Capital & Ideology (Thomas Picketty) : Book review

About the book :

French economist Thomas Piketty published Capital and Ideology in French (September 2019) and then in English (March 2020). The book is somewhat an updated and enriched version of Picketty’s great success, Capital in the Twenty-First Century (2013), which focused on wealth and income inequality only in Europe and the United States.

After exploring historical and contemporary justifications for inequality, Piketty outlines, in his new book, potential means of redistributing wealth.

Key insight #1 : Inequalities are never “natural”

Inequalities are never “natural”: any regime justifies them by an ideology and builds them by laws, taxation, organization of property, education system… The system of inequality that prevails in a given country is first of all the result of political and ideological choices

The central message of Picketty is that behind every inequality is a system of justification that ensures its perpetuation. However, there is no determinism: a bifurcation is possible, if the right political and ideological mobilization is there.

“Every human society must justify its inequalities: unless reasons for them are found, the whole political and social edifice stands in danger of collapse.” 

Key insight #2: Inequalities have been growing since the 1980s after entering in the post-communist and hyper-capitalist word

After the fall of the Soviet Union, the world has entered a new unequal regime, which the author describes as “neo-proprietarist”, reviving the sacralization of private property in force in the 19th century. This regime glorifies the “society of winners “and justifies the explosion of inequalities by the fact that the most talented people deserve to enrich themselves by reward for their exceptional productivity.

Interpretation. The share of the top decile (the 10% highest incomes) in total national income ranged between 26% and 34% in 1980 in the different parts of the world and from 34% and 56% in 2018. Inequality increased everywhere, but the size of the increase varies greatly from country to country, at all levels of development. For example it was greater in the United States than in Europe (enlarged EU, 540 millions inhabitants), and greater in India than in China.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. In 2018, the share of the top decile (the 10% highest incomes) in national income was 34% in Europe (EU+), 41% in China, 46% in Russia, 48% in the United States, 54% in Subsaharan Africa, 55% in India, 56% in Brasil and 64% in the Middle East.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The bottom 50% incomes of the world saw substantial growth in purchasing power between 1980 and 2018 (between +60% and +120%). the top 1% incomes saw even stronger growth (between +80% and +240%). Intermediate categories grew less. In sum, inequality decreased between the bottom and the middle of the global income distribution, and increased between the middle and the top.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The share of the top decile (the top 10% highest incomes) in total national income was about 50% in Western Europe in 1900-1910, before decreasing to about 30% in 1950-1980, then rising again to more than 35% in 2010-2020. Inequality grew much more strongly in the United States, where the top decile share approached 50% in 2010-2020, exceeding the level of 1900-1910. Japan was in an intermediate position.

Sources and series: see piketty.pse.ens.fr/ideology

Interpretation. The top marginal tax rate applied to the highest incomes averaged 23% in the United States from 1900 to 1932, 81% from 1932 to 1980, and 39% from 1980 to 2018. Over these same periods, the top rate was 30%, 89% and 46% in Britain, 18%, 58% and 50% in Germany, and 23%, 60% and 57% in France. Fiscal progressivity was at its highest level in the middle of the century, especially in the United States and in Britain.

Sources and series: see piketty.pse.ens.fr/ideology

Key insight #3 : Picketty’s recipe to tackle rising inequalities

  • Granting employees voting rights in (fairly large) companies with capping of large shareholders voting rights
  • Putting in place a progressive tax on income (all income), inheritance but especially on wealth (all wealth) so that capital circulates more
  • Creating a Capital endowment for any young person entering working life: A cash payout of two hundred and thirty-one thousand dollars—the equivalent of sixty per cent of the average adult’s net worth. (Piketty has called this system of capital endowment “inheritance for all.”)
  • Creating of a basic income and education capital for everyone, up to the education expenses of the privileged groups, to be used throughout life
  • Extending the carbon tax to all carbon emissions so that it takes into account the realities of climate change, with a great contribution from polluting companies
  • Renegotiating treaties and trade agreements, which force countries to compete with each other for who has the lowest taxes on wealth and income, starving national social systems and increasing financial inequality

Good Economics for Hard Times : Book review

The book was first published in November 12, 2019. The authors, Abhijit Banerjee and Esther Duflo, were jointly awarded the Nobel Prize in economics in 2019 (Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel).

In the book, Abhijit Banerjee and Esther Duflo address controversial topics such as immigration, trade, economic growth, technological disruption, universal basic and climate change. To do so, the authors rely on various experiments (randomized controlled trials) to test the effectiveness of specific policy interventions, in the same way clinical trials are performed in medicine (cf. figure below).

Thanks to its experimental focus, the book is written in an easy-to-understand style, which makes it accessible for readers who are not well versed in economics.

Some of the findings that caught my attention are as follows:

  • Increased immigration does not negatively affect local people wages
  • Ordinary people like to stay in their place. They don’t want to go to a different sector, to a different location and to a different life
  • Free trade boosts overall growth, but it also produces concentrated pockets of job losses
  • Tax cuts for the wealthy do not produce economic growth
  • Damages from climate change will be much more serious in poor countries
  • Because of distortions in the tax code (taxing humans more than capital) and industry concentration, most of automation today is more about deplacing workers than raising overall productivity
  • There is no evidence that cash transfers make people work less
  • Universal basic income is a good idea but it is very expensive. However, in the case of the US, it would require eliminating all existing welfare programs and raising the US tax level to the level of Denmark’s

Selected quotes from the book :

“Economics is too important to be left to the economists.”

“Economists are more like plumbers; we solve problems with a combination of intuition grounded in science, some guesswork aided by experience, and a bunch of pure trial and error”

“The focus on income alone is not just a convenient shortcut. It is a distorting lens that often has led the smartest economist down the wrong path, makers to the wrong decisions and too many of us to the wrong obsessions”

“We clearly don’t have all the solutions, and suspect that nobody else does either. We have much more to learn. But as long as we understand what the goal is, we can win”

“If the world warms by a degree centigrade or two, residents of North Dakota will mostly feel perfectly happy about it”

“The bulk of R&D resources these days are directed towards machine learning and big data methods designed to automate existing tasks rather than the invention of new products that would create (…) new jobs”

Covid-19: It is time for Impact finance to act now!

Sustainable development is more than ever relevant

The Covid-19 challenges are not only sanitary but also economic. The crisis has already plunged the world’s economy into a recession with negatives consequences on jobs and social stability. Low-income countries, particularly, face tremendous pressure to deal with the externalities of this crisis. In such a context, sustainable development goals have become more than ever critical (as shown in the following table). Moreover, a prolonged crisis would adversely influence the implementation of the 2030 Agenda and might wipe out the progress made in recent years in many SDGs.

SDGImpact of the crisis
Poverty (SDG1)Loss of income leading vulnerable segments of society and families to fall below poverty line
Health & wellbeing (SDG3)Devastating effect on health outcomes
Education (SDG4)Schools closed; remote learning less effective and not accessible for some
Decent work and economic growth (SDG8)Economic activities suspended, lower income, less work time, unemployment for certain occupations
Sustainable cities and communities (SDG 11)Population living in slums face higher risk of exposure to Covid-19 due to high population density and poor sanitation conditions

With all this economic mess, is impact finance pertinent now?

Impact finance is far from being immune from the current systemic crisis aside from very few sectors like technology and biotech. However, times of uncertainty and hardship create new opportunities for financiers to make an impact. Indeed, the necessity of finding solutions in providing healthcare supplies, ensuring continuous access to food and supporting small and medium-sized businesses can be a catalyst involvement in impact finance. Furthermore, it is fair to say that public sensitivity to social issues, and to a lesser extent, environmental issues will be stronger when things normalize. Islamic financial institutions will be obliged to deal with this new reality, especially that they mostly operates in low and medium income countries. Relying on isolated and sporadic social responsibility initiatives (donations, interest free loans…) will not be effective nor sustainable in the medium and long terms.

The role of digital technology going forward

The crisis has forced us to review several paradigms including the integration of digital technology in our daily life. It is true that before this crisis we had already entered the era of the fourth industrial revolution, in which the fusion of technologies blurs the boundaries between the physical, digital and biological spheres.  In the finance sector, technology has become a positive enabler to deal with the crisis’ impacts. Examples include mobile-first banking, digital currencies, crowd funding and blockchain-driven supply chain finance. For Islamic financial institutions, the crisis is, therefore, an opportunity to embrace technology at a larger scale and to roll out new tech-driven business models that address critical sustainability issues in countries where they operate. The digital transformation challenge lies in the organization’s ability to evolve its business model, to transform its processes and finally to conduct change.

This article was first published in IFN

Green financing : Turkey’s first Sukuk issuance

On 3 June 2020, Zorlu Energy made history by becoming the first green Sukuk issuer in Turkey. Zorlu Energy, a subsidiary of Zorlu Holding, operates in electricity generation, electricity and gas distribution, wholesale and trade in the energy sector. More specifically, the company has projects in sustainable infrastructure, clean transportation and renewable energy. The green Sukuk issue, which targeted qualified investors, is part of 450 M TL issuance program. The first issue has a one-year term and quarterly variable income payment. The issue’s proceeds will be directed to finance sustainable infrastructure and clean transportation investments.

Industrial Development Bank of Turkey (TKBB), the investment bank that structured Zorlu Energy green Sukuk, applied a sustainability framework aligned with the standards of the International Capital Markets Association (ICMA). Escarus acted as the external reviewer that provided the second party opinion on Zorlu Energy’s Sustainable Sukuk Framework.

Issuance elementsDetails
Program amount450 million TL
Issuance amount50 million TL
NatureDomestic
MaturityOne year
ReturnCorresponding Government Bond Yield + 4.5%
StructurerTKBB
Second opinionESCARUS
Nature of the placementPrivate
Underlying assetsSustainable infrastructure and clean transportation
Underlying contractIjara

Zorlu Energy green Sukuk : Technical details

Zorlu Energy green Sukuk is definitely a good news for impact finance for the following reasons:

  • Door opener to other Turkish green and social Sukuk issuances:  After this successful maiden assurance, other Turkish companies may be interested to issue Sukuk to finance their sustainability projects in the future either in local or foreign currencies. Sustainable Sukuk allow particularly issuers to broaden their investors base to include both conventional and sharia compliant investors
  • Confirms Turkey’s ambition as a center for sustainable finance: It is true that the country has already issued several green bonds since 2016. However, the ambition of positioning Istanbul international center has a hub for sustainable and Islamic finance supposes first a diversity of structures (Sukuk, bonds, equity, REIT…). Second, a diversity of local and international investors and finally a variety of the underlying sustainable assets in sectors such as renewable energy, healthcare, education, water and transportation.  
  • Triggers sustainable Sukuk momentum globally: The first half of 2020 has been very calm in terms of green and Sukuk issuance compared to the same period in 2019. This performance is understandable as most issuers have been busy struggling with COVID19 crisis.  Now that the economic activity is slowly kicking off, Sukuk can play an important role in closing the financing gaps of government and business to offset Covid-19 aftereffects. To illustrate, the Indonesian Government raised recently $2.5b through global Covid19 Sukuk offering to address the pandemic deficit

This article was first published in IFN Volume 17 Issue 26 dated the 1st July 2020 

Covid-19: What implications for the future of the banking sector?

Source : Velvet Chainsaw

With a large part of the world in forced confinement, the damage from the COVID crisis19 is mainly economic. This unprecedented situation has forced us to review several paradigms including the integration of technology in our daily life. It is true that before this crisis we had already entered the era of the fourth industrial revolution, in which the fusion of technologies blurs the boundaries between the physical, digital and biological spheres. However, the current crisis will have an accelerating effect on the generalization of this trend to all sectors of activity because, on the one hand, several psychological barriers related to digitalization will vanish. On the other hand, technology will be leveraged to prevent the effects of an upcoming crisis. We are already seeing the beginnings of these changes with examples such as the generalization of distance education, the use of telemedicine, teleworking and the distribution of public aids by smartphones. Changes that should take years (if not decades) happen now in a matter of days!

These conclusions apply to the banking sector as well. Digital channels are already emerging as the preferred distribution alternative especially with restrictions in terms of movement and in terms of staff availability. While ensuring continuity of service and addressing customer expectations, banks should take advantage of this opportunity to experience a radical overhaul of their operating models in order to adapt them to the new market reality when the crisis ends. The reliance on digital technologies and the limited use of physical branches currently will fast track the transformation of the banking landscape in the future by favoring banks with stronger digital capacities. Other external factors may further accelerate this trend. During this pandemic, banknotes have become a burden because facilitating virus transmission (some central banks disinfect banknotes). It is for this reason that the World Health Organization recommends the use of contactless payment. On the other hand, regulators could relax their requirements for Fintech during this period such as in South Korea.

Contrary to what one might think, the transition to digital and agile banking is not primarily a technological challenge because digital solutions are available on the market and, above all, have already been successfully implemented in several contexts. The challenge lies rather in the bank’s ability to evolve the business model, to transform processes, to adapt the organization and finally to conduct change.

Six takeaways from the event « Impact investing for SDGs: A new chapter for participative finance »

Al Akhdar Bank and The Islamic Corporation for the Development of the Private Sector (ICD) in partnership with UNDP Istanbul International Center for Private Sector in Development and Al Maali organized a conference and a series of master classes on « Impact investing for the Sustainable Development Goals (SDGs): A new chapter for participative Finance » on February 20th and 21st in Casablanca (Morocco).  The event saw the participation of national and international experts in impact finance and was attended by more than a hundred national and international professionals.

The main takeaways from the conference, the master classes and the interactions with the participants are presented below:

  • Closing the gap between finance and sustainable development 

According to the Sustainable Development Solutions Network, 1.5-2.5% of the global GDP may be needed to finance the achievement of the SDGs in all countries. The public sector alone will not be able to close such important gap especially in developing countries. The active contribution of the private sector is contingent upon the availability of effective impact investing tools. Hence, there is clearly a timely opportunity for participative finance. It will allow the industry to clarify its genuine value proposition based on its core values, serve customers’ expectations and channel funds to address social and environmental challenges especially in OIC countries. In the context of Morocco where the government has an ambitious strategy in sustainable development, the need for financing is more than ever critical to achieve the set targets in energy, health, education, youth empowerment to name a few. It is true that flagship sustainability projects have easily secured financings (nationally and internationally), but this is not the case for most small and medium size initiatives.

  • Leveraging conventional impact investing experiences

Participative impact investing does not need to start from a white sheet. In fact, impact investing has been successfully applied in various sectors (green energy, education, health, food…), in both developing and developed countries and with diversified financial instruments.  Such a rich conventional impact investing experience has to be leveraged and, if needed, adapted to the participative finance requirements.

For instance, the Global Impact Investing Network (GIIN) has developed a toolkit designed to help investors navigate the landscape of impact measurement and management tools. This open source knowledge, which comprises systems, methods, data and indicators, can be easily used in the participative impact Investing context.

  • Thinking globally and acting locally

Relying on international best practices is important but adapting them to the local context is critical. For instance, copy pasting a Malaysian social sukuk structure in Morocco may not necessarily work because the social, economic and legal contexts are not identical. 

  • Empowering Waqf through blended finance mechanisms

Morocco prides itself on its rich millennial Waqf heritage whether it be in education, health and poverty alleviation. Thereby, Waqf can definitely bring value to the impact-investing field. For example, directing cash Waqf funds (which is now possible under a new Waqf law) to support social entrepreneurs can generate a much higher social return compared to simple cash donations. Cash Waqf use include co-financing, subsidizing or guaranteeing equity investments.

  • Building supportive ecosystems

The development of participative impact investing requires a supportive ecosystem that comprises assets owner (Participative finance institutions, high net worth individuals…), assets managers (investment advisors, government investment programs…), demand side players (social enterprises, cooperatives…) and service providers (consultants, auditors, research institutions…). Building the ecosystem will naturally take time but the industry has to start somewhere

  • Embracing Fintech

It is hard to image the emergence of participative impact investing without a strong focus on technology. Today, technology provides tremendous possibilities to make financial services affordable, scalable, customizable and effective (smart phones, peer-to-peer platforms, Blockchain, artificial intelligence…). The recent Fintech initiative in the Moroccan market (Crowdfunding, Digital financial services…) are encouraging and it is fair to expect more traction in the near future.

A note on the recently published “UAE Guiding principles on sustainable finance”

General context

The world is struggling with systemic challenges including slow economic growth, lack of infrastructure, inadequate technological development and a growing youth population. The economic impacts of these developments are far-reaching, and require targeted responses if countries are to meet their Sustainable Development Goals (SDG) commitments. In fact, the huge financing requirement to implement the SDG has increased from billions to trillions of US$, exceeding the capacity of any single institution or state. The public sector alone will not be able to close such important gap.

UAE has demonstrated its commitment to the pursuit of a sustainable growth pathway, including addressing climate change, through signing the Paris Agreement in 2016 and championing a number of initiatives, such as the UAE Green Agenda 2015-2030, the National Climate Change Plan (2017-2050), the Dubai Declaration (2016), and the Abu Dhabi Sustainable Finance Declaration (2019).

The UAE Guiding principles on sustainable finance aim to facilitate the country’s transition to a more sustainable economy and help organizations to develop strategies which re-orientate and diversify the economy, help mitigate risks of reduced global demand for oil, adapt to the physical risks of climate change and explore the new investment opportunities it presents. These voluntary principles represent the shared views of the financial regulatory authorities in the UAE including the Central Bank of the, Dubai Financial Services Authority and the Insurance Authority.

Summary of the Guiding principles

Principle 1: Integration of ESG Factors into Governance, Strategy and Risk Management

Financial companies are encouraged to incorporate ESG factors into their governance, risk management framework and strategies by:

  • Identifying and considering opportunities, as well as any associated risks and threats, afforded by ESG-compliant investing.
  • Integrating consideration of opportunities and risks from ESG factors at all levels of organizations’ businesses, strategy and financial planning where such information is material; and
  • Enhancing the organization’s ESG performance through the development and enhancement of suitable products, services and otherwise promoting sustainability in all organizations’ activities.

Principle 2: Minimum Eligibility Requirements

This principle clarifies the minimum components that should be present in a product categorized as ‘sustainable.

  • Process for Project Evaluation/Selection
  • Use of Proceeds
  • Management of Proceeds
  • Recording, disclosing and reporting:

Principle 3: Promotion of Appropriate ESG-Related Reporting and Disclosures

This principle seeks to encourage financial organizations to produce timely and relevant information on key ESG metrics. Such reporting would aim to disclose ESG-specific risks, processes, initiatives and performance, in accordance with internationally recognized reporting standards of financially, environmentally or socially material information

The way forward

UAE Sustainable finance taxonomy

The Guiding Principles encourage issuers to rely on internationally recognized standards and taxonomies such as the Principles for Responsible Banking, the Principles for Responsible Investment and The Green Bonds Principles. In the future, the UAE Authorities shall adopt a specific taxonomy Sustainable finance for in the country.

Moving from voluntary to compulsory

The Guiding Principles are so far voluntary. Next steps may include more compulsory guidelines and policies, to encourage the UAE financial firms to develop strategies to incorporate ESG considerations into their core business activities.

Ideas for Action 2019 : Financing and Implementing Sustainable Development

Source : World Bank

The Ideas for Action competition is an initiative in which young people submit their proposals for implementing SDGs. The attached report presents the 2019 winner projects that were selected from more than 3,000 proposals, which included over 21,000 participants from 142 countries.

The six winning (and mind blowing) ideas are:

  • Fetosense and U- Act: Novel Solutions for Monitoring Fetal Heart Rate and Uterine Activity to Reduce Neonatal Morbidity and Mortality
  • Using Location Intelligence to Solve the Urban Sanitation Crisis
  • WellPower: A Sustainable and Scalable Approach to Addressing the Water Crisis in Kenya Using an Innovative Smartphone App– Based Clean Water Delivery Network
  • The Eco Panplas Solution
  • Ekomuro H2O+: Collecting Rainwater in Used PET Containers in poor urban areas
  • DamoGO: Implementation of Mobile app–based Technology to Tackle Food Waste in the Republic of Korea and Southeast Asian Countries

The ideas are presented through the following perspectives:

  • Problem and context
  • Solution
  • Implementation and application
  • Scaling up the solution
  • Challenges and mitigations

For more details, kindly download the report “Ideas for Action 2019 Financing and Implementing Sustainable Development” by the World Bank

Station de dessalement d’Agadir : Nous n’avons pas le choix mais … !

De quoi s’agit-il ?

  • Une station de dessalement de l’eau de mer avec les caractéristiques suivantes :
    • Capacité totale à terme : 400 000 m3/jour 
    • 50% sera destinée à l’agriculture (irrigation de 15000 ha)
    • 50 % sera destinée aux ménages
    • Investissement de 4,4 milliards de DH à travers un partenariat public-privé
    • Date prévisionnelle de mise en production : Juillet 2021
    • Alimentation de la station à partir des énergies renouvelables
  • Il existe déjà des stations opérationnelles au Maroc. Mais celle-ci se distingue par sa taille même à l’échelle du bassin méditerranéen

Pourquoi nous n’avons pas le choix ?

  • Ressources hydrauliques insuffisantes dans la région du Souss-Massa
    • Irrégularité des précipitations
    • Niveau très bas des nappes à cause de la surexploitation
  • Augmentation de la demande au niveau des ménages et des exploitations agricoles
  • Projet déterminant pour préserver les activités économiques implantées dans la région ainsi que les emplois

Quels challenges ?

  • Le principal défi est celle du coût du m3 eau produite pour le secteur agricole (5 DH/mètre-cube) qui de toutes les façons serait plus cher que le coût d’exploitation des nappes ou ceux des rivières / pluies
    • Implication : Est ce que les cultures d’agrumes et maraîchères, gourmandes en eau, seront toujours rentables ?
    • 3 options s’offrent à nous :
      • 1) Rationalisation de l’utilisation de l’eau à travers des technologies modernes d’irrigation
      • 2) Recours à des cultures moins gourmandes en eau avec plus valeur ajoutée sur le marché local et à l’export
      • 3) Augmentation des rendements des cultures pour absorber le surcoût en approvisionnement en eau
  • Le défi écologique est également un point à clarifier pour ce projet. En effet, Le dessalement implique des rejets de saumure (solution avec forte concentration de sel) en très grandes quantités dans les océans. Sachant que la région de Souss est connue pour son potentiel halieutique, il est légitime de se poser la question de l’impact du projet sur les écosystèmes marins de la région

Climate change deniers should watch this!

A New research in AGU’s journal Geophysical Research Letters finds ice in the Arctic Ocean north of Greenland is more mobile than previously thought, as ocean currents and atmospheric winds are likely transporting the old, thick ice found there to other parts of the Arctic. As a result, ice mass in the area – the last place researchers think will lose its year-round ice cover – is declining twice as fast as ice in the rest of the Arctic, according to the new findings.

This visualization shows the age of the Arctic sea ice between 1984 and 2019. Younger sea ice, or first-year ice, is shown in a dark shade of blue while the ice that is four years old or older is shown as white. A graph displayed in the upper left corner quantifies the area covered by sea ice four or more years old in millions of square kilometers.

More info on the research