Portland Quarterly
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New economic environments
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Introduction Tim Allan Managing Director, Portland
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Africa's integration into the global economy Allan Kamau Associate Director and Head of Nairobi office, Portland
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The economics of independence: who is better off? Georgina Mallory Senior Account Executive, Portland
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Health and private enterprise in a new economic environment Georg Toufar Chief Marketing Officer, Mundipharma
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Financial services policy in the era of anger Simon Tiernan Senior Account Manager, Portland
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The political battle for Britain’s economy: facts or feelings? Ed Leech Senior Account Executive, Portland
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The Coalition’s rebalancing act Kitty Ussher Chief Economic Adviser, Portland
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INTRODUCTION Tim Allan In each of the thirteen years Portland has been in business, we have worked with an ever-more diverse set of clients, challenges and audiences. But if we take a step back and try to find a common thread between the organisations we work with, they are having to adapt the way they communicate to match the changing environment – and in particular a changing economy. Domestically, political and public attitudes to business have become more hostile and less forgiving. Internationally, the balance of power is shifting, slowly but inexorably, towards growing economies in the East and South. Our Quarterly this time looks at some of the effects these changes are having in the UK and further afield. In the twentieth century, the nations of Africa seemed largely left behind by global economic growth. The early years of this century have seemed to show much more promise, with South Africa taking its place at the table with other emerging economic powers. Allan Kamau looks at whether this moment had real significance and what challenges are still to be overcome. As economies develop and change, many people in different parts of the world feel their economic destiny is out of their hands. Part of the case for nationhood is that selfdetermination can let people win control
back. But the emotional pull of independence might yet trump straight calculations of who ends up better off. Georgina Mallory looks at how this dynamic is playing out in the very different environments of Scotland and Somaliland. The business perspective of the changing economy is provided for us by guest contributor Georg Toufar of Mundipharma, who explains that a company failing to adapt to changes in what consumers and buyers want and need will soon find itself in trouble. To cover the forces at work in domestic economic politics, we present three contributions from Portland colleagues. Simon Tiernan assesses the new framework for the financial services industry. Ed Leech sets out the way economic choices are being sold to voters by the two biggest political parties. And our Chief Economic Adviser Kitty Ussher uses her political experience to turn a sceptical eye on the claims by politicians to be ‘rebalancing’ the economy. Taken together, this Quarter’s essays provide a whirlwind tour of a global and domestic economy which is changing fast and demanding new ways of thinking from all of us. As ever, if you would like to talk about how Portland can help support you in responding to these changes, we would be delighted to hear from you.
Tim Allan is Portland's Managing Director
When South Africa joined Brazil, Russia, India and China in being considered the fifth member of the BRICS grouping in 2011, it sent a powerful message about Africa’s increasing significance in a changing global economic order. The elevation of Africa’s leading economy into this group was greeted with some scepticism. South Africa’s economy is tiny relative to the other BRICS nations. However, as a representative of the African continent, its membership offered the promise of greater integration for Africa’s rapidly growing economies. Fast forward two years and last year’s BRICS summit – held on African soil for the first time – saw no fewer than 18 African heads of state troop to South Africa to meet the BRICS leaders. Many read this as a sign of a maturing of the relationship between Africa and BRICS countries. China, the group leader by a wide margin, has been a key driver of Africa’s economic rise, with trade standing at $160bn in 2011 up from just $9bn in 2009. China’s demand for African commodities has boosted prices while offsetting weak demand from traditional partners in the West. China is still recording one of the highest rates of growth in the world, but a forecast 7.4% for 2014 is a big drop from the 10 to 12% growth achieved in the last decade. With slowing growth, China needs to curb its insatiable appetite for commodities. This may not sound like good news for Africa but China’s desire to move up the value chain could see Africa pick up the slack as the next frontier for low-cost manufacturing.
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While lagging behind in trade and investment volumes, India sees its relationship with the eastern seaboard of Africa as an opportunity to expand on centuries of contact. Its engagement has been different from the state-led Chinese model. Private
sector conglomerates like Tata and Essar are winning contracts across the continent. Ethiopia for instance has seen a $1 billion investment into its agricultural sector from India. Since 2003, total Indian vehicle exports to Africa have swelled by over 1,000% and by 160% since 2008 - by far the fastest rate for this product group among Africa’s traditional and BRICS trading partners. Brazil’s recent write-off of $900m of debt owed by African countries signals a strategy to redefine its relationship with the continent. Brazil-Africa trade has increased five-fold over the last decade according to official sources. Companies like Vale and Oderbrecht are making inroads, while Embraer aims to double the number of its aircraft flying the African skies over the next twenty years. Brazil is also exporting its successful agricultural models to countries like Ghana and Tanzania. The entry of the BRICS has helped to fill a gap left by Africa’s traditional partners in the West. Before the 2008 crisis, Africa relied mainly on the West for exports and connectivity to the wider world. However, the financial crisis prompted African countries to opt for a great diversity of routes. Now, these traditional partners are playing catch up. US President Barack Obama’s recent trip to Africa was considered too little too late by many commentators on the continent. A strategic Heads of States summit in Washington in August is now being discussed as a key platform to reengage a continent that has felt ignored by a president with strong family ties to Africa. Europe is still Africa’s largest trading partner. The global economic crisis seems to be fading and Europe is seeking to recapture its pole position on the continent as growth stagnates at home. A looming deadline for African states to sign contentious
Economic Partnership agreements will continue to strain relations and may frustrate efforts to boost trade between the two regions. Lack of market access and unfair trade policies are an often cited reason for low levels of African exports. But internal barriers also need to be addressed including investment in infrastructure and skills, and reducing red tape to improve competitiveness. The continent’s biggest hope for increased economic growth lies in regional economic integration, which would provide the size of markets and opportunities that would attract investors. Intra-African trade has more than doubled over the past five years, but there is huge potential yet to be unlocked. The East African Community has shown great promise with plans to integrate at pace. The Southern Africa Development Community and Economic Community of West Africa States are also slowly overcoming challenges. African leaders have proposed the creation, by 2015, of a free trade area that will combine 26 countries in eastern and southern Africa into a single market worth $2.6 trillion. As the world economic order changes, Africa too must change if it to take it rightful place in the global economy.
Allan Kamau is an Associate Director and Head of Portland Nairobi
Allan Kamau
AFRICA’S INTEGRATION INTO THE GLOBAL ECONOMY
Great Britain may not exist in a year’s time. A strange thought, and one coloured with real emotion.
after gaining its independence from the British, Somaliland decided to merge with Somalia.
But to date the majority of arguments for and against Scottish independence have pulled at the purse strings as much as the heart strings.
The union, unhappy almost from the beginning, fractured permanently when the Somali regime of Mohamed Siad Barre waged a brutal war against Somaliland in the 1980s in which 50,000 civilians lost their lives. As Somalia disintegrated into chaos, Somaliland took the opportunity in 1991 to regain control of its own future.
In Alex Salmond’s November White Paper he attempted to convince the Scottish public of the financial benefits of going it alone. Only the day before, the media reported that independence could leave Scottish taxpayers £1,000 worse off per year, and the Westminster Treasury wasted no time in calculating the tax increases required to pay for SNP promises. Of course, it is essential to consider the possible financial implications of deciding to become an independent country, but predictions for the Scottish economy can only be guesses or projections. There are no guarantees that Scotland will be better or worse off after independence. It is much harder to argue against the emotional pull of nationalism: the desire to decide your own destiny as a distinct community, bonded together by history, culture and geography. The world’s three most recently independent countries, South Sudan, Kosovo and Serbia were all born of violence; the emotional pull of independence was so acute that there was little need to argue for or against the economic case. In 1991, Somaliland, a stillunrecognised region of Somalia a little larger than England and with a population of around 4 million people, decided to go it alone. Like many 20th century states, Somaliland as a distinct geographical, political and social entity was forged by colonialism and civil war.
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Somalia and Somaliland were run as two separate countries by the colonial powers of Italy and Britain respectively until 1960. Five days
Somaliland’s elders made this decision in order to save and protect the lives of their people, not because of the economic benefits that the independent nation might accrue. In fact, Somaliland sacrificed much of the international aid that has been made available to Somalia’s government in Mogadishu. And without recognition, it has also been unable to access the global currency market. As a result, the government relies almost entirely on tax receipts and remittances from the diaspora to make up its annual budget. And yet, over the last two decades Somaliland has built a stable, democratic state with the most open economy in the region. The government has put in place functioning state institutions, and foreign investment is beginning to flow back in to help strengthen the economy. While being untied from decades of instability and violence has undoubtedly allowed the Somaliland government to shape a better future for its citizens, the economic arguments for or against independence have not been at the forefront. In contrast to South Sudan, Kosovo, Serbia and the as yet unrecognised Somaliland, the problem Alex Salmond faces is that, in many ways, the union of Scotland, England and Wales has worked extremely well. For three centuries, Great Britain has been stable, secure and prosperous.
Next year’s referendum has been scheduled 700 years on from the battle of Bannockburn, a famed victory over the English by Robert the Bruce. But gimmicks, aimed at pulling at the heart-strings, may not be enough to carry the vote. The emotional pull towards independence is undoubtedly real, but relatively weak by international standards. Of course, Alex Salmond will need to call on national pride to persuade the electorate that Scotland will flourish in the global economy as an independent nation, but without the draw of a significant improvement in their everyday lives will the Scottish people be prepared to take the risk? In 2011, 65% of Scots told one poll they’d vote for independence if it made them £500 better off – but only 21% said they would vote to leave the UK if it cost them a similar amount. This is what makes the Scottish independence agreement unique. Relatively cool-headed voters are being asked to weigh up the financial pros and cons of independence before making their decision. The results will be watched closely by other aspiring national movements in a similar position, such as those in Flanders, Catalonia and Brittany. Their respective current home states will equally be watching to see whether economic well-being or national identity is the ultimate victor. ‘Better off together’ is a slogan we might be hearing again.
Georgina Mallory is a Senior Account Executive at Portland
Georgina Mallory
THE ECONOMICS OF INDEPENDENCE: WHO IS BETTER OFF?
HEALTH AND PRIVATE ENTERPRISE IN A NEW ECONOMIC ENVIRONMENT
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Georg Toufar
In 2014, the pharmaceutical industry faces a set of choices about how to adapt to a changed marketplace. Historically, the pharmaceutical industry has focused on developing new, breakthrough and blockbuster medicines. These can be very financially rewarding but also require huge investment. The onset of the global financial crisis in 2008 has had a considerable impact on global healthcare budgets. Historically the pharmaceutical sector has been less exposed to economic fluctuations. The most recent slump, however, has made a sustained and deep impression on the sector. Pharmaceutical companies are now facing mature markets, slow organic growth and national austerity programs, all of which are leading to pricing pressure. This has had a substantial influence on pharmaceutical innovation and pipelines, with often serious repercussions. A number of the big pharma companies have had to reassess their R&D budgets and workforces - 120 companies announced restructuring plans in 2008-09 alone. Pharma companies are constantly looking for clarity about the future pricing and regulatory environment they will be operating in, in order for them to plan for their long-term investment in to the UK. With the average cost of bringing a new drug to market between $4–11 billion, it is hardly surprising that new products and R&D are falling by the wayside, a move that could ultimately lead to a stark stagnation in innovation. In the UK, NHS finances are under more pressure than ever, and demand for services is continually rising. The UK has a strong history of innovation in medicine and is a major pharmaceutical exporter. At least ten of the current top-selling drugs worldwide have UK-trained chemists as named inventors, and the UK biotechnology sector leads Europe in the number of drug candidates at all stages of clinical development.
So how should industry respond to this shift in the global market? Now is the time for us to better understand the needs of payers and patients. We must re-shape our innovation model and put value at the heart of it. Value means more than just price. Value means clinical excellence without the uncertainty; innovation without the risk; quality without the premium. The critical question is how we deliver this. In the divergent worlds of high-end R&D and generics, it is difficult to offer these value assurances. There is inherent risk at both ends of the spectrum – in terms of price, quality and efficacy. There is now a new space emerging – one that sits between these two sectors, and allows those within this new space to offer payers some of the assurances they need in order to invest with confidence. At Mundipharma, we understand that in the current economic climate, customers are juggling efficacy, quality and price often being forced to make a trade-off on some or all of these variables. This new “middle segment” model means that such a trade-off is no longer the only option. We choose to work with molecules for which the medical concepts are already well proven. They have well-established safety and tolerability profiles; serve clearly defined patient populations; and deliver positive health outcomes. We then share this value with payers, minimising uncertainty around the impact on their budgets and patient outcomes. Combined, this is equivalent to an insurance policy for payers. In a world of economic uncertainty, now more than ever we need to invest in products that will deliver clinical excellence, without breaking the bank. We are making this happen by innovating from the outside-in. To achieve real cut-through in the
market, pharmaceutical innovation needs to start in the real world, proving solutions to real-world problems, and not spending money on innovating for innovation’s sake. While creating leaner and more focused R&D departments plays a crucial role in cost-cutting within the industry, pharma companies can and should be exploring their ability to make further savings by shifting the focus away from blockbuster development and towards upcycling existing treatments to make them work harder. Only by focussing on what works for patients and payers can the industry as a whole find the right way forward.
Georg Toufar is Chief Marketing Officer at Mundipharma
FINANCIAL SERVICES POLICY IN THE ERA OF ANGER
The financial crisis of 2008 ensured that politicians had to approach financial services in a totally different way. There were three reasons for this change in approach.
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Consumers were angry that rich city bankers seemed to have made everyone poorer. Governments were terrified at the prospect not only of systemic failure, which could bring the economy to its knees, but also that banks in future might behave as if a government bailout was always a possibility, which is unacceptable to the custodians of taxpayers' money. And businesses that relied on bank support in hard times were frustrated when banks cut back on lending.
Consumers are still restless for change. Anger remains across the country about the perceived unfairness of normal households losing out due to the errors of the greedy rich. This is compounded by falling real wages: while the costs of living are rising, energy bills were up by 37% between 2010 and 2013. It’s little wonder that the public remain angry at the people who they blame for their empty purses and wallets. A 2012 YouGov poll found that 80% of those polled either agreed or strongly agreed that there is a widespread problem of ethics in the British banking industry. A range of organisations have sprung up to champion the case of consumers. The Church of
England, Which?, Citizens Advice and Consumer Focus have all lobbied to bolster consumer powers. The Independent Commission on Banking, launched in the early days of the Government, concluded that retail banking was insufficiently competitive, while the Parliamentary Commission on Banking Standards sought to address failures of governance. The most controversial element of reform – the separation of retail and investment banking – will be implemented over the course of this decade. But in the run up to that, a new institutional framework has been created in an attempt to move on from the perceived failures of
Simon Tiernan
the previous regime. Yet the new regulators are being asked to deliver several, sometimes contradictory, things at once. The FCA under the stewardship of Martin Wheatley will be the first to come under the glare of the spotlight. The body will take over consumer credit powers from the OFT in April this year. The FCA are consulting businesses, banks and credit reference agencies on this and a wide range of other financial services topics to cement how they intend to improve consumer credit in 2014 and beyond. But politics is never far away: the FCA is already reeling from the Chancellor's decision to intervene
on the payday lending debate in response to campaign groups, forcing the new regulator to rapidly insert a section on interest rate caps into their current consultation document. The FCA’s difficulty is that consumers want a more responsible banking sector along with cheaper, bigger loans. So while the regulator may be forgiven for focussing for now on taking some early scalps and to crack down on flagrant abuses, its longer term challenge will be to navigate between the desire for dynamism and the need for sobriety. The political mood as we approach the election only points in one direction. Labour, initially
compromised by a perceived failure to prevent or mitigate the crash, is pursuing a populist agenda taking on big business across several sectors. Within the Government, Lib Dem Vince Cable has wrestled with the Treasury, largely unsuccessfully, for a say on banking policy, and will put the case for further action in 2015. This will leave the Conservatives, traditional friends of the City, who urged Labour to deregulate more in the run-up to the crisis, in the unusual position of pointing to how hardline they have been.
 Simon Tiernan is a Senior Account Manager at Portland
Governments are elected, or deposed, on the basis of the economy. However, the choice is often not between two radically different economic approaches but rather voters’ feelings about their personal financial situation. The next election will see two analyses of the economic situation presented to the British people, who will be asked to decide which they believe, and who they trust to look after the economy after May 2015. Chancellor George Osborne’s strategy is built around a steadily improving economy, with the promise of more to come if the voters allow him to keep his steady hand on the tiller. His opposite number Ed Balls lacks the Chancellor’s air of responsibility but is trying to make up for it with an appeal to the personal feelings of voters about their own financial situation. Which agenda wins the day will be a matter of numbers, but also of emotion. Ronald Reagan understood the importance of appealing to feelings at the 1980 US Presidential Election asking “are you better off than you were four years ago?”, a question to which he hoped the answer was ‘no’, with the result that the incumbent Jimmy Carter was rejected by the public. In 2015, Labour will be looking to pull off a similar trick.
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Looking at the headline numbers, the Conservatives appear to have a decent story to tell. “Britain's economic plan is working”, declared Mr Osborne once again as he opened his budget speech on 19th March forecasting another increase in growth to 2.7% in 2014. With interest rates at historic lows, unemployment under control and inflation very low in comparison to periods in living
history, he could be forgiven for expecting a national mood of optimism. The public certainly seem to be granting him credit for his stewardship: as the economy improved over the course of 2013, polls suggested the public increasingly rated the Conservatives as the more economically credible party, ending the year 5 points ahead of Labour on the economy, having begun the year a point behind. Labour will hope sufficient numbers of people will feel the Government’s economic recovery is not delivering for them, and want a change. The following day, however, The Institute of Fiscal Studies backed Ed Balls’ claim of a 6% fall in absolute wages between spring 2010 and Autumn 2013. The danger for Labour, though, is that even if they win that argument it may not be enough. They still have some way to go in convincing people their offer is the better one. A YouGov poll published on 13th December found that 25% thought they would have been better off if Labour had won in 2010, 32% worse off while 31% felt they would be much the same. The figures were even stronger for the Conservatives when questioned on the broader economy, with just 21% believing the economy would be doing better under Labour, while 42% believed it would be doing worse and 26% thought it would be much the same. Ultimately, though, what will matter is who people vote for on election day. And polls of voting intentions continue to show a poll lead for Labour, albeit reduced almost to nothing over the past year, in terms of the
public vote at least. While they broadly give the Government credit for its handling of the economy, they may not yet feel this entitles Conservatives to their vote. This in turn is what prompts Osborne to emphasise that the challenge is far from over. So both sides may have more to do to reach hearts and minds, regardless of where the numbers fall. The Prime Minister and Chancellor have begun 2014 appealing once again to voters’ good sense and understanding of how to run a household. For Labour’s part, while their cost of living agenda resonates well with the public at present, if wages begin to rise, the two Eds will be left with the unwelcome task of trying to tell people they are poorer than they feel.
Ed Leech is a Senior Account Executive at Portland
THE POLITICAL BATTLE FOR BRITAIN’S ECONOMY: FACTS OR FEELINGS?
Ed Leech
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THE COALITION’S REBALANCING ACT
Kitty Ussher
In the search for blame that followed the global financial crisis the idea of structural imbalance was attractive. After all, things teeter before they crash. But rebalancing meant different things to different people. For the Conservatives it primarily meant over-reliance on the public sector, with an implied focus on national debt. In his first Budget speech, George Osborne told parliament that the size of the state "crowded out" private endeavour. For Labour in opposition it meant over-reliance on financial services, with the implied need to refocus on manufacturing and the regions. And an easy conclusion for many was that if the banks hadn't been so big, things wouldn't have got so out of control. In reality neither the size of the British state nor the size of our banks were responsible for the global financial crisis. I cite as evidence the fact that countries with small financial sectors also went into recession, that government debt was low by international standards and projected to fall when the crisis hit, that small institutions - including mutuals - went bust, that some very large international banks did fine and that manufacturing was already larger than financial services in its contribution to GDP before the recession. The problem was less one of imbalance and more one of a gaping void between the way many complex financial assets were valued - mainly, as the IMF has shown, related to the US housing market - and their underlying worth. In Britain, however, high levels of household borrowing meant that when the crisis hit, families had further to adjust to get themselves back on an even keel. Since both diagnoses of imbalance were wrong, the economic patient has not behaved in the way either political doctor would have expected. The sharp paring back of the state did not unleash entrepreneurial spirit commensurate with the problem
being the need to rebalance from public to private. Rather it drained demand out of the economy and tipped us back into near-recession for a further two years. And recovery when it finally came was not because manufacturing and the regions were at last able to realise their potential, but because business services, predominately in London and the South East, got their mojo back. The recession has been noticeably harsher in every other part of the UK than in London, even despite the latter's reliance on financial services, and manufacturing is actually a little weaker now than it was a couple of years ago. We are left in 2014 with an economy pretty similar to the one of five years ago. The differences are first that the household sector as a whole has less mortgage and other debt, second that the banks are better regulated and more aware of risk, and third that London, if anything, is stronger. There has been a shift from people working in the public to the private sector, but not in the number of companies employing people. According to BIS's latest Business Population Estimates, it is the number of sole traders and other non-employing businesses that is on a steady upward trend; the number of businesses that actually employed people fell by 26,000 in the last year. If you agree with the political diagnosis of the last crash, then, today’s similarities might suggest a repeat is imminent. But that diagnosis confused the general environment with the direct causes of the crisis. Raising the potential economic contribution that can be made from every part of the UK, having an efficient government, growing the strength and resilience of the private sector in general and manufacturing in particular, and ensuring individuals can maximise their potential in the labour market are all important long-term goals, for both economic and social reasons. They aren't correlated to the crisis we've just witnessed.
It would be more helpful to shift the debate from rebalancing to sustainability. There will be another shock to the economy, hopefully a long time from now, and it will (by definition) be unexpected and could happen in any sector. Remember the oil price and exchange rate shocks? The dotcom bubble? The trick is to be able to identify it early enough to mitigate the effect; for either main party a dogmatic policy belief set is unlikely to help
Kitty Ussher is Portland’s Chief Economic Advisor. She is also a member of TheCityUK's Independent Economists' Panel and was previously a Treasury Minister
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