What Next: The AfCFTA in Context

What Next: The AfCFTA in Context

A triumph! Despite one of the biggest economies in Africa cancelling their trip to Kigali, the signing of the AfCFTA went ahead as planned. The absence of Nigeria did not deter other leaders from attending, particularly from other economic giants on the continent such as South Africa and Kenya, who were represented by their respective Heads of States.

The AfCFTA is the first agreement of this size to be concluded by the continental leaders. Now that the leaders have signed this agreement, what next?

At Kigali Rwanda, three documents were set to be signed:

  1. The AfCFTA (framework agreement),
  2. The Kigali Declaration and
  3. The Agreement on the Free Movement of Persons

Overall, 50 signatures out of 55 were obtained; 44 for the AfCFTA Framework Agreement, 47 for the Kigali Declaration and 30 signatures for the Agreement on the Free Movement of Persons. Forty-four Member States (indicated in the map above in blue) signed the AfCFTA while six Member States signed the Kigali Declaration only (indicated in red on the map). The remaining five Member States (indicated in the map above in green) did not attend or sign any of the agreements. But what sets the Kigali Declaration apart from the Framework Agreement?
For Heads of State and other delegates that do not have the executive authority to sign a trade agreement like the AfCFTA into law, the Kigali Declaration serves as an instrument that shows their support and solidarity for the agreement. Once processes at home are cleared, the Framework Agreement can then be signed. The agreement will only come into force after 22 signatures is coupled with 22 ratifications. Member States that signed the agreement have 160 days in which to ratify the agreement, while those that have not signed have 160 days to sign the agreement.

Of the five SACU members, only Swaziland signed the AfCFTA and the Kigali Declaration while the remaining members (South Africa, Botswana, Namibia and Lesotho) signed the Kigali Declaration. South Africa cited its parliamentary process as the main reason for not signing the Framework Agreement, but only the Kigali Declaration. In terms of section 231 of the Constitution of the Republic of South Africa, the negotiating and signing of all international agreements is the responsibility of the national executive. As such, “an international agreement binds the Republic only after it has been approved by resolution in both the National Assembly and the National Council of Provinces.” The AfCFTA requires ratification and just signing the agreement is not sufficient. Thus, for South Africa, the AfCFTA needs to go through a parliamentary process before it can be ratified. The 160-day hourglass is already running out for South Africa.

SACU members that did not sign the agreement may be politically motivated, in that they follow in the footsteps of South Africa as SACU members. However, the government of Botswana cited the unfinished status of the AfCFTA annexes – the Protocol on Trade in Goods and Services – as a motivating factor. They further cited that the AfCFTA has to go through a consultative and constitutional process designated for treaty making according to Botswana laws. At the time of publication there were no official statements from Namibia or Lesotho on why they did not sign the agreement.

However, Nigeria’s absence is still baffling. As the news media cover the President’s official line on his cancelation, being one of labour union appeasement, another reason that may have been overlooked by many is President Buhari’s protectionist campaign promoting local products. President Buhari’s not signing the agreement may be in line with an opposition to the CFTA that will open Nigeria’s markets to foreign goods, hindering local entrepreneurship and encouraging dumping of finished goods. But will Nigeria remain on the fringes while the rest of the continent moves ahead in negotiating the outstanding provisions?

The signing of the AfCFTA sets the wheels in motion for Africa’s integration process and boosting intra-African trade. But with Africa’s two biggest economies yet to insert their signatures, the first dissenters might just be harbingers for what’s yet to come as we await the critical mass of ratifications and the outstanding negotiations. Overall the rest of Africa is sending a positive message to the other members that the agreement will enter into force and carry on forward.

Photo credit: GovernmentZA on VisualHunt / CC BY-ND

Populism on the rise: What to do?

Populism on the rise: What to do?

This is the third part of Tutwa’s mini-series, Populism on the rise, which is dedicated to the reaction to populist movements and politics in order to maintain a liberal world economic order (Pax Americana), which I regard as the preferred regime for most. Three main actors to combat populist threats can be found in politics, science and the business community.

The role of politics

Economic policy has to react to populist governments abroad, such as President Trump, President Erdogan, or Prime Minister Orban, as well as to populist threats at home such as the Alternative für Deutschland (AfD) in Germany or the Front National (FN) in France. To start with external populists, let us take the example of the US President who demands the reduction of trade surpluses against the United States (US), something US savers could best do themselves, threatens the introduction of high import tariffs, and suggests bilateral “deals”. Chancellor Merkel gave a good example of a proper reaction.

  • First, she, as well as the European Commission, made clear that European Union (EU) member countries are bound by the European Treaty: trade policy is a common policy issue, with the Commission being exclusively responsible. Bilateral deals are impossible. Rumor has it that Mrs. Merkel had to explain the EU’s principle to President Trump eleven times.
  • Second, it is important to keep calm and refrain from threats of retaliation. Mrs. Merkel correctly pointed to the multilateral trading system as organized within the World Trade Organisation (WTO). Special American tariffs against European, Chinese or Mexican companies will be a case for the WTO’s Dispute Settlement Mechanism (DSM).
  • Third, there are partners for trade outside of the US. Directly after President Trump dumped the Transpacific Partnership (TPP), the Australian Prime Minister suggested to get China on board, knowing very well that one major American objective of TPP was to exclude China. Similarly, the EU is advocating for and negotiating free trade agreements (FTAs) with a number of countries, among them Australia, New Zealand, Japan, and Mexico. Even an FTA with China may not be utopian anymore.

Domestically in Germany, one might think of mutual commitment of political parties to not take recourse to populist actions or statements. Experience suggests that this does not help. In addition, real populists would mock this as another conspiracy of elites against the peoples’ will. Internationally, this has no chance. Why should President Trump agree to such a commitment?

However, there is already good news stemming from five months of populist government in the US. It seems as if the walking-stick-hypothesis cannot be confirmed in the States. Instead of a flourishing economy we witness chaos and idleness, the President has not managed to succeed with any of his plans so far. Everyone abroad sees this failure, which obviously weakens the populists in Europe immensely. Elections in the Netherlands and France did not go well for populists, the German AfD has not dared to connect to Trumpism; instead they tend to ignore the US President. Even Prime Minister May has suffered from an electoral setback, dealing a blow to the populists backing Brexit.

This experience may force governments to finally resort to a rational, long-term-oriented, rule-based policy path. Against this background, those politicians who argue for a western style ruled based liberalism and against ad-hoc politics may gain ground. The liberal party in Germany (FDP) – thrown out of the Bundestag in 2013 – has high hopes to return into the German Parliament in September’s general election. In two recent state elections (in Schleswig-Holstein and North Rhine-Westphalia) they could celebrate very good election results.

One can only hope that US experiences are also relevant for South African politics, where a populist president is giving his countrymen a hard time. In any case, populist experiences reduce the opportunity costs of rational policies.

In addition to advice on what to do, the populist episode suggests two things not to do. First, established parties should not try to mimic populists and argue in the same – simplifying – way. It may be a temptation to also simplify matters, but as can be seen in France, voters take attempts of policymakers to be serious earnestly, and honor them.

Second, it does not make sense to exclude populist parties from political circles. During the German Protestant Church Congress in May, some leading bishops and laymen engaged into a public debate with a Christian AfD politician and were fiercely criticized. I regard this criticism as wrong since the best way to unmask the populist is to engage in discussions with them. Their arguments are systematically weaker than those of rational actors. So populists must be challenged whenever the chance is there.

How can economic science help to combat populists?

The debate about the role of economics in society is a long-standing one. Critics of mainstream economics argue that an economic profession too blind to predict the outbreak of an enormously distortive worldwide financial and economic crisis in 2008 should change its methodological and topical focus. Indeed, part of economics has become too focused on internal rankings and methods instead of focusing on relevant policy questions.

Today’s credo of “publish or perish” leads young scholars particularly to specialize too early in their career and to neglect urgent policy issues, since theoretical and methodological contributions can be published in highly ranked journals. The discussion of, for instance current South African labor market problems is not of interest for the typical reader of the American Economic Review.

Thus, economic science can support rational policymakers by discussing important issues and allow for methodological variety. Underrated topics comprise political economy, theory of economic policy, economics of entrepreneurship, balance of payment theory, and problems of distribution. It is necessary to change the reward system in economic science.

Responsibility of Business

Finally, the responsibility of the business community must not be underestimated. Two aspects come to mind immediately. First, the salary structure – particular the relation between management and workers’ pay as well as the sheer size of bonuses – has to be reconsidered in most listed companies. It seems as if the majority of top managers have lost touch with the ordinary man. As said before, this creates frustration and the potential for simple messages to get attention.

Second, entrepreneurs who own their businesses must take responsibility in their community. They should grant adequate working conditions and pay decent salaries; both actions seem self-evident and unnecessary to mention. Next, local enterprises can sponsor local activities, e.g. social, cultural or sport events. Finally, entrepreneurs can volunteer in many contexts, e.g. in the city council or on the board of a local charity. In other words, they can provide a positive image to society and thereby contribute to the social stability of a society. This will certainly discourage populist movements.

The strategies mentioned here require stamina since they are indirect and respect democratic values. But an undemocratic response to seemingly undemocratic populist initiatives (which indeed are mostly an expression of democratic variety) cannot be accepted. The European example can be a cautiously interpreted sign that a rational long-term-oriented response to populist threats may well be successful.

Towards the next frontier: Industry 4.0 and e-commerce

Towards the next frontier: Industry 4.0 and e-commerce

Conversations about the fourth industrial revolution often revolve around the negative impacts thereof and how woefully unprepared we are. This debate was brought into sharper focus after Donald Trumps’ victory as the media and academics scrambled to find out why people voted for a man running on a mercantilist platform. As it turns out a lot of people were ‘left behind’, or at least felt that way, in an economy that had marched forward; the private sector had leveraged free trade and automation with government having almost no plan to assists or redeploy those affected by the rapid changes. Now that most people are nodding in agreement, the narrative is changing; governments should be better prepared for these disruptive forces, but what does this mean?

The impact of industry 4.0

Advances in the fields of nanotechnology, biotechnology and material sciences are staggering! Ever heard of Graphene or Navacim? Development of these technologies is in itself a huge leap forward, but we’ll only really know the full extent of their impact once they are absorbed into other industries. This requires scale and commercialization, which at the moment is just out of reach. On the other hand, rapid advances – especially in the biotech industry – are forcing some developers to consider the moral implications of their breakthroughs. However, advances in other fields; like robotics, energy storage, autonomous vehicles, the internet of systems and 3D printing; are already available and some have already entered the market.

As the potential benefits of employing these technologies could far outweigh the risks, staggered labour market shocks can be expected when they are absorbed. In some occupations, clerical work for example, human operators are a big liability, exposing a system to errors, fraud and misunderstandings; things that can be eliminated in a completely automated system. Companies who embrace the advances are likely to be more competitive than those that don’t. It would also mean that the ultimate survivors are those companies that don’t rely on human capital.

We could just as easily see the ‘ironies of automation’ where the systems are less efficient than initially thought but would only be realised after long term operation. At this point it’s hard to tell, as there is a surprising amount of social elements that need to be explored when technologies are introduced alongside human counterparts, but we’re certain at least that more tasks will be automated.

In time the net effect of these emerging technological break throughs will likely translate into large scale labour market disruptions but the extent will depend on the scalability, economic viability, absorption rate and whether or not there’s any room for symbiosis with current occupations. But as more parts of manufacturing value chains are automated, the demand for unskilled and semi-skilled labour will decrease. If left to market forces industry 4.0 will further increase inequality as highly skilled and educated innovators are rewarded for their efforts, alongside those individuals with the capital to invest in risky start-up ventures and large scale research and development projects.

Most advances in technology make our jobs easier; we don’t have to dig individual holes for each seed we plant, we plough and seed an entire field in a matter of hours using mechanical muscle and possibly satellite guided farming equipment. This leaves us with more free time, presumably to develop other skills and satisfy our needs, but at some point certain jobs become so easy that we really don’t have anything to do anymore. Technological advances have always caused disruptions like this but it’s the first time that we’ve seen this many industries and occupations become vulnerable in such a short time span. Think of it as a massive productivity shock which can make humans the least productive part in most manufacturing chains.

Folklore suggests that humanity ultimately loses this battle and is left behind with our old means of production while the machines march on. But people are uniquely equipped to adapt, and as opportunities disappear from one segment of the economy, people will migrate to pursue opportunities in another. We’re already seeing such a migration.

The opportunities of digital trade

Digitalisation is a ‘cross-border trade’ game changer, and while there are significant threats and disruptions, massive opportunities are created. According to McKinsey Global Institute, the value of data flows has overtaken the value of global trade in physical goods. Cross-border data flows transmit valuable streams of information and ideas in their own right, and also enable the movement of goods, services, finance, and people such that virtually every type of cross-border transaction now has a digital component.

Approximately 12{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} of international trade in consumer goods is now conducted via e-commerce. The total global flows of goods, services, finance, people, and data have raised world GDP by at least 10{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} in the past decade, adding US$7.8 trillion in 2014 alone, of which data flows accounted for $2.8 trillion.

As such, harnessing the power of digitalisation should be a top priority for policy makers and business everywhere particularly developing countries with massive economic inequalities. Digital trade presents an opportunity for shared global economic growth and allows many start-up companies to become global players even while they are still micro-enterprises.

What’s a government to do?

It’s worth noting that most online service providers, like Airbnb and Uber, initially operated in a largely unregulated space giving them the opportunity to quickly gain market share over traditional, more strictly regulated, service providers. Frustrating as it may be, legislators need to continue regulating markets and technologies as they are introduced to the economy rather than trying to primitively introduce regulation to protect traditional markets which has a smothering effect on industry innovation. Government efforts should be focused on identifying crosscutting issues in industry 4.0 and introducing legislation that will create an enabling environment to further increase competitiveness.

This entails, inter alia, more investment in education (especially in the STEM – Science, technology, engineering and mathematics – disciplines) in order to promote digital literacy and spur innovation; revamping tax policies to reduce or eliminate customs duties on ICT infrastructure in order to reduce internet access costs; and ensure affordable data charges with a view to enhance access to the internet and creation of new platforms and/or participation in the world’s biggest digital platforms such as Alibaba, Amazon, and eBay, amongst others, which are enabling millions of SMEs around the world to seize cross-border opportunities.

There certainly will be losers. The challenge for policy makers is to ensure that more winners than losers are made. Without doubt, the well-connected and digitally literate will swell the ranks of winners.

Photo credit: MattHurst via Visualhunt.com /  CC BY-SA
Populism on the rise: What are the costs?

Populism on the rise: What are the costs?

In this second part of Tutwa’s mini-series, Populism on the rise, the focus falls on the consequences of populism for society and its economic welfare. Predicting the outcomes of populist developments is of course a very difficult exercise, since the exact elements of the policies in economies run by populists is difficult, if not impossible, to discern. Their policy paradigm is often not concise and free of contradiction, particularly over time. Take the changing attitude of the new US Administration towards NATO, which was termed obsolete during the campaign and now has been called immensely important. Or predict US trade policies towards China against the background of the looming North Korean crisis: it is doubtful whether the allegation of a manipulated currency will be upheld in the immediate future; the art of a deal may suggest otherwise.

To be on the safe side, one could look at past populist movements and their policies to assess the consequences. The Peronists in Argentina provided one of the most striking examples since the 1950s. Their example is even surpassed by Venezuela, which was among the richest and freest economies in Latin America in the 1970s. After large oil reserves were found (in fact the largest in the world), the country started to suffer from the resource curse and experienced the paradox of plenty. This process of slowing economic growth, decreasing democratic freedom, and low development outcomes was further reinforced by the, at first, popular then increasingly populist President Chavez, whose “Socialism of the 21st century” attracted enormous attention among the Western Left. Over the long run however, this led to a shrinking middle class, nepotism, and finally to a failing (and today failed) state in Venezuela.

Another example is Turkey, where President Erdogan took the opportunity of an amateurish coup d’état in July 2016 to start turning Turkey into a dictatorship. He fired (and partly jailed) judges, civil servants, officers and professors (among them about 1500 deans in the first few weeks after the coup), closed down the press, jailed many journalists and seized private firms. There is little doubt that he and his family personally benefit from the seizures. This was followed by a referendum on 16 April 2017, proposing several changes to Turkey’s constitution including changing governance from a parliamentary system to an executive presidency, significantly expanding the powers of the top office. As a result, tourism is dramatically shrinking. In particular, German tourists – who traditionally loved the Turkish coastal regions – stayed at home in 2016 and even more so in 2017. In addition, the vigilant rhetoric of President Erdogan towards the European Union suggests further disintegration and higher costs for the Turkish economy. Remember that President Erdogan was a reformer when he became Prime Minister in 2003.

The last example is Hungary, where in early April the government decided to close down the very successful Central European University (CEU), which is funded by George Soros. This decision is based on a law that officially concerns all foreign universities with subsidiaries in Hungary, but in reality only affects the CEU. Ironically, Prime Minister Victor Orban is himself a former scholarship holder of Soros’ foundation. The attacks on the CEU are accompanied by official initiatives against civil society actors, including foreign think tanks and NGOs. Seemingly, the Hungarian government is driving the country into a nationalist, if not xenophobic, direction. Normally this has negative consequences not only for the political environment but also the economy. However, the Hungarian economy has developed quite well in the course of the last few years. Unemployment as well as inflation are low, and debt to GDP (with less than 50 per cent) is below the European average. It seems that Hungary’s membership in the European Single Market offsets any disadvantages that may stem from general nationalism; in other words, this nationalism does not translate into economic protectionism, at least not immediately.[1]

Thus, one can see an interesting pattern. Populist policies may lead to a welfare improvement or can prevent welfare losses stemming from job losses due to structural change, at least in the short run. For example, if the US introduces a 35 per cent import tariff on Mexican and Chinese products, there will be less demand for these goods and services with the consequences of American jobs being protected or even new jobs being created in the short run. This suggests that over time there is an economic development in distinct phases as consequence of populist policies. The economy grows strongly at first, and contracts sharply later, which can be labelled the “walking stick path”. Countries pursuing liberal reforms normally follow the opposite development. The economy first contracts and later grows strongly, which is often called a J-curve effect.

In the long run, the situation may look very different. To start with the economy and tariffs: the import levy acts like an export tax that distorts allocation of factors in the country (using the US in the example above). The consequences of such a policy would be overall job losses and rising prices for imports, which would mainly hurt the poorest domestic consumers. If the populist still governs, he (rarely she) might react by blaming foreign forces and the continued dissatisfaction of the domestic elites and even strengthen the protectionist policies, starting a vicious cycle.

This has a large side effect, namely erosion of trust within society leading to an ever more divided population. It can be observed that the countries mentioned above already face serious internal unrest and division. The more liberal middle class citizens in Hungary strictly oppose the decision to close the country’s best university and thus weaken the academic potential of the country, whereas many people seem to believe that this university is bringing harmful foreign influences into the country. In the US, the divisions within society – between those who feel left behind and those successfully making use of globalization –led to the election of Donald Trump. If he follows his campaign agenda, this split might even go deeper in the future. Finally, the Turkish constitutional referendum has not only divided society in Turkey, but also the Turkish diaspora in Europe. Proponents and opponents of the new constitution respectively have built up much mutual antagonism. It cannot be foreseen whether, and if so, trust can be restored or whether this kind of division of societies can be overcome.

A divided society may therefore lead to a radicalization of politics. In order to stop protests and opposition by the part of society that does not support the populist government or movement, the government might resort to violence and through brute force strengthen its grip on society, first by calling a state of emergency, later by oppressing journalists and opposition and, in the worst case, by erecting an authoritarian or even totalitarian regime. In this regard it is important to note that both President Erdogan and Prime Minister Orban, but also Presidents Putin and Mugabe, started their political careers as reformers and open-minded democrats. None of them gives this impression today. In the US, many observers have interpreted the language of President Trump and claim to observe many elements of a “totalitarian playbook”. But differently from Turkey, in the US constitutional checks and balances will certainly keep such attempts at bay (if ever the President had the inclination towards totalitarianism).

It is obvious that the loss of trust and a subsequent radicalization of politics are more harmful than dead weight losses through trade policies. Therefore, it is in the interest of democratic societies to react rationally to any populist movements – not by simply denouncing them but to take the concerns seriously and offer policies that remedy the underlying causes of populism. This will be the subject of the third and final part of the mini-series on “Populism on the rise”.

[1] I am grateful to Chris Ball for drawing my attention to this observation.

Populism on the rise: Is there a rational policy response?

Populism on the rise: Is there a rational policy response?

More than two months after his inauguration, the President of the United States (US) is visibly still in campaign mode. He seems to have identified half of the US-population and the mainstream press as his personal enemies and searches for scapegoats for every problem he encounters. His rhetoric is still polarizing and one can hardly imagine that he will ever behave like a statesman.

Sadly, the new US-President is not an outlier in modern politics. The Western world is experiencing rising populism among its leading politicians. This is a rather new phenomenon in the West although populism in politics has been a long-standing companion of Latin America and other developing regions.

Western 21st century populism puts the post WWII achievements concerning wealth and peace at risks and threatens to halt development processes in emerging economies and developing countries. This blog is the first part of a mini-series in the upcoming issues of the Tutwa Newsletter meant to explore the populism phenomenon. The first part is dedicated to defining populism and discussing its roots and causes. In the following issues, I will analyze its potential effects on the economy, and strategies to keep populist tendencies at bay, respectively.

With the rise of populist movements all over Europe, a need emerges to define populism and distinguish populist behavior from other political actions. One common element of all definitions is that populists claim to represent the people – defined as a homogenous “us” – who are being exploited by a ruling elite or by foreign powers – defined as “them”. The populist allegedly expresses a “volonté generale”. A second element is a general distrust of scientific expertise and media coverage, since scientists and journalists are presented as part of the elite. Third, populist politicians – having simple explanations for problems – also offer simple solutions: higher barriers to trade, expulsion of immigrants, retreat from international agreements and organizations. Interestingly, populist movements are not restricted to the left or right. Whereas the Brexiteers are more or less free traders, the French Front National is very protectionist.

So far, nothing is new. We have seen these patterns for instance in Argentina since the 1950s and Venezuela since the 1990s. These countries, however, were not stable and thriving market economies when populism rose. Contrary to the prevailing conditions of Latin American populism the Netherlands, for example, is one of the richest economies, yet populism still finds fertile ground between its windmills and polders.

This begs the question, what are the driving forces of 21st century populism? The academic literature regularly identifies demand and supply side factors. I add vested interests and their influence as well as the emergence of new ways to spread populist messages, in particular new media and social networks.

Demand side explanations comprise two main directions.

  • The first, and foremost, is the deteriorating economic situation of a broad and increasing share of Western population. Losers of structural change and those who fear to fall behind, are prone to simple arguments and follow populist movements. Their support is further enhanced if politicians and managers are misbehaving.
  • The second demand side argument focuses on cultural aspects, but is directed at more or less the same constituency as the first argument. A long-standing core group of society (white middle class males in the US for instance) no longer feels represented by elected politicians who allegedly place too much emphasis on non-discrimination, gender mainstreaming or integration of immigrants, but are blamed for allegedly not caring about the core population.

These two arguments only explain parts of the picture. An additional branch is dedicated to supply side explanations. Interestingly, the literature does not offer the whole set of potential causes. This may well be explained by the fact that these explanations – if they contain some truth – can be directly traced back to the very politicians, scientists and journalists who are blamed to be elitist.

  • First, there has been a neglect of the losers of globalization – who in fact are rather losers of technological progress, which in turn is stimulated by globalized markets. Neither analysts, nor observers, nor politicians, have done enough to mitigate the problems of those who lost their jobs. In economic analyses provided by computational equilibrium models, a comparative static view is taken. As a general result, further trade integration leads to a net growth of jobs. However, there are losers and there is a process of structural change to be mastered. It is simply not enough to pay social security.
  • In addition, better and targeted education as well as properly regulated labor markets offering chances for outsiders, i.e. unemployed persons, are urgently needed. These – or better put: the lack of both – are the second supply side explanation.
  • After the world-wide financial and economic crisis, income and wealth distribution has increasingly been skewed within Western societies. In particular, the low interest rate monetary policy of leading central banks contributes to this development, since the monetary expansion of the past decade resulted in a strong increase of asset prices and a much less accentuated increase in investment. Middle class savers suffer from negative real interest rates while wealthy people, being able to diversify their portfolios, gain.
  • This line of reasoning leads to a fourth supply-side explanation for, in particular, European populism. The global crisis, as well as the European crisis, have led to a string of rescue packages which are mostly not covered by the European Treaties. It may be too much to blame the Eurozone for breaching the Treaty, but it is fair to argue that the rules of the Eurozone meant to prevent fiscal crises have been permanently stretched. The European Commission has identified more than 60 incidents of excessive budget deficit – to be eventually sanctioned – but there has been zero sanctioning. This has contributed to a very critical public stance towards the Eurozone in many countries and to new nationalism.
  • The response of European politicians to criticism is another explanation for growing populism and dissatisfaction with the European Union (EU). Instead of allowing a widespread and open discussion of the right means to meet a common objective (European integration and stability), Eurocrats have constantly reacted in a quasi-religious manner to criticism. Critics are often being accused as nationalists if not neo-fascists. This contributes to dissatisfaction even among convinced “Europeans”.
  • There is another important problem that leads to Euroscepticism. The European Commission regularly has to take the blame for over-regulation (one reason for the Brexit). This sentiment might be correct as the Commission shows a tendency to behave like a Niskanen-type of budget-maximizing bureaucracy. However, it often reacts to domestic initiatives, delegated to Brussels because domestic politicians felt they are unpopular, partly because they were driven by lobby groups. Domestic politicians outsource the dirty work, as economist Roland Vaubel famously put it. This strategy works for a while, but it leads to an increasingly bad reputation of the European institutions.

In addition to demand and supply-side driven explanations, one has to analyze vested interests, in particular “Big business”.

  • The financial sector has been generously bailed out by governments during both the worldwide and the European crisis. Some critics argue that financial actors take too high an average risk, because they can privatize the profits and socialize the losses.
  • In addition, in Europe the issue of excessive manager salaries has got some attention, in particular related to environmental scandals in the car industry.

Finally, one can observe an increasingly aggressive tone in public debate, in particular when the internet is involved. New technologies and social media allow for distribution of imprecise and false news, which often stir up excitement and resentment. This is further deepened by the general tendency of media to focus on bad news.

An empirical confirmation of these hypotheses is yet to be provided. In order to test such hypothesis, more efforts have to be made to define populism and find indicators about the degree of populism in societies. This being said, the arguments themselves make sense. As long as we have only anecdotal evidence, we use them as working hypotheses. They also give strong hints about strategies to combat populism. Before this step is taken, the case against populism is to be made – maybe President Trump is right and 35{fdf3cafe0d26d25ff546352608293cec7d1360ce65c0adf923ba6cf47b1798e1} tariffs on Chinese products could help make America great again. But, let’s discuss this in the next issue.

Photo credit: Gage Skidmore via VisualHunt /  CC BY-SA
Digital trade – changing the landscape in the information age

Digital trade – changing the landscape in the information age

For the past 16 years Walmart has been among the top three companies in the Fortune Global 500 list. Globally it employs 2.3 million people and posted $482.1 billion in revenue for 2015. Reportedly Walmart’s biggest concern is its lagging e-commerce growth compared to its’ main competitor, Costco. When considering the trend in e-commerce growth it’s no mystery why Walmart has set its sights on the digital front.

Currently e-commerce accounts for a small percentage of global GDP. As it stands, the internet has not yet reached all corners of the globe and neither have online transactions become the norm just yet. However, according to a 2015 UNCTAD report the trend is changing fast. In the United States, for example, business to business (manufacturing sector) e-commerce revenue surged from $752 billion in 2002 to $2.9 trillion in 2012. Over the same period online business to consumer transactions (retail trade) grew fivefold from $45 billion in 2002 to $227 billion in 2012. As more people connect to the internet, more consumers use online transactions, and each consumer increases their spend.

There are also marked differences, pros and cons between traditional brick and mortar and online operations. As a consumer your experience with shopping online is very similar to your experience shopping in person. You land at your chosen suppliers’ store front (or homepage), you’re presented with the stock, occasionally bombarded with special offers not to be missed, you can add and remove goods from your ‘cart’ to check-out and pay when you’re done. Sure, there’s no instant gratification when purchasing online, as a delivery delay is expected, but you have the benefit of home delivery. Traditional retailers will also point out that you have a tactile and personal interaction with goods in their stores before purchasing, in addition to having helpful, friendly in-store assistance; and that is true.

E-tailers cannot possibly replicate these services, however, savvy shoppers will have no problem visiting a retailer for these services and do online comparison shopping, literally at the same time. Odds are that you’ll be able to find a better deal online as e-tailers do not have the expensive overheads that retailers do. While shopping online you can have multiple suppliers on a single platform offering different deals and occasionally you’ll find an even better match to your needs, thanks to cleaver catalogue algorithms, but mostly due to the limited stock space in traditional brick and mortar stores.

Of course not all goods sell as well online as they do at your corner shop, this is mostly true for nondurable consumer goods as people still prefer to pick the best looking apples from the cart. For everything else though, odds are that you’ll have a better experience online. The benefit of using online transactions from a consumer perspective lies in the fact that it’s much more convenient, especially if you like to shop around. You’re able to browse through thousands of offerings, make technical comparisons, price comparisons, and read previous buyers’ reviews before making a decision to purchase.

However, from a producer/supplier perspective e-commerce can be a game changer. Starting a business can be a challenge especially when considering the fixed costs. When testing the waters, so to speak, ideally you want to keep them as low as possible. Traditionally this meant looking for the cheapest, best suited, location for your business; however, this still meant that you needed to pay rent even when getting a small part in a shared space. With the advent of e-commerce, you have other options:

  • Set up you own website, using any of the number of platforms available, for example Magento which is dedicated to handling high traffic volumes, hosting on a global scale, simplified contract management and includes extension services to automate documentation and assist with business management and marketing; or
  • Become a vendor on an established website (domestically or internationally) where you list your offers, ship your stock to distribution warehouses and pay small subscription, warehousing and sales fulfilment fees.

Both options are available at a fraction of the price compared to brick and mortar start-ups and all of the technical setup work can be outsourced. These options are also not mutually exclusive as you can run your own website and be a vendor on an established e-tailer. Start-up costs for professional, online, services can be even cheaper as you do not need to pay for physical storage or logistics. Engaging in e-commerce instantly expands your market reach from your local area to an almost global reach, this is also true when sourcing inputs or services. This global reach unfortunately also comes with its somewhat unique set of constraining factors according to the UNCTAD: unreliable and lengthy transit times, complex and ambiguous return processes, customs delays, lack of transparency on delivery and pricing, and limited ability to alter delivery times and locations.

As for economic development e-commerce looks to be a capitalist dream. A seemingly open and fair market place for a virtually unlimited number of consumers who, in turn, have a seemingly unlimited number of suppliers to choose from. Rather than solely relying on supplier generated marketing material you have access to user reviews and ratings. In addition, the larger market access means that niche markets can be sustainable without compromise to meet local or regional demands.

But all this could come at a price. One of the larger fixed costs, depending on the sector, tends to be wages. In brick and mortar operations you need people to fulfil a number of functions from stocking shelves and managing inventories to occupying the floors and acting as sales representatives. In the world of e-commerce the number of people needed to successfully run a business is much less. In comparison to Walmart’s 2.3 million employees, the online retail giant Amazon employed 230 800 people in 2015, while the entertainment streaming service Netflix only employed 3 700 people (and posted $ 6.7 billion in revenue). On the domestic front South African e-tailer Takealot employed more than 800 people in 2015. Unfortunately, these digital giants also have a cascading effect on downstream services. Amazon is reportedly building a shipping network to cut down on delivery times, putting the squeeze on large package delivery companies who themselves employ a lot more people than Amazon, while the streaming service Netflix has all but decimated the video rental market in the US.

Only time will tell if large shopping complexes will turn into popcorn-scented wastelands however, there’s a growing body of work that suggests a rapid change in the composition of the workforce is occurring. From anecdotal evidence at least it seems that the spread of new technologies could further increase inequality as it leaves behind labourers with redundant skill sets. E-commerce is surely bringing a lot of new and exciting opportunities and experiences to the world, possibly at a more affordable price and definitely to the benefit of consumer comfort. While it could be having a detrimental effect on employment it’s worth noting that taking an opportunity has never been this affordable.

Photo credit: hnnbz via VisualHunt / CC BY