internet of Things. Microsoft and IBM have programs that target Africa, and General Electric has declared that it is seeking to turn itself into a “digital industrial giant” on the continent. Twitter, Facebook, and Google have gained the lion’s share of digital traffic in Africa at almost no cost. Apple, however, is nearly irrelevant, with a market share of less than 3% on the continent (where its iPhone is being outsold by the hapless Blackberry). The company has shown no sign that it intends to design any product that would be affordable in Africa. When it comes to jobs, every tech company looks as disconnected as Apple. The AfricanAmerican employees of Twitter, Facebook, and Google could fit on a single Airbus A380. African-born executives at these and other tech companies are even rarer – and those who have found jobs often are disillusioned. “It is soul-sucking to be a high-talent African at a Silicon Valley company,” one African tech leader said in an interview with one of us. “You leave because you get tired of fighting for attention and authority, and being reminded how lucky you are to work for them.” In Africa, the employment opportunities are pitiful. Twitter has no operations in Africa. Google employs only about 100 people on the continent. And Facebook’s lone African office is staffed with fewer than 50 people – hardly

enough to run an average supermarket. Even if one disregards parochial employment practices, the space between the availability of technology products and the availability of tech jobs in Africa looms large. Targeted projects – such as Facebook’s Internet.org – are designed to employ only experienced talent (almost always expatriates). Tech companies fall over themselves to boast that they are creating jobs in Africa, touting training programs and startup competitions. Google promises  to train one million Africans in digital skills. But what’s the value of tech training if there are no tech jobs? Young African graduates in science, math, and engineering are told they can get ahead by becoming entrepreneurs. But the continent lacks the capital, customer base, and talent that give entrepreneurs in developed economies at least a remote chance of tech startup success. Without good entry-level job opportunities to develop skills and pursue careers, African graduates are falling further behind. Offering real jobs to build an indigenous workforce is good business. It is the only path to a sustainable place in the African market – and it will also be the best source of Africa’s future entrepreneurs.

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Internet or Splinternet? JOSEPH S. NYE

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CAMBRIDGE – Who owns the Internet? The answer is no one and everyone. The Internet is a network of networks. Each of the separate networks belongs to different companies and organizations, and they rely on physical servers in different countries with varying laws and regulations. But without some common rules and norms, these networks cannot be linked effectively. Fragmentation – meaning the end of the Internet – is a real threat. Some estimates put the Internet’s economic contribution to global GDP as high as $4.2 trillion in 2016. A fragmented “splinternet” would be very costly to the world, but that is one of the possible futures outlined last month in the report of the Global Commission on Internet Governance, chaired by former Swedish Prime Minister Carl Bildt. The Internet now connects nearly half the world’s population, and another billion people – as well as some 20 billion devices – are forecast to be connected in the next five years. But further expansion is not guaranteed. In the Commission’s worst-case scenario, the costs imposed by the malicious actions of criminals and the political controls imposed by governments would cause people to lose trust in the Internet and reduce their use of it. The cost of cybercrime in 2016 has been estimated to be as high as $445 billion, and it could grow rapidly. As more devices, ranging from automobiles to pacemakers, are placed online, malicious hackers could turn the “Internet of Things” (IOT)

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into “the weaponization of ever ything.” Massive privacy violations by companies and governments, and cyber attacks on civilian infrastructure such as power grids (as recently happened in Ukraine), could create insecurity that undercuts the Internet’s potential. A second scenario is what the Commission calls “stunted growth.” Some users capture disproportionate gains, while others fail to benefit. Three or four billion people are still offline, and the Internet’s economic value for many who are connected is compromised by trade barriers, censorship, laws requiring local storage of data, and other rules that limit the free flow of goods, ser vices, and ideas. The movement toward sovereign control of the Internet is growing, and a degree of fragmentation already exists. China has the largest number of Internet users, but its “Great Fire Wall” has created barriers with parts of the outside world.

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Many governments censor ser vices that they think threaten their political control. If this trend continues, it could cost more than 1% of GDP per year, and also impinge on peoples’ privacy, free speech, and access to knowledge. While the world could muddle along this path, a great deal will be lost and many will be left behind. In the Commission’s third scenario, a healthy Internet provides unprecedented opportunities for innovation and economic growth. The Internet revolution of the past two decades has contributed something like 8% of global GDP and brought three billion users online, narrowing digital, physical, economic, and educational divides. The Commission’s report states that the IOT may result in up to $11 trillion in additional GDP by 2025. The Commission concluded that sustaining unhindered innovation will require that the Internet’s standards are openly

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developed and available; that all users develop better digital “hygiene” to discourage hackers; that security and resilience be at the core of system design (rather than an afterthought, as they currently are); that governments not require third parties to compromise encr yption; that countries agree not to attack the Internet’s core infrastructure; and that governments mandate liability and compel transparent reporting of technological problems to provide a market-based insurance industr y to enhance the IOT’s security. Until recently, the debate about the most appropriate approach to Internet governance revolved around three main camps. The first, multi-stakeholder approach, originated organically from the community that developed the Internet, which ensured technical proficiency but not international legitimacy, because it was heavily dominated by American technocrats. A second camp favored greater control by the International Telecommunications Union, a United Nations specialized agency, which ensured legitimacy but at

the cost of efficiency. And authoritarian countries like Russia and China championed international treaties guaranteeing no interference with states’ strong sovereign control over their portion of the Internet. More recently, the Commission argues, a fourth model is developing in which a broadened multi-stakeholder community involves more conscious planning for the participation of each stakeholder (the technical community, private organizations, companies, governments) in international conferences. An important step in this direction was the US Commerce Department’s decision last month to hand oversight of the so-called IANA functions – the “address book” of the Internet – to the Internet Corporation for Assigned Names and Numbers. ICANN, with a Government Advisor y Committee of 162 members and 35 obser vers, is not a typical inter-governmental organization: the governments do not control the organization. At the same time, ICANN is consistent with the multi-stakeholder approach formulated and legitimated by the Internet Governance Forum, established by the UN General Assembly. Some American senators complained that when President Barack Obama’s Commerce Department handed its oversight of the IANA functions to ICANN, it was “giving away the Internet.” But the US could not “give away” the Internet, because the United States does not own it. While the original Internet linked computers entirely in the US, today’s Internet connects billions of people worldwide. Moreover, the IANA address book (of which there are many copies) is not the Internet. The US action last month was a step toward a more stable and open multi-stakeholder Internet of the type that the Global Commission applauded. Let’s hope that further steps in this direction follow.

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On the Cusp of an AI Revolution MARC BENIOFF

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SAN FRANCISCO – Over the last 30 years, consumers have reaped the benefits of dramatic technological advances. In many countries, most people now have in their pockets a personal computer more powerful than the mainframes of the 1980s. The Atari 800XL computer that I developed games on when I was in high school was powered by a microprocessor with 3,500 transistors; the computer running on my iPhone today has two billion transistors. Back then, a gigabyte of storage cost $100,000 and was the size of a refrigerator; today it’s basically free and is measured in millimeters. Even with these massive gains, we can expect still faster progress as the entire planet – people and things – becomes connected. Already, five billion people have access to a mobile device, and more than  three billion people  can access the Internet. In the coming years, 50 billion things  – from light bulbs to refrigerators, roads, clothing, and more – will be connected to the Internet as well. Every generation or so, emerging technologies converge, and something revolutionary occurs. For example, a maturing Internet, affordable bandwidth and file-compression, and Apple’s iconic iPhone enabled companies such as Uber, Airbnb, YouTube, Facebook, and Twitter to redefine the mobile-customer experience. Now we are on the cusp of another major convergence: big data, machine learning, and increased computing power will soon make artificial intelligence, or AI, ubiquitous. AI follows Albert Einstein’s dictum that genius renders simplicity from complexity. So, as the world itself becomes more complex, AI will become the defining technology of the twenty-first century, just as the microprocessor was in the twentieth century.

Consumers already encounter AI on a daily basis. Google uses machine learning to autocomplete search queries and often accurately predicts what someone is looking for. Facebook and Amazon use predictive algorithms to make recommendations based on a user’s reading or purchasing history. AI is the central component in self-driving cars – which can now avoid collisions and traffic congestion – and in game-playing systems like Google DeepMind’s AlphaGo, a computer that beat South Korean Go master Lee Sedol in a fivegame match earlier this year. Given AI’s wide applications, all companies today face an imperative to integrate it into their products and services; otherwise, they will not be able to compete with companies that are using data-collection networks to improve customer experiences and inform business decisions. The next generation of consumers will have grown up with digital technologies and will expect companies to anticipate their needs and provide instant, personalized responses to any query. So far, AI has been too costly or complex for many businesses to make optimal use of it. It can be difficult to integrate into a business’s existing operations, and historically it has required highly skilled data scientists. As a result, many businesses still make important decisions based on instinct instead of information. This will change in the next few years, as AI becomes more pervasive, potentially making every company and every employee smarter, faster, and more productive. Machine learning algorithms can analyze billions of signals to route customer service calls automatically to the most appropriate agent or determine which customers are most likely to purchase a particular product. And AI’s applications extend beyond online re-

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tail: Brick-and-mortar stores still account for 90% of retail sales, according to the consultancy A.T. Kearney. Soon, when customers enter a physical store, they will be greeted by interactive chat-bots that can recommend products based on shopping history, offer special discounts, and handle customer-service issues. Advances in socalled “deep learning,” a branch of AI modeled after the brain’s neural network, could enable intelligent digital assistants to help plan vacations with the acumen of a human assistant, or determine consumer sentiments toward a particular brand, based on millions of signals from social networks and other data sources. In health care, deep-learning algorithms could help doctors identify cancer-cell types or intracranial abnormalities from anywhere in the world in real time. To deploy AI effectively, companies will need to keep privacy and security in mind. Because AI is fueled by data, the more data the machine gains about an individual, the better it can predict their needs and act on their behalf. But, of course, that massive flow of personal data could be appropriated in ways that breach trust. Companies will have to be transparent about how they use people’s personal data. AI can also detect and defend against digital security breaches, and will play a critical role in protecting user privacy and building trust.

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As in past periods of economic transformation, AI will unleash new levels of productivity, augment our personal and professional lives, and pose existential questions about the age-old relationship between man and machine. It will disrupt industries and dislocate workers as it automates more tasks. But just as the Internet did 20 years ago, AI will also improve existing jobs and spawn new ones. We should expect this and adapt accordingly by providing training for the jobs of tomorrow, as well as safety nets for those who fall behind. AI is still a long way from surpassing human intelligence. It has been 60 years since John McCarthy, a computer scientist and nominal father of AI, first introduced the term during a conference at Dartmouth College, and computers have only recently been able to detect cats in YouTube videos or determine the best route to the airport. We can count on technological innovation to continue at an even more rapid pace than in previous generations. AI will become like electrical current – invisible and augmenting almost every part of our lives. Thirty years from now, we will wonder how we ever got along without our seemingly telepathic digital assistants, just as today it’s already hard to imagine going more than a few minutes without checking the 1980s mainframe in one’s pocket.

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How Scary is Disruptive Technology? MARTIN FELDSTEIN

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CAMBRIDGE – The steady stream of improvements in driverless cars has convinced me that before too long the roads will be filled with cars and trucks operating without humans at the wheel. Likewise, I am convinced that the revolution in artificial intelligence will allow computers and robots to do many of the tasks that whitecollar workers now do. It’s not surprising, therefore, that many people are worried about the fate of those whose jobs are vulnerable – or have already been lost – to the latest disruptive technology. What will happen to the millions of men and women who now drive trucks and taxis when the trucks and taxis can drive themselves? What will happen to the accountants and health workers when computers can do their jobs? Some analysts have estimated that, with many fewer employees needed to produce the current volume of goods and services, a large share of current employment could be made redundant. I hear these worries and realize that they cannot be easily dismissed. But I am optimistic that the United States, at least, will adapt successfully to the new technology. There may be some losers as well as winners, but the American public as a whole will be better off. And those who lose their jobs to the new technology will soon find other employment. I believe that there is little reason to worry that the new technology will create large-scale unemployment. The changes in technology will increase the economy’s output and raise the poten-

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tial standard of living of the population. Those who want to work will continue to find jobs. Why am I so optimistic? Simply put: history. Rapid technical change is not something new. We have experienced technological change that substitutes machines and computers for individual workers for many years. And yet, despite the ups and downs of the business cycle, the US economy continues to return to full employment. This has been most dramatic in manufacturing. Robots and automated machines have replaced production workers in manufacturing for many years, driving employment in the sector from 13 million in 1950 to only nine million now, even as the real value of manufacturing output rose by 75%. And those who are no longer employed in manufacturing have found jobs elsewhere in the economy. Computers have also replaced workers in a wide range of service industries. We no longer see many elevator operators. Switchboard operators are gone. Most of us get our boarding passes at airports from automated check-in machines. Law firms and accounting firms use computers to do what professional employees used to do. And yet the US unemployment rate is now just 4.9%, even lower than its average in recent decades. Among US college graduates – who constitute 40% of the US labor force – the unemployment rate is just 2.7%. Because college graduates comprise a larger share of the younger age cohorts than of the older population, the overall unemployment rate will be held down as that group ages and its share of the labor force grows. The rising output per worker made possible by the increased use of robots and computers also will allow employees to work fewer hours and enjoy more leisure. Employees in the US currently work an average of 1,790 hours a year, 30% more than their German counterparts, who average just 1,371 hours per year. A reduction in working hours per employee translates into quality-of-life improvements like longer vacations and longer weekends. Fewer working hours will also provide more opportunities for travel, eating out, and other activities

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that create jobs for service workers. The aging of the population will increase the need for service-sector employees in hospitals and nursing homes as well. These trends will fuel higher demand for workers in the service sector, which now accounts for 81% of employment in the US. The share of workers in the US service sector increases year after year; it is where those who lose jobs in manufacturing or construction find new ones. And computers and robots simply cannot replace many of these jobs. Although they can provide some of the services that older people will increasingly need, for example, they cannot provide the services that involve actually touching clients and patients. People choosing careers will bear such considerations in mind as they select occupations. That, too, will hold down the unemployment rate in the future. The US unemployment rate currently is less than half the rate in the European Union. There are many reasons for the disparity ; but a critical one is the absence in the US of labor laws and union rules that prevent employees and firms from adapting to the new technologies. If the US maintains a relatively free labor market, employees will adjust positively to the changing technology.

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