B&O – The Quarterly Journal of the Economic Research Council (Autumn 2019 / Vol. 43 / Issue No.1)

The Quarterly Journal of the Economic Research Council

CONTENTS: ■ ERC CHAIRMAN’S DABERIAM REPORT

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■ US LESSONS FOR TAX CUTS

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■ POPULISM, FINANCIAL TURMOIL AND THE END OF CENTRAL BANK SUPPORT: WHAT LIES AHEAD FOR MARKETS?

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■ TWIN THREATS ENDANGER GLOBAL SOCIAL STABILITY

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■ ERC INFORMATION PIECE: WHAT CAN BLOCKCHAIN DO FOR SOCIETY?

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President Lord Lamont Chairman Damon de Laszlo Vice-Presidents Sir Vince Cable, Tim Congdon, Peter L. Griffiths Brian Reading, David B. Smith, Peter Warburton Vice-Chairman John Mills Hon. Secretary Jim Bourlet Programme Director Aimée Allam

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Editor

Aimée Allam

EXECUTIVE COMMITTEE

Damon de Laszlo (Chairman) Tony Baron Robert McGarvey Oliver Bond Christopher Meakin Jim Bourlet Howard Mighell William de Laszlo Wolf Raymer Kristina Manalo

MASTERS COMMITTEE

Gregory Opie Kristina Manalo Oliver Bond William de Laszlo Tom Chatfield Dan Madden David Hobson Contributions to Britain and Overseas should be submitted to the editor, Aimée Allam (aimee@ercouncil.org), electronically only.

Books for review should be sent to the Economic Research Council, 5 Albany Courtyard, Piccadilly, London, W1J 0HF.

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Editorial

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t gives me great pleasure to welcome you to the Autumn 2019 issue of Britain and Overseas, a publication which has been in near-continuous print for almost 50 years.

This issue comprises five pieces, each striving to illuminate an aspect of the current political and economic backdrop- and what interesting and testing times we find ourselves in!

ERC Chairman, Damon de Laszlo, in his Daberiam report highlights enhancements in both global political decision-making and world trade from Brexit and Trump’s unorthodox actions that are causing intense worry. Different approaches to surveillance and data gathering are contrasted, with China and Europe at two extremes and the US in-between.

Expanding on the impact of ‘Trumponomics’, is our assessment of the President’s tax cuts one year on. Via his examination of real US GDP growth, consumption, and investment since the tax reforms, Kenneth Deterding finds plenty to discuss and asks whether conclusions might be drawn were the UK to implement similar policies.

Insights into long-term perils facing markets from global, economic and political forces at play were provided by FT markets editor, Michael Mackenzie in his November 2018 lecture transcribed on page 11. These dangers include populist governments’ policies which, initially beneficial, will be malign later.

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Two ERC talks are reviewed together in Dr Sittampalam’s piece. The first by Dr Faiza Shaheen, Director of the Centre for Labour and Social Studies, looks at inequality as a driver of the popularity of Brexit, Corbyn and Trump. In the second, Dame Minouche Shafik, Director of the London School of Economics imagines on the welfare state of the future. These two distinct topics each cover key aspects strongly relevant to the other, but covered insufficiently in it.

Together, the two speeches offer a more complete analysis of the problems affecting the sustainability of liberal democracies.

Many financial and industrial groups are exploring and implementing blockchain for commercial purposes. Our final piece reviews its potential uses for society at large.

The technology is already helping with many socially significant problems ranging from alleviating food shortages and environmental degradation, as well as improving health and education systems for the 21st century. Two types of blockchain players, governments and small-scale innovators surprisingly, hold the most promise for benefiting society.

Keen followers among you will note that this is my first issue as the editor. Indeed, I’m excited to share with you some provocative and informative pieces, which have been compiled with the assistance of the diligent eyes and sharp insight of long-time ERC member, Dr Arjuna Sittampalam.

I do hope you enjoy reading the issue.

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Daberiam DAMON DE LASZLO A week in politics is a long time – the two months of May and June has seemed like an eternity. In Britain, Mrs May has finally thrown in the towel, having managed the extraordinary achievement of antagonising virtually the whole of her own party and both sides of the festering Brexit debate. Elections to the European Parliament have produced near paralysis and have virtually destroyed the status quo, making it difficult to see how the new leadership of Europe will evolve.

The President of the USA has swung from tearing up virtually every agreement with the rest of the world to becoming everybody’s best friend at the G20 meeting. It’s difficult to understand the political mayhem and reconcile this with the extraordinary economic stability which seems to roll on, regardless of chaos in the western governments. One of the positive effects of the UK/European negotiations seems to have been that it has greatly spurred the European bureaucracy into entering into trade agreements, firstly with Japan and secondly with the so-called Mercosur group of Latin American countries* after twenty years of negotiations.

Another interesting positive side effect of the upheaval in the basic order is a realisation that leaders can break through the constraints of bureaucracy. Flouting all conventional advice, Trump’s meeting with the North Korean leader Kim Jong un in his visit to the DMZ is without precedent. He has 04

further infuriated the political establishment in his discussions with Chinese Premier Xi on rolling back some of the embargoes on American businesses selling to China.

Whether his tactics are part of a deeply thought-out strategy or just antics, we will probably never know, but they certainly break the bureaucratic hold on political leaders that has been steadily circumscribing their room to manoeuvre in recent history.

Probably the most extraordinary phenomenon of today’s world is the fact that economies in the West and most of Asia are doing relatively well, and it would seem that the political uncertainty is holding back the boom that could have developed in what economists would predict is the tail-end of an economic cycle. Full employment is the best thing for general well-being, with the caveat that the so-called middle classes are not benefiting from the current economic growth. These are the people who are most politically active and when expectations are not being met, causing political polarisation.

In the last month I have been visiting companies in China and have spent time at an electronics show in San José, California.

What is extraordinary is to see the amount of incredible innovation going on in two very different economies. The advances in electronics, which is the core of the development that is leading to ever-growing applications of Artificial Intelligence, robotics and virtual reality, is quite extraordinary.

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In economic terms, we are indeed in an age of “capitalism without capital”. Vastly reduced amounts of capital are needed to create economic prosperity. The amount of energy being generated by new ideas and capabilities is extraordinary and will have unpredictable results. The most interesting, if not serious, by-product of this technological development is surveillance technology. In China people by and large accept that there is mass surveillance and data gathering by companies as well as the State. The US, overall, feels relatively unperturbed by corporate data gathering but is intellectually nervous of State data gathering. In Europe there is much less acceptance and understanding in general of modern technology, and Brussels, rather than encourage it, positively discriminates against the processing of mass data.

This could lead to Europe becoming a technological backwater. Whether one views the ability to collect and process data on individuals as good or bad, it is going to be an inevitable consequence of modern technology.

We are in a period of rapid change with unpredictable outcomes and it is more than unusually difficult to see the consequences of the changes that are driven by disruptive technology, particularly as this development is so rapid.

This added to the political instability in the West makes for “interesting times”!

Whether his tactics are part of a deeply thoughtout strategy or just antics, we will probably never know, but they certainly break the bureaucratic hold on political leaders that has been steadily circumscribing their room to manoeuvre in recent history.

*Brazil, Argentina, Uruguay and Paraguay

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US Lessons on Tax Cuts KENNETH DETERDING

Recent empirical evidence surrounding the 2017 US Tax Cuts and Jobs Act can shed some light on the short run effects of similar tax policy here in the UK, as proposed by Boris Johnson before he became PM. The first chart plots quarterly US Real GDP Growth and Consumption Growth from Q1 2014 - Q1 2019. Real GDP Growth is plotted in green (distinguished from nominal growth in that it is adjusted for inflation) and consumption growth in quarter on quarter percentage change is plotted in yellow.

The first chart plots quarterly US Real GDP Growth and Consumption Growth from Q1 2014 - Q1 2019. Real GDP Growth is plotted in green (distinguished from nominal growth in that it is adjusted for inflation) and consumption growth in quarter on quarter percentage change is plotted in yellow.

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The second chart plots quarterly percentage change in components of private non-residential investment from 20142019. The solid blue line plots investment in intellectual property, mostly comprising of Research and Development.

The dashed blue line plots firm investment in equipment and machinery. Finally, the dotted blue line plots firm investment in structures such as new buildings or factories.

He laid out his leadership bid by proposing a rise in the threshold of 40% tax bracket from £50,000 to £80,000. Given that yearly incomes ranging from £30,000 to £40,000 are considered to be median figures, most individuals who earn at this level are well within the top quintile. In support of his policy, Johnson stated that the cuts will provide economic stimulus and help ‘the huge numbers that have been captured in the higher rate’ during and after the UK exit process from the European Union.

‘We can go for much greater economic growth – and still be the cleanest, greenest society on earth,’ he asserted in his Daily Telegraph column. Johnson also added that the UK ‘should be cutting business taxes’ from the current corporate tax rate of 19%. Regardless of any distributional Autumn 2019 | Vol 43 No.1

concerns around granting society’s highestincome earners and firms tax cuts, it is worth examining whether such policies serve to stimulate the economy.

As stated above, recent evidence sheds some light on the short-term effects of similar policy. Similar to Johnson’s proposed income tax policy, this legislation extended several lower rate tax brackets. Additionally, the Act lowered many of the rates in their respective brackets, with most substantial rate cuts benefitting top and middle earners.

As the income tax cuts were accompanied by additional cuts in estate taxes, dividend income taxes and taxes on income earned

by S corporations (commonly used as a legal means of tax avoidance/reduction through income shifting), the benefits reaped by top income earners were compounded.

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The TCA also lowered the corporate tax rate from 35% to 20%. In a similar manner to Johnson, the proponents of the US tax reform touted the measures as leading to GDP growth, wage growth as well as increased investment.

The non-partisan Congressional Research Service (CRS) recently released its assessment of the effects of the TCA through 2018, in order to test the validity of the claims. The findings of this report must be qualified, however. This is a shortrun analysis and many economic reforms take several years to make more profound impact. Despite this, it is helpful in shedding light on whether the claims that these reforms would have an immediate effect on economic growth, wages, and investment are valid. In the US, advocates of the TCA took figures modelling the long run impacts of the reform and advertised them as if they would occur immediately. Nonetheless, Johnson’s claims can still be analysed at this stage, as economic stimulus is intended to have short term positive effects, which can offset shocks caused by recessions

In a similar manner to Johnson, the proponents of the US tax reform touted the measures as leading to GDP growth, wage growth as well as increased investment.

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or by occurrences such as Brexit. Finally, the effects of the TCA corporate tax cuts on investment and wages provide a useful comparison with Johnson’s proposed corporate tax cuts due to the immediate effect of the US cuts on stock buybacks and corporate income repatriation.

With respect to GDP growth, the Congressional Budget Office projected that the TCA would have a positive impact of 0.3% during 2018. Indeed, a much higher estimate of 1.2% additional growth was projected by the Republican-majority congressional Joint Committee on Taxation. The goal of the type of analysis done by the CRS is to isolate the effect of the tax cuts by comparing the observed 2018 figures to economists’ projections in the absence of the reforms.

The observed figure from 2018 was 2.9% GDP growth and the CBO projected figure was 3.0%, which included the effects of the TCA. Without the tax reform, the CBO’s projection for 2018 was 2.7%. Comparing the observed to projected figures, the effects of the tax cut seem to have been to add an additional 0.2% to GDP growth, lower than the CBO’s conservative 0.3% estimate.

But time series analysis is often far from perfect when concluding causal effects, so we must disaggregate the effects to provide further corroboration that the TCA’s shortrun analysis was unimpressive in critical areas such as consumption and investment.

In any case it is far from providing the level of rapid and significant stimulus and growth predicted by its proponents.

Considering consumption, there is reduced need for projections. Time series Autumn 2019 | Vol 43 No.1

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analysis should provide some evidence as to whether the tax reform increased demand for consumer goods in the short run by affording consumers more disposable income. Consumption increased by 2.6% in 2018, only 0.1% higher than 2017 and below the figures from 2014-2016. With the US economy continuing to expand and near full employment, consumer confidence was already high prior to tax reform. Overall, the absence of historical evidence of short run demand side effects is unsurprising for a few reasons.

First, as mentioned, the US already had low unemployment. Increased employment resulting from workers wanting to work more hours for higher wages (supply side) as well as from the decreased corporate tax burdens (demand side) would have little impact in an already tight labour market.

As the UK is currently following a similar low unemployment trend as the US, this conclusion would likely hold here as well.

Secondly, top income earners are less likely to spend additional income on consumption as they are presumably already consuming a relatively large, relatively stable amount.

In economic terms, higher income individuals have lower marginal propensity to consume, and they tend to spend a lower portion of each additional pound earned on consumption than lower income individuals.

Therefore, since most of the TCA’s impacts were on top income earners, there should not be much of an impact on consumption.

On the balance of probabilities, Johnson’s cuts would have a similar result in the UK. The TCA’s impacts on investment can also Autumn 2019 | Vol 43 No.1

Ordinary workers were touted as the primary beneficiaries of the tax cuts. Wages for these individuals grew by only 1.2%, below the overall number, implying that any more substantial wage growth effects accrued to higher level, supervisory, non-production workers such as leadership and executives. be discussed in more detail than its effects on overall GDP. The CBO projected that the tax reform would lead to an additional 1.5% growth in fixed non-residential investment.

Given that in 2018, US investment increased by 7%, it is plausible that the tax cut did cause the intended increase in investment.

However, as seen from the chart and noted by the CRS report; the largest increase in 2018 investment occurred in the first two quarters. This implies that many of these projects, which take time to plan and coordinate, had begun before the tax cuts were in place and should not be considered as resulting from them. Secondly, the growth in the respective components of investment does not align with the incentives provided by the TCA. This can be seen through changes in the opportunity cost of capital 09

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for the three components included in the chart. The tax cuts included specific changes with respect to each, such as a lower tax rate and faster depreciation for investment in equipment. The opportunity cost of capital is the required rate of return for a particular investment, meaning that an investment must generate some return in excess of that hurdle rate to be ‘worth the money’. With other factors equal, a lower opportunity cost of capital for a particular opportunity means that it becomes a better or easier investment. The CRS estimates that the cost of capital declined by 2.7% for equipment and 11.7% for structures but increased by 3.4% for intellectual property.

These changes in cost of capital are very likely largely affected by the changes in the tax incentives for investments in these respective areas. Intuitively, this should result in the highest investment growth for structures, the second highest for equipment, and a decline in investment in intellectual property or at least a decrease in the growth rate of such investment.

Rather, what is seen during 2018 in the second chart is that intellectual property investment experienced the highest growth and structures investment experienced the lowest growth, even decreasing in Q3 and Q4 2018. This is the converse of what might be expected or incentivised by the tax cuts and changes in cost of capital. This implies that the tax cuts had a dubious short-run effect on investment. In the words of the CRS, “it would be premature to conclude that the higher rate of growth of nonresidential fixed investment was due to the 10

tax changes” and their effects of the return of certain investment opportunities.

Finally, the CRS found that the TCA corporate tax cuts did have certain short run effects, just not on wages or investment, the key components of any economic stimulus supposedly sought by a Johnson-led government. In 2018 US overall real wages grew by 2.0%. As ordinary workers were touted as the primary beneficiaries of the tax cuts, the wage growth of production and nonsupervisory workers is a better figure to consider. Wages for these individuals grew by only 1.2%, below the overall number, implying that any more substantial wage growth effects accrued to higher level, supervisory, non-production workers such as leadership and executives. With respect to earnings repatriation and increased investment, overall repatriation did increase substantially in 2018. However, repatriated earnings used for reinvestment or ‘plowback’ decreased remarkably by nearly a factor of 3.

Further to this, dividends paid out increased by an even larger extent from $158 billion in 2017 to $664 billion in 2018. As the overwhelming proportion of firm shares are owned by very high-income earners, this change in dividend policy (alongside the additional $1 trillion in stock buyback which occurred in 2018) served to vastly increase top incomes. And, as stated above, these income increases seem to have had little effect on consumption and GDP. Ultimately, recent empirical evidence can do well to inform the debate on UK public policy.

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‘Populism, Financial Turmoil and The End of Central Bank Support: What Lies Ahead for Markets?’

From a salient ERC lecture in November 2018 by Michael Mackenzie, FT Markets Editor, many conclusions in which can still inform observers today.

It’s been a tough year for many investors not a pretty picture. But for all the current gloom the global economy is still expanding as are company earnings. A slower pace beckons next year, but there is still growth.

So why are markets in such a funk?

Central banks are no longer pumping as much money into the financial system. This has been a year of dimming central bank support and expectations are for that trend to continue into 2019.

Before we address populism and the current market turmoil, let’s start at the beginning of the cycle: the depths of 2008. I was in New York covering markets for the FT at the time and it was a financial earthquake.

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The seeds of the current populism were sown at that time. The worst financial crisis since the Depression was always going to leave deep scars.

The credit and mortgage boom of the last decade arrived after the dotcom bust and helped mask a disturbing aspect of the new technology driven era, a lack of real wage growth.

I would argue we are still experiencing more a time of outright tech disruption, rather than Schumpter’s creative destruction. Tech has been transforming industries - media, film, advertising, conglomerates, millennial tastes. My career in journalism began in 2000, and I have seen a constant focus on cutting costs, and talented people leaving - the introductory scene in Spotlight, the winner of the best picture Oscar for 2015 - shows a scene that I have become very familiar with - a seasoned reporter leaving the industry for good.

When QE was announced in December of 2008 it was described as a temporary measure. A jolt like a defibrillator to jumpstart the economy. By the time Ben Bernanke 11

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appeared on 60 minutes to sell QE2 because it wasn’t bringing down US mortgage rates, QE was all about getting the stock market higher.

There is a very good reason why asset prices matter - our retirements are linked to this. But as QT replaces QE, the major worry with QE is that it has brought forward returns.

The bar for the future has been raised and a look across major equity markets for 2018 shows all are pretty much down.

QE is the most explicit example of the Fed put - it’s been with us since 1987’s Black Monday prompted the Fed to cut rates the next day and place a floor under the stock market. Right now, the bond market thinks Jay Powell will soon confirm it still exists.

Whenever there’s a big market shock, investors expect central banks will ride to the rescue. This is known as the central bank put an insurance term that policymakers will eventually do “whatever it takes” to help support asset prices such as equities and, for main street, bolster housing.

The UK, Australia, Canada and Sweden are prime examples of banking systems and property markets locked in a very snug embrace that looks frankly unsustainable should central banks allow interest rates to rise sharply. These are areas to watch next year if global growth continues to slow.

The past decade experience of central banks cutting rates to zero and in Europe and Japan into negative territory while buying bonds represents drastic action, a grand experiment in monetary policy as some call it - but it sends a message to the general public that something is fundamentally 12

broken. After the second major equity crash inside 8 years, the response from many on Main Street after 2009 was to buy income through bonds and high-quality company dividends and housing.

A decade ago, I often spoke with Andrew Lo at MIT. As QE suppressed interest rates across the curve, Andrew made the point that this was going to hurt savers and retiring baby boomers. Suddenly a retiree could not liquidate their holdings of stocks and allocate 125K to a series of federally insured bank accounts. Placed in a five-year Certificate of Deposit and earn 5% on top of your social security and that was a handy income. Gone under QE. During this time, I often met with Fed officials. The NY Fed has a quarterly lunch with reporters that are off the record briefings where you are given a steer on how the central bank sees the road ahead.

I was struck how the Fed viewed QE in cost and benefit terms. From their perspective, the benefits outweighed the costs. At this time, Tim Geithner as Treasury Secretary prevailed upon the Obama administration not to punish the banks. There is a third policy at the Fed - beyond inflation and

When QE was announced in December of 2008 it was described as a temporary measure. A jolt-like a defibrillator to jumpstart the economy.

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employment. Keep the banking system functioning. It’s important and we only have to look at Eurozone banks to see why this matters for an economy.

But the take on Main Street was that Wall Street socialised its losses and kept the profits - 2009 was a particularly egregious year for banker bonuses - so here the seeds of voter anger were sown after the financial crisis.

Baby boomers are still pressured as they retire from low yields, while millennials without the bank of mum and dad face paying off large student debts as they embark on their careers. You can see why there’s a lot of unhappiness among voters.

We have some clear examples as we are all familiar with - Brexit, Italy, Mexico, Brazil and, of course, Mr Trump’s arrival in the Oval office. After the vote for Brexit in 2016, elections in Holland and France in 2017 were worrisome but populism was checked in Europe until Italy, a key core member of the EU elected a populist coalition government this year.

Angry voters are a fact of life for markets, but now there is an important distinction.

Emerging market economies have a welldocumented history of embracing populists.

But in recent years, starting with Brexit, developed economies have done so too. I see the consequences of the financial crisis, globalisation and how technology have combined to lower real wages. And that does and should worry markets.

Of course, there is a wrinkle here - via Capital Economics: Most governments that tend to get grouped under the populist Autumn 2019 | Vol 43 No.1

The past decade experience of central banks cutting rates to zero and in Europe and Japan into negative territory while buying bonds represents drastic action, a grand experiment in monetary policy as some call it - but it sends a message to the general public that something is fundamentally broken. banner also have a proclivity for fiscal stimulus. In the right circumstances, this can actually boost economic activity. Indeed, it’s striking that GDP growth in Hungary, Poland, the Philippines and the US accelerated in the two years that followed the election of populist leaders.

But they also make an important point: However, the effects over the longer term are likely to be far more malign. Accordingly, while the early evidence may seem to support the case made by populist leaders, history is likely to form a different view.

We are seeing signs of this in the US. Having enjoyed a Trump bump via tax cuts and deregulation, the bill for US populism is building and has long term implications for markets.

A somewhat slower economy in 2019 13

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Angry voters are a fact of life for markets, but now there is an important distinction. Emerging market economies have a well-documented history of embracing populists.

But in recent years, starting with Brexit, developed economies have done so too. means the idea that tax cuts pay for themselves will not eventuate. Tax cuts have come towards the end of an alreadyextended cycle. During the next recession an already challenging deficit picture will blow out further.

This is where the Trump administration’s focus on trade and its aggressive “America first” foreign policy has big repercussions down the line. And one that will make funding the US budget deficit a lot harder over time.

Now as the Fed prepares next month to raise borrowing costs for the fourth time this year, markets are not happy.

The bond market thinks the Fed will soon pause. Equities are struggling to find an appropriate valuation level as the tailwind of the Trump boom starts fading.

The current repricing in equities reflects a slower pace of earnings growth and margin compression from here. Higher wages will help ease some of the voter anger out there, 14

but at the expense of lower equity market performance.

Last week an asset manager remarked: Investors are stuck in the worst part of the cycle. It’s “too late to buy equities and too soon to buy government bonds”. For the first time since the demise of Lehman Brothers, the three-month Treasury bill yield is above the average yield of the Barclays Global Agg yield.

As JPM note: It appears that we have entered a phase of asset repricing and higher yields more broadly led by more attractive USD cash yields. And unless USD cash yields stop rising this repricing seems likely to continue.

This year I have asked investors: How much cash do you hold and is that a peak?

The answer is a lot and for many it’s the highest weighting since the crisis.

We are at a tricky juncture - some look at the performance of equities this year and think it’s flagging a recession. A slowing global economy has not yet reached a point that halts the current trajectory of policy by the Fed and the European Central Bank. We would need to see a major shock to stop the ECB from ending QE next month while Mr Powell will continue as planned is the likely outcome.

In the US, November jobs are seen expanding by 215K and the unemployment rate dipping to 3.6% - very hard to see the Fed relenting from a steady policy tightening stance just yet.

In spite of Mr Trump’s objections to higher interest rates, I think the Fed remains focused on a robust US jobs market. You Autumn 2019 | Vol 43 No.1

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need to see US employment data slow before the Fed halts.

I would also argue, that no matter the red flags being raised by markets over the economy, the central bank retreat from easy money needs to continue and reset markets.

Last year, it was interesting to hear a junk bond manager defend buying eurozone high yield at low yields. ‘That’s my mandate’ he remarked on his rationale - rather reminds me of the synthetic CDO bid in 2007. Last month in NY at a hedge fund conference the concern about credit exposure was palpable.

It should be and a painful adjustment has begun and has room to run.

Cheap money creates very bad incentives. If I was a hedge fund investor, I would be asking long short funds why they were so long tech in October and had few shorts positions.

As central banks retreat, that’s hurting investors who have enjoyed a nice ride. The 60/40 portfolio faces losses on both equity and bonds. We haven’t seen that in the US since 1994.

Against that backdrop, I don’t suspect 2019 is going to be any easier for investors and markets - in fact there is an understandable worry that 2018 has merely been a dress rehearsal. There are certainly challenges out there.

If we start with Italy, forget supply side reforms, Rome wants to spend more and you can see the point. With that kind of debt burden, Italy needs growth. They are pushing the EU on this and it will run into 2019 and influence the EU parliamentary elections.

The lack of a stronger market reaction - a Autumn 2019 | Vol 43 No.1

BTP/Bund 10 year spread north of 500bps - suggests to me that investors expect Brussels will kick the can down the road.

Brexit uncertainty comes when the global activity is slowing - A Q3 contraction in both Japan and German can be blamed on special factors up to a point. It tells us something does it not? The former head of the PBOC last year warned about a Minksy moment.

That was a big hint for how 2018 has turned out in China. In the past week the Chinese two-year yield briefly dropped below that of the US two-year note. One very important economy is slowing, the other has enjoyed a tax cut spurred sugar rush.

The relationship between the US and China alongside the performance of their respective economies overshadows the outlook for global markets into 2019.

In terms of US-Sino trade, some think there’s hope of a ceasefire. More US companies are complaining about the cost of tariffs while China is seeing the limits of relying on debt to bolster its economy.

I hope so, but while US voters have passed control of the House to Democrats, both political parties agree on one thing get tough with China.

Having enjoyed a ‘Trump bump’ via tax cuts and deregulation, the bill for US populism is building and has long term implications for markets.

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As central banks retreat, that’s hurting investors who have enjoyed a nice ride. The 60/40 portfolio faces losses on both equity and bonds. We haven’t seen that in the US since 1994.

The big risk for 2019 is clearly a major breakdown between China and the US through trade. This risks hurting global growth at a fragile time and when markets are suffering a bumpy ride from QT. That scenario will see defensive stocks retain favour and cyclicals suffer further pain.

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In the meantime, a key question is whether the Fed and officials at the European Central Bank look beyond the market noise.

Last week, Fed chairman Jay Powell highlighted the risk posed by trade and a slowing global economy, while he also noted the lagging nature of the current tightening cycle on the future performance of the US economy.

Withdrawal of monetary stimulus is painful, but at a modest pace, and against a backdrop of global growth, markets should handle corrections. They did before the advent of QE.

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Twin Threats Endanger Global Social Stability At two Economic Research Council events, Dr Faiza Shaheen, Director of the Centre for Labour and Social Studies (CLASS), and Dame Minouche Shafik, Director of the London School of Economics (LSE), outlined their perspectives on two pressing global social problems, growing inequality and the consequent rise in populism and the second, a need for a 21st century version of the welfare state, respectively. The two topics are very different in that inequality necessitates comparisons among different society layers, while the welfare state is about the provision of a safety net and less concerned with relative prosperity levels.

Nevertheless, strong interconnections between these two topics point to each benefiting from the joint treatment of both below.

Corbyn, Brexit and Trump: What Do They Tell Us About Inequality?

Dr Shaheen connected rising inequality to the big three UK and US electoral shocks that occurred in just 12 months from June 2016: the Brexit vote, Trump’s election and Corbyn’s performance at the 2017 general election. Inequality in the US and the UK Autumn 2019 | Vol 43 No.1

As the average age increases in OECD countries, a corresponding rise occurs in the cost of pensions as a proportion of GDP is projected to increase, giving rise to the question of whether more serious shocks are in the pipeline.

She focused on three different aspects of inequality. The first one of the most discussed is the growing share of wealth commanded by the top 1% in the UK. The UK, one of the most equal societies in the 1970s, has now become the third worst in this respect, behind only the US and Israel.

Regional inequality was addressed next.

The economic disparity between the best and the worst-performing regions in the UK is the worst of any European Union country.

Dr Shaheen pointed out that the difference between the ultra-affluent West End of London and areas in Wales and the Wirral is as bad as that seen in many of the poorest

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countries. In the US, a similar picture has been emerging. There is evidence of the situation in the US resembling the 1920s with the income share of the top 1% now having reached the same levels seen in that decade.

The third marker of inequality cited was perhaps the most serious – a deterioration in the employment structure while low-paid jobs at the bottom of society proliferate. At the other end of society, the highly skilled are doing very well. The all-important middle is getting squeezed. Not only are the middle classes shrinking in number, but also their income is falling. Dr Shaheen wondered how centrist politics expects to survive with the middle class under such pressure.

Rising inequality is an antidemocratic phenomenon. This is being subverted by economic power leading to political power concentrating in the same hands. The amount of money that goes into lobbying and elections highlights this process in the UK and the US. In 2012, research drawn from The Sunday Times rich list of the wealthiest 1000 in the UK found that these ultra-rich

The dangers to capitalism and democracy might be realised sooner rather than later, rendering merely theoretical the development of a new welfare system in a free market liberal context.

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There is evidence of the situation in the US resembling the 1920s with the income share of the top 1% now having reached the same levels seen in that decade. have collectively donated as much as ÂŁ84m to political parties.

A telling example of how money corrupts democracy relates to the lobbying at the EU following the financial crisis. A banking team from the left-leaning New Economics Foundation was advised by politicians and MEPs in Brussels that NGOs like them should try harder to counter the massive weight put on EU policy makers by banking organisations. Dr Shaheen lamented that the NGOs cannot compete against the financial sector with its superior resources for lobbying. She highlighted that the fallout from the financial crisis had its main consequences in public spending cuts, rather than hitting the banking sector.

Dr Shaheen blamed the media for manipulating perceptions among the public, accusing it of focusing on immigration rather than on the distortions at the highest level of society. With the top 1% undermining democracy through the unfair leveraging of wealth into political influence, the implication is that the media impact represents an indirect example of this power grab.

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Dr Shaheen accepted that people are anxious about immigrants who undercut the local population with both lower wages and more skills, but also felt that they are scapegoated by both the media and the politicians for their own ends.

In general, awareness of inequality is increasing and resulting in widespread anger at perceived unfairness, unhelped by many CEOs receiving in just three days as much as the average person’s earnings over a year.

Though there is anger, Dr Shaheen asserts this remains undirected at an appropriate target.

A further unfortunate consequence is the massive decrease in trust. In particular, trust in media, centrist politicians and institutions has hugely eroded. People feel that they cannot identify with those who present as if from a different planet.

This tends to explain why unconventional politicians such as Trump and Corbyn have gained popularity and leaked information is regarded more credible than that which originates from more established news channels.

While devoting much attention to the UK and the US, Dr Shaheen did not dwell exclusively on these countries, pointing out that faith in the political system is being eroded in one out of every two countries.

What is the result of all this anxiety and feelings of unfairness? Dr Shaheen mentioned two likely outcomes. One is the focus on extreme nationalism and xenophobia, with Trump just one of a new breed of politicians who posit immigration as one of society’s ills. The second possible Autumn 2019 | Vol 43 No.1

outcome is a popular move towards collective sharing in times of difficulty and helping each other.

Brexit was in part due to inequality with poorer people outside the big conurbations in favour. But overall Brexit presented a mixed picture as a wide section of the middle class, being more likely to vote, indeed voted to leave. This cohort came largely from the conservative voters who have been split over Europe for decades.

Trump’s and Corbyn’s ascents, in contrast to Brexit, demarcate more clearly the two possible outcomes referred to by Dr Shaheen. Trump’s plans stand to make inequality worse and his electoral success owes much to the xenophobic rhetoric.

However, there is evidence that Corbyn’s rise is attributable, to a large extent, to genuine ideological support. According to polls conducted at the time of the general election in 2017, one of the most important factors among labour voters was the NHS and public spending. Dr Shaheen felt that the erosion of public services in recent years has upset many including the young, something that Corbyn has benefited from.

In concluding, Dr Shaheen reiterated the possible scenarios of xenophobia or

Interestingly, the interplay between the ageing population and the workings of democracy adds to the unfairness.

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collectivism. She asserted that trust will be central to the outcome in the future and that inequality needs to be considered far more seriously. She also suggested that new technology is integral to the mobilisation of the young, poor and marginalised groups.

Beveridge 2.0: Sustainable societies and the Welfare State The central theme of Dame Minouche’s speech is the fear that big structural changes in the society are making current welfare systems potentially unsustainable.

In analysing the causes and possible cures, she drew upon a long sweep of history starting from very beginnings of humankind.

There have always been mechanisms for looking after the old, children and the others unable to fend for themselves. Historically, four different players have been involved: the family, community organisations including religious ones, the state and the market. Traditional societies have largely relied on the first two elements, while in more advanced modern economies the last two have dominated.

Until recently, the welfare state was considered the main safety net for protecting the less able, clearly a manifestation of this predominance. The welfare system, while essentially collective in nature, plays a valuable role in capitalism by softening its harsher effects on the needy and the less able.

Otto von Bismarck, the first chancellor of the German Empire, is credited with being one of the early movers in this field having 20

introduced the first compulsory insurance scheme for pension and sickness in 1889.

Beatrice Webb, one of the founders of the LSE, was the first person to demand a national health service in her Royal Commission on the Poor Law in 1909.

But a comprehensive approach to the welfare state is attributed to Sir William Beveridge, a previous director of the LSE, who designed a system that would meet the needs of citizens “from cradle to grave�.

According to Dame Minouche, the LSE has always been a centre for assessing the role of the state in society and therefore, qualifies as the best place to come up with the answers to the current problems. To this end, she announced the launch by the LSE of a research agenda referred to as Beveridge 2.0 which, as hoped, will propose a new welfare system fit for the 21st century.

Welfare systems have assumed different forms outside the UK. In Anglo-Saxon countries such as the US and Australia, the emphasis is on individuals, whereas in continental Europe, it depends more on a combined social effort by employers and employees. In contrast, Nordic countries tend to have higher levels of state financing.

The most rapid progress in recent decades has been in the introduction of the safety nets in poorer countries which have previously relied more on family and communities. In the last two decades the number of countries with welfare systems of one kind or another has increased from 72 to 149 in 2017.

The new LSE research agenda is both timely and urgent, as the welfare systems particularly in the West are feared to be unsustainable. Several underlying reasons can be identified for social cohesion being

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endangered: ageing of the population, globalisation, technology, inequality and fiscal policies.

One of the most serious is the ageing of society. By 2050 the proportion of the world’s population that will be over 60 will nearly double from 12% to 22%. What is in store is a relatively older Northern Hemisphere and a more balanced Southern Hemisphere. But in absolute numbers, 80% of the growth in the population over 60 will be in the poorer countries which, will have to adjust three times as fast.

Many of the increasing elderly will need care. But women’s traditional role as carers is diminishing with more of them joining the workforce. There is a commensurate increase in burdens on the state. The growing problem is that, those of working age, decreasing in number, have to support more of those not working. With the population ageing, the higher costs of health care, pensions and advanced medical technology for the elderly will put welfare systems under yet more pressure.

A worrying consequence of ageing is intergenerational inequity. By and large, the welfare state provides a balance between generations so that over a life cycle people put in approximately as much as they receive. However, if generations differ hugely in size, this intergenerational balance is upset, giving rise to further inequity.

Interestingly, the interplay between the ageing population and the workings of democracy adds to the unfairness. As the average age increases in OECD countries, a corresponding rise occurs in the cost of pensions as a proportion of GDP, possibly a consequence of the elderly having voting power, unlike children.

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Globalisation is widely blamed for inequality as Trump’s success underlines.

It is believed to have an adverse impact on wages through competition, thereby requiring more welfare support.

But the real problem is the conflict between highly mobile capital and less mobile labour, accounting for the declining share of labour in most countries and further fuelling inequality.

Similarly, immigration causes difficulties when the size of inflows strains underfunded social infrastructure and the capacity to assimilate the new comers. Globalisation hitting some regions particularly hard makes matters even worse.

Another problem worsening inequality is technology which is providing increasing rewards and the associated higher share of income for the highly skilled. Technology has also transformed the awareness of the world and the way people communicate and interact, both positive and negative, jeopardising societies’ ability to hold together.

Technology is more to blame than globalisation for reduction in wages of lowskilled workers. It is estimated that trade accounts for just 10-20% of the change in wages and immigration even less. But the biggest impact is from technology that shifts labour demand towards higher skilled workers.

Work and welfare also face uncertainty from automation, as widely recognised. It is forecast that about 50% of jobs will be affected in the next two decades.

When it comes to inequality, Dame Minouche focused on different aspects to what Dr Shaheen addressed, highlighting the multifaceted nature of this complex

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topic. Dame Minouche referred to inequality between countries, within countries and inequality in wealth, all distinct from Dr Shaheen’s coverage of the top 1%, regional inequality and the middle-class squeeze.

Inequality between countries has been sharply falling along with global poverty, largely due to China’s and India’s growth.

But within countries, inequality is more of a problem, particularly worsening in advanced economies where higher skilled workers have benefited from technology and education.

The situation with respect to inequality in wealth does not look good either. Capital is becoming more concentrated among fewer people and more inherited. In Europe, from 1980 to 2010, the share of inherited private wealth has increased from 38% to 54%.

Regressive fiscal policies are considered to have contributed to inequality with a trend of taxes having become less progressive in OECD countries, especially in the 1980s and 1990s. Social mobility has been hit and there is a clear picture that children are less able to do better than their parents in more unequal countries. Overall, the worsening of inequality is endangering social cohesion and economic growth in addition to fostering populism.

Regressive fiscal policies are not the whole story with respect to public finance.

There is an important issue surrounding fiscal sustainability of the welfare state. In most of the advanced economies the cost of the welfare state as a share of GDP has shot up, having been 10-15% in the 1960s and reaching 21% by 2016. Because of the population ageing and its consequences, the burden is expected to increase. But according to Dame Minouche, this comes

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up against the difficulty of fiscal spending already being too high. For instance, UK debt has doubled from 40% of GDP before the financial crisis of 2008 to higher than 80% currently.

Dame Minouche went on to put forward several possible ways of dealing with the threats to social sustainability from ageing of the population, globalisation, technology, inequality and fiscal policies.

A widely implemented solution is the obvious one of increasing the retirement age. An important modification here is to introduce an automatic mechanism for the choice of retirement age. In the Netherlands, it is scheduled to become 67 in 2023 and thereafter will be adjusted in line with life expectancy. The advantage here is that the setting of the age will be insulated from political controversy.

Other measures, made easier by technology contributing to the reduction in the costs of tertiary education, will cater to the needs of an ageing population by facilitating lifelong learning. It will also propose that governments should improve access to later life education. This can take the form of increasing public funding for training programmes and supplying vouchers. Singapore has started a project of giving every citizen over 25 a voucher for S$500 to be used for approved training.

While globalisation and technology confer undoubted benefits, there are many losers who need to adjust to changed circumstances. Demand has risen for slowing down the impact of these forces.

For the adjustment process, a model referred to ‘flexicurity’ associated with the Netherlands and Denmark is highlighted.

One of its key features is employers being

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enabled to change tack quickly through flexible labour contracts. Also, while unions have to go for employment security rather than job security, employers themselves have to pay higher taxes in return for this flexibility. Furthermore, several measures related to adult education, childcare and supporting workers in transition need to be introduced.

To cope with the adverse effect of automation on jobs, more part-time work is envisaged with machines doing a greater share of the routine work. Though the volume of such part-time work has been growing fast, policies in many countries have not kept pace. It is important that rights to benefits cater for the needs of this breed of workers.

The state paying for socially useful work, not paid for in the past, is a method of helping people into jobs. This includes public funding for work with social benefits such as care of the elderly in their homes or activities that improve wellbeing. India guarantees 100 days of work to citizens at the minimum wage allowing them to make an economic contribution.

Though controversial, Dame Minouche proposed that a universal basic income (UBI) can be part of the solution to deal with the effects of technology and globalisation on the losers. She contended that many countries cannot afford this approach on top of the welfare state and therefore, UBI has to replace some of the existing programmes.

But in countries where welfare measures such as energy and food subsidies are not particularly progressive, UBI could be a good alternative.

An important route to cutting future welfare spending is referred to as a

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trampoline. It amounts to a ‘hand-up’ rather than a ‘hand-out’. The essence here is to introduce preventative and proactive policies involving early education and health. In the late 1990s, this approach dealt with adolescence deprivation in the UK. Government actions included cash transfers, more school expenditure and measures for alcohol abuse and teenage pregnancies. As a result, substantial success was seen among the children, reducing child poverty, persistent school absences, teenage pregnancies and underage drinking.

In closing, Dame Minouche deplored the insufficient attention paid to welfare state issues in stark contrast to escalating emotions that surround inequality worldwide.

In support of this contention, she pointed out that references to the topic in the record of parliamentary debates fell from 170 times per year in the 1980s to just 50 times in the mid-2000s. The LSE’s Beveridge 2.0 project is partly meant to enhance debate in this area. But, more importantly, it is hoped that new solutions will transpire.

Conclusion Dr Shaheen and Dame Minouche, as mentioned at the outset, covered two distinct topics. Dr Shaheen dealt with one of the most burning global questions of the day, rising inequality and its threats to social cohesion as well as the growth of populism.

People resent, on grounds of unfairness, comparisons with those better off, especially about the super-rich grabbing and retaining a bigger share.

On the other hand, the main theme of Dame Minouche’s speech, the welfare state, while important, is much less universally recognised as an intractable problem, taken 23

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for granted by most without much inkling of the underlying fault lines. It doesn’t involve comparisons between different layers of society as does inequality. Instead, its rationale is to help people when in need irrespective of their relative position.

But when one has a closer look at both topics, there is a considerable coincidence in the forces threatening the welfare state and those generating inequality, arguing for a combined treatment of the two topics.

Some of the underlying forces that have contributed to inequality also largely put at risk the sustainability of the welfare state.

Dame Minouche expressed concern about social cohesion which has a lot to do with both resentment about inequality and a potential unsustainability of the welfare state, again underlining that the dangers covered in the two separate topics can lead to the same catastrophic outcome of social breakdown.

Apart from the commonalities, the differences in content and treatment reinforce the case even more strongly for considering the two as an integrated whole.

Dr Shaheen mainly focused on the current state of inequality and its effects, emphasising the impact on democracy, populism and the potential outcomes.

The growing dissatisfaction with inequality was dealt with more briefly by Dame Minouche, but she went deeper into the forces endangering social stability. She also outlined possible ways of ameliorating the worst impact of structural strains.

Dr Shaheen came across as passionate, polemical and superficially off-putting to diehard proponents of unfettered markets in her preferred collectivist solution. But her speech, in fact, represents a succinct

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analysis of the emotions and perceptions of the disaffected and the forces underlying populism manifested in Brexit, Corbyn and Trump. Believers in liberal democratic principles will disdain or downplay these feelings only at peril to the cause they espouse.

Dame Minouche was more analytical, but perhaps paid insufficient attention to the serious social discontent already prevalent.

The question is how solidly the panoply of measures suggested by her will ensure social sustainability rather than just being palliatives. Moreover, these remedies may not do much for addressing the potentially explosive resentments and anger caused by perceptions of unfairness and inequality.

All in all, coming from different angles, each speech covered key aspects dealt with insufficiently by the other. The content of the two speeches benefits from being combined, as together they are more complete and effective than each separately. While the common causes and ultimate outcomes coinciding argue for joint treatment, the differences actually makes such treatment compelling, representing, in fact, serious gaps in each speech. Thus, they complement each other like a pair of gloves.

The decline of trust in the media, politicians and institutions has been highlighted, but it goes much further. Respect for democratic norms has lessened as reflected in authoritarian trends worldwide.

Capitalism is also being questioned.

Increasing distrust in the workings of the market system is manifested in Corbyn’s rise among the young who represent the future.

Dr Shaheen’s camp needs to accept that inequality is not just to do with the rich, but also owes much to structural forces in

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society, independent of the wealthy. For their part, the LSE in its Beveridge 2.0 agenda should recognise the urgent need to address inequality. The dangers to capitalism and democracy might be realised sooner rather than later, rendering merely theoretical the development of a new welfare system in a free market liberal context.

It is more than likely that some of the arguments presented will be subject to challenge and disagreement and that many questions will be thrown up, given the brevity of the two cameo speeches.

Nevertheless, these speeches at the ERC taken together are a good starting point for a more comprehensive analysis contributing to diffusing the social time bombs that are ticking away.

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ERC Information Piece: What can Blockchain do for Society?

Rising social consciousness is causing western consumers to reject benefiting through exploitative working conditions of farmers in poorer countries.

Blockchain (also known as smart ledger) remains much hyped, especially in financial services. Nevertheless, it holds exciting potential for benefiting tremendously society at large, the theme of this article.

The needs of the poorer sections of society receive particular attention.

A potential global food shortage within decades threatens to hit the poorest the hardest. Blockchain can ameliorate its impact, reducing wastage and also help with the related challenges of fraud and safety afflicting food supplies.

Large influxes into cities, old and new, via population growth and urbanisation are expected. Policymakers must plan ahead to forestall likely overloading leading to untold misery. They need to access, understand 26

and exploit advanced technologies including blockchain. Many ‘smart cities’ worldwide have already progressed here.

But the smart application does not stop with cities. Governments are embarking on applying technology to improve efficiency and reduce barriers faced by their citizens which, often disadvantages the already unfortunate.

Smart ledger technology also promises to facilitate much needed 21st century enhancements in the vital sectors of healthcare and education.

Notwithstanding the hype and the real prospects, which is important not to get carried away by blockchain’s benefits. There are several barriers, some insurmountable, to adoption of the technology.

What is blockchain and what does it do?

A blockchain is a distributed ledger that maintains a constantly growing list of transaction or event records referred to as ‘blocks’ in which every block contains a link to the previous block. It is open, decentralised and distributed, capturing transaction or event data in a permanent, secure,

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incorruptible and verifiable way.

When tangible products (food products, fish etc.) are considered, blockchain is frequently used in tandem with other technologies such as Internet-of-Things (IoT), smart phones and artificial intelligence (AI). IoT refers in this instance to consumer goods which are electronically fitted with chips that transmit information on activities within the product through the internet to a data repository. AI plays a role here then to select and interpret this data for possible responses within the object or via external sources.

The power of blockchain is magnified when used in conjunction with other technologies, while it is often limited in its effectiveness on its own.

Reducing food worries Food supplies need to increase by as much as 70% to avert catastrophic food shortages in coming decades arising from population growth and higher living standards.

Otherwise, widespread hunger and famine, spread unevenly, appears increasingly likely.

An estimated 30% of food produced is wasted at various points of the supply chain between the farmer and the end-consumer.

Consider the example of apples. The evidence is that up to 25% of the crop is lost along the supply chain. At the grading stage, fruit not suiting size, quality and appearance criteria is discarded. Storage and packing lacking technology helping to maintain the required temperature and other conditions increases losses. Mis- or noncommunication about the transportation Autumn 2019 | Vol 43 No.1

schedule can also result in further wastage.

Wastage is not the only challenge; fraud and safety concerns afflicting food have also resulted in episodes commanding worldwide publicity in countries such as the US, China and the UK. The E. coli outbreak in early 2018 in the US, the UK horse meat scandal in 2013 and the 2008 baby food fraud in China have served to intensify universal anger and anxiety. The World Health Organisation estimates that one in 10 people fall ill every year from food contamination resulting in 420,000 deaths. Food fraud often involves mislabelling ingredients, varieties, countries of origin as well as passing off non-organic as organic.

Rising social consciousness is causing western consumers to shrink from benefiting through exploitative working conditions of farmers in poorer countries. A large number of farmers globally subsist on less than $2 a day; the chief losers in ‘supermarketification’ of our shopping habits, their profits eroded by too many middlemen and corrupt practices along the supply chain. Shockingly, forced labour is still rife. Increasingly, consumers are requiring reassurance that their food is not generated unfairly and unethically. The fair trade program appears to be largely

Several entrepreneurial companies have sprung up with a fascinating array of approaches combining IoT and AI with blockchain.

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ineffective in identifying adverse practices.

The normal supply chain allows unfair and potentially dangerous practices to go largely unnoticed. With blockchain, each transaction is securely recorded, thereby registering any unacceptable outcome. This traceability of every transaction or event is a critical feature that blockchain technology brings to the table.

Blockchain combined with IoT could make a huge difference in cutting down wastage. Farmers could provide advance warning to buyers of a larger crop or a smaller yield than expected. IoT sensors could trace the journey of food items along the supply chain allowing the monitoring of conditions en route, such as temperature.

Furthermore, the company processing the food gains by immediately pinpointing and preventing any attempt to tamper with the food. Retailers can identify and remove the specifically hazardous products without having to recall entire batches. Clients can stipulate the payment of fair wages and acceptable working conditions.

Dozens of the larger food companies, both producers and distributors, have established a consortium, IBM Food Trust to develop a blockchain project supported by

Companies must discern where the balance lies; even fair trade was originally considered unviable.

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and under the aegis of IBM. These include US’s Walmart and Europe’s Unilever and Carrefour. Walmart was able to demonstrate recently that it took just 2.2 seconds, compared with the few days needed previously, to trace mangoes to their source in China.

Suzanne Livingston, Offering Director of IBM Food Trust, recently stated that full traceability had been introduced for about 200 items.

Alibaba and JD.com are using blockchain traceability to boost confidence in China where food safety is paramount, following multiple scandals in the last 10 years.

At the other end of the spectrum, several entrepreneurial companies have sprung up with a fascinating array of approaches combining IoT and AI with blockchain. One of the better-known is a Colorado-based firm, Bext360. It uses smart image recognition technology along with AI to evaluate coffee crops submitted to a robot in order to identify not only the grade and price but also to suggest profit-maximising techniques.

Faced with the daunting logistics of dealing with 25 million people in the coffee supply chain, Bext360, places machines in kiosks owned by small-scale local entrepreneurs and cooperatives in communities where they have trading partners. These businesses share fees with financial services companies managing the digital wallet accounts of farmers.

In another remarkable innovation, OriginTrail based in Slovenia is becoming globally prominent for its traceability process.

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blockchain data in product tracing. Instead, only fingerprints of data are stored reducing the cost to only a fraction in many instances.

Arc-net in Belfast has come up with an impressive initiative injecting DNA information into the supply chain. They take a tissue sample of an animal early on and others along the chain can test the sample of the meat for assurance that the meat is as promised.

Goodr in Atlanta, the US has embarked on a socially laudable initiative to reduce food wastage. From January 2017, it has organised leftovers from restaurants and other businesses to be sent to local charities.

The service is chargeable to businesses, but the recipient charities get the food free. It hopes to expand to other US cities.

China, befitting its fast-growing status as a technology superpower, is not behind in traceability initiatives. ZhongAn Technology in Shangai uses a platform, Bubuji, to put sensors on chickens allowing customers to monitor their movements, thereby ensuring they are free-range. Techrock also uses sensors, this time, on baby formula containers, that register any tampering.

Conforming to fishing rules Though closely related to agriculture, fishing has its own characteristics and problems. In common, they relate to food which ends up on the dining table. Naturally, some of the problems bedevilling agriculture are shared by fishing including food safety and fraud, worker exploitation and even slave labour.

Unlike agriculture, fishing does not call for extra production to relieve shortages.

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Private sector involvement in sensitive data can create potential abuse. The authorities need to provide reassurance of absolute privacy and security.

On the contrary, the problem of overfishing and consequent excess supply endangers the future of the industry and reduces biodiversity.

Just as in agriculture, traceability is vital for checking that rules are being observed.

But blockchain needs to be combined with IoT or other technologies as on its own it cannot monitor happenings on boats.

Among several initiatives worldwide, Provenance, a London-based blockchain company with a focus on social and environmental impact, and the International Pole and Line Foundation have completed a successful pilot tracing tuna from Indonesia to UK consumers. In another pilot project in Fiji, various companies have got together to also track albacore tuna.

In a manifestation of an on-board technology, a radio-frequency identification (RFID) tag is attached to the fish for continuous tracking. These sensors are linked to automatic identification system transmitters installed on vessels to record time and exact location confirming that the fish was caught in a place legally. After the fish is processed, the reusable RFID is

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Estonia was not encumbered with the legacy systems others have to contend with, having embarked on the digital path immediately following independence from the Soviet Union. replaced by a cheaper quick response (QR) code tag which traces the rest of the supply chain to the consumer. These and other devices used at the vessel, at the dock and the processing factory transmit data to a blockchain.

But these digital systems cannot prevent physical manipulation. For instance, the RFID tag could be damaged or detached from the fish and reattached to another fish along the supply chain. Furthermore, these tags might be too expensive for small operators.

On the regulatory front, fully documented fisheries are increasingly encouraged by authorities globally. The system, utilising onboard cameras, also help to convince prospective buyers of catch quality. The expense, however, can drive smaller boats out of business with an adverse impact on many small communities, where employment opportunities are otherwise very limited.

In the UK, Malcolm MacGarvin has developed a low-cost system, Fishface, using an affordable consumer GPS-enabled

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HD video action camera. This system, much less costly for smaller boats, is connected to the file storage facility, MetroGnomo, created by the leading City think tank, Z/Yen run by Professor Michael Mainelli, a pioneer thinker in blockchain.

Fishface has already had a successful sea trial in extreme winter conditions from December 2017 to February 2018.

MacGarvin hopes that it will eventually appeal to many low-income countries around the world.

Problems with measuring ESG Environmental, social and governance (ESG) covers vast areas of sustainability and social causes. However, to date, blockchain seems to have relatively limited applicability.

A promising use of blockchain lies in plastic waste. The corruption of oceans with plastic rubbish is one of the bigger challenges environmentally. Plastic Bank in Canada has come up with a blockchain-based scheme that is based on hitting two targets: the responsible disposal of recyclable plastic waste and the amelioration of poverty.

The parts of the world which are the biggest generators of plastics are also some of the poorest. The company’s strategy is to increase plastic recycling in developing countries via enabling locals to trade plastic for goods and services such as cooking oil and healthcare. They are paid in cryptocurrencies rather than with cash at risk of theft.

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the individual’s account through a mobile phone application then usable for purchases.

The process has been used in 40 centres in Haiti. More than 100 million discarded plastic bottles have been exported for making new products. Expansion is planned into the Philippines, Brazil and Indonesia and ultimately to all countries where both poverty and plastic waste are rife.

However, finding willing customers to buy the waste is problematic. But the opportunity lies in consumers, motivated by social considerations and happy to pay a premium price for the plastics. To this end, Plastic Bank has introduced the designation ‘social plastic’ for product labels to attract the socially conscious just as the label ‘fair trade’ currently does.

A criticism is that trying to subsidise the recovery process this way is uneconomic, given insufficient commercial demand.

This, of course, is a matter of judgment as companies must discern where the balance lies; even fair trade was originally considered unviable.

A more potent argument is that this project only deals with recyclable plastics, just a fraction of all plastic waste. But environmental sustainability should not rely merely on large initiatives. Small scale endeavours such as Plastic Bank’s, not only add up, but foster environmental consciousness in current and future consumers.

Technology-driven healthcare Data is critical in healthcare to ensure its quality and efficacy. Individuals’ past ailments Autumn 2019 | Vol 43 No.1

matter for their current treatment.

National aggregation of individual and other categories of data points to a gigantic database. Its continuous updating makes a prima facie case for blockchain.

Information has to be gathered in the following areas: 1. Individuals’ records 2. Disease surveillance and public health 3. Research and clinical trials Currently, fragmentation of data poses a serious problem. The US situation is among the worst, as disparate private sector organisations are loath to share data with competitors.

The UK’s position, despite the nearmonopoly of the National Health Service (NHS), is not good either. Blockchain is set to change matters here.

Currently, different entities holding patient data have no knowledge of what is stored by others. The entities include NHS hospitals and GP practices, their counterparts in the small private sector and pharmacists. Often each doctor is unaware of patients’ data held by predecessors.

The authorities leading the way will encourage and inspire many to follow.

Proliferation of socially conscious entrepreneurs will attract others to spread their ideas worldwide.

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The following illustrates how fragmentation can damage the delivery of modern healthcare.

Mr Jones in Bournemouth reports to his NHS GP a potentially fatal allergy to a particular antibiotic. The GP says that if they refer him to a hospital, the information can be transmitted. Jones on holiday, 300 miles away, develops an illness, goes to a local hospital where they, all unknowing, prescribed precisely this drug. They just managed to save his life from the allergy consequences.

This near disaster from fragmentation screams for all the records for a particular patient to be held in one location, the individual authorising access to the data by medical entities.

Similar considerations apply to other health data. Authorities would benefit from immediate access to information about a public health scare elsewhere. Access to a global database of research and clinical trials would also be of considerable value.

Futuristic predictions abound of IoTstyle devices, worn or implanted in human bodies, that can transmit salient information for immediate medical attention. There are examples already. The adoption of wearable trackers including the Apple Watch and Fitbits by insurers such as Vitality is a case in point.

Daily Mail Online has reported that an Apple Watch saved the life of a 40-yearold. Repeated warnings of an irregular heart rhythm.

These sensor technologies will detect a problem in the body and relay the data 32

to medics. An immediate transfer of this information to a blockchain will allow several parties to contribute to the treatment as quickly as needed. Should blockchain combine successfully with these alternative technologies, individuals can look to tangible benefits in their treatment and care.

The picture is mixed worldwide of blockchain’s progress. Cultural problems, regulations and fragmentation in the US are obstacles despite activity in specific areas.

The Centers for Disease Control and Prevention (CDC), partnering with IBM Watson plans to incorporate blockchain into its electronic health record data sharing system.

The UK presents a brighter outlook. A software security company, Guardtime in partnership with other firms has launched for the NHS a blockchain platform allowing 30 million British patients instant access to their medical records through a smart phone. The system will relay patients’ progress in hospitals to their GPs. Private sector involvement in sensitive data can create potential abuse. The authorities need to provide reassurance of absolute privacy and security.

Europe is still mainly at the exploratory stage publishing reports and funding pilot projects collaboration, understandably, in view of the EU’s complex decision-making process involving 27 countries.

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information requirements could be handled by data repositories.

21st Century educational data Relative to food and healthcare the other two sectors indispensable for humanity, the use of blockchain in education is still in its infancy.

With populations more mobile within and between countries, there is a growing need for individuals’ qualifications and experience to be verifiable by employers and educational institutions.

False medical school degrees, in particular, are a big problem worldwide. Many countries have a pressing need to import doctors and require reliable methods of ascertaining their history.

Unsurprisingly, the most concrete manifestation of smart ledger technology is seen in the verification of students’ qualifications. This would be manna from heaven particularly for human resources professionals.

Some institutions have begun to issue digital certificates to students which can be made accessible to relevant third parties.

These include the US’s Massachusetts Institute of Technology, the University College London and the Open University, both in the UK, as well as the University of Nicosia in Cyprus.

Though the most progress is in verifying degree qualifications, educational data encompasses a much wider range. The centralised model of existing educational systems, based largely on physical institutions, is less universally applicable now.

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A key driver is the growing desirability of lifelong education as the population ages.

Now learning takes place through a variety of different channels, both formal and informal.

These include: • Massive open online courses (MOOCs) with their increasing popularity, potentially very disruptive for traditional universities, issuing digital certificates • Workers’ lifetime digital record of both formal qualifications and knowledge gathered through experience and training courses • Continuing professional development (CPD) systems being loaded from authorised learning avenues such as conferences • Corporate training which can be recorded over an employee’s working lifetime • Apprenticeship and other types of vocational education where blockchain can be a natural fit for delivery and certification Just as in health care, there is a formidable case for every person to have a lifetime database of learning credentials. It needs public authorities to put their muscle behind this as only they can engender the essential universal trust.

While blockchain is promising in educational applications, as in the case of other sectors, cost can be prohibitive. In any case, trust and reputation continue to be indispensable in education and cannot be reflected in a blockchain. Rather than total reliance on smart ledgers, a hybrid model is called for.

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Smart ledgers for smart cities and governments More than two thirds of the world’s population are forecast to live in urban centres in coming decades, presenting opportunities and dangers. The potential perils include squalid housing, deprivation, public services decay, environmental problems and social disruption.

Government departments should collaborate, but often fail to do so. Sharing their massive data would facilitate smoother interactions among them, boosting public sector efficiency.

Individuals, for their part, frustratingly have to deal with different government departments for various purposes, often providing similar inputs in a repetitive fashion. If they could provide the information to just one platform, it would simplify their lives, particularly benefiting those that face literacy hurdles.

A digital foundation for governments to share data, software and services with the citizen in control is considered the ideal way forward. Professor Helen Margetts, eminent political scientist and internet authority at Oxford University, in a paper co-authored by her, states that the vision has come nearest to being realised in Estonia, earning it a global reputation for advanced digital government.

Almost all Estonians have electronic IDs and ownership of their public data.

No government department is allowed to duplicate or share personal data without the permission of the individual who must be notified when and for what purpose this 34

data is accessed. The system is based on open standards, made safe with encryption, accessible and efficient while decentralised and not intrusive of privacy. The state is effectively more transparent than the citizen, allaying fears of authoritarianism.

It is, of course, argued that Estonia’s success is attributable to specific socioeconomic and demographic circumstances and not universally applicable. In many poorer countries, even the need to prove information such as name, address and other basic data for a digital ID is not straight forward for the less fortunate. Furthermore, Estonia was not encumbered with the legacy systems others have to contend with, having embarked on the digital path immediately following independence from the Soviet Union.

In many of their functions large cities resemble governments. Thus, the above interactions between government departments and individuals apply to cities as well.

An entire family of techniques such as IoT, AI and robots have been already brought into play under the label ‘smart cities’.

Estonia’s smart ledger commitment ties in well with this smart city approach worldwide.

Smart cities, such as in the examples below, introduce another dimension through the information generated by their advanced technologies.

Amsterdam residents benefit from off peak energy with smart solar panels. Sensors in Barcelona streets alert the availability of parking spaces.

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incorporates smart technology. Digital kiosks along the line measure air quality.

Smart traffic signals cut time at red lights reducing pollution. Sensors on street lights provide early warning of potholes.

The above developments do not involve blockchain in many cases. But these cities mastering alternative technologies augurs well for wider use of them together with blockchain in other functions. Governments can learn a lot from them in this respect.

The governance of the planet will be predominantly influenced by how cities, with their increasing share of the world’s population, are organised. Newer cities, in place and planned, not suffering from the legacy problems of the established metropolises, encounter less hurdles in integrating blockchain technology.

Overview and conclusion In agriculture, already fully functioning blockchains combining with other technologies are mostly the small entrepreneurial companies. IBM Food Trust is just at an early stage. Its coverage of a few hundred items represents a drop in the ocean to the companies in the Trust. So, the feasibility of the project on a sufficiently large scale is yet to be established.

Most of the projects outlined in fisheries are also pilots. But MacGarvin’s Fishface, mainly designed for small communities, has the makings of something concrete, replicable worldwide.

ESG as yet is not very fertile territory for blockchain. But Plastic Bank’s endeavours

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classify in a small way under this sector. It is argued by critics that their plastics may suffer from poor demand by being too expensive. This criticism would have applied even to fair trade at the outset and the social consciousness of the public, willing to pay something extra for deserving causes, should not be underestimated.

In healthcare, many changes are needed but so far the implementation level is not high. Various promising developments are at initial stages. The UK’s Guardtime for the NHS is perhaps the closest to concrete results and is almost fully functioning.

Certification and verification of students’ credentials in education is where blockchain technology is entrenched. However, education is not just about certificates.

Radical changes are afoot in its delivery and blockchain is envisaged to play a key role in this 21st century transformation.

Estonian achievements as well as some of the smart city initiatives including Kansas City, Barcelona and Amsterdam are already solid. Inspired by Estonia, many other governments are exploring smart ledgers actively.

The viability of blockchain on a very large scale remains an open question. For many projects there are serious doubts about scalability.

In assessing projects which are not yet concrete, potential obstacles have to be borne in mind. Some of the pilots have not established the technology’s unique value to supply chains. In some cases, delivering full transparency or traceability can be solved through alternative means.

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Development and running costs are not yet clear, with few standards in place. In many situations, the gap between blockchain’s current capacity and what supply chains will need is enormous.

So, can blockchain change the face of society? Yes, it may. Surprisingly, the changes may not occur in the ways widely expected through big organisations such as IBM in the forefront. Of course, the participation of these players, some of them deep-pocketed, is important, but actual experience points currently in another direction.

Some of the most practical already viable private sector applications are seen among small entrepreneurs. Interestingly, there is the world of a difference between the two groups in their motivations. The former while aiming at socially valuable outcomes are not principally acting from philanthropic impulses, but mainly from self-interest and preservation. But some of the latter, impelled by social consciousness, are the real heroes and heroines. People of this ilk could be the ones to fire popular enthusiasm about the potential for the synergy of blockchain and IoT. Jasmine Crowe, CEO of Goodr that supplies food waste from businesses to charities, was inspired to set up her company after encountering a friend suffering from food insecurity. Malcolm MacGarvin founded Fishface in the UK to enable small fishing boats to affordably invest in tracking equipment to satisfy potential regulatory requirements. He was concerned that otherwise the disappearance of these fishing 36

boats might inflict severe economic damage on the small communities they serve.

Finally, Plastic Bank of Canada is invaluable in supporting developing countries in their recycling policy aims. Thereby it achieves the dual objectives of reducing poverty and contributing to planetary sustainability.

These small players, however, may never become significant on a global or even on a national scale. Nevertheless, in every instance, they can stay small without worrying about the problems of scaling up while doing considerably good.

In these small ventures, ‘scaling up’ differs from those with extensive corporate support. The formula they create can be replicated by many others, each remaining small, but their approach becoming global.

This highlights the fact that these innovators are helping the poor and the dispossessed and their ideas need to catch on worldwide.

In the promotion of social welfare through blockchain, three types of players have been identified: large corporates, small tech-orientated entrepreneurs and the public sector.

Of these three, large corporates still have to establish the level of scalability needed to move forward from the pilot stage. The second group is already fully in business, clearly a part of the future of blockchain.

The third force has a powerful role to play in backing the social uses of the technology.

Results are already visible in smart cities and the government interface with citizens. But in two other areas of vital concern worldwide, healthcare and education, governments still Autumn 2019 | Vol 43 No.1

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have a lot to do.

Blockchain allied to alternative technologies promises a radically new landscape in the provision and quality of healthcare. As in the example of Guardtime helping the NHS in the UK, the changes need to be pushed by public authorities. The EU has a problem in reconciling the wishes of its 27 member states, but eventually it is likely to get there. US healthcare looks the most intractable, chronically fragmentated.

Without the government in the driving seat, an unlikely proposition in the near future, not much can be expected.

In education, the third element of the triad encompassing food and healthcare, once again, it is only the governments that can enforce the cooperation for establishing common standards among all institutions.

From a wider perspective, government implementation of blockchain augurs very well for a universal take-off of the technology. The authorities leading the way will encourage and inspire many to follow. Proliferation of socially conscious entrepreneurs will attract others to spread their ideas worldwide. Perhaps this will point to a real future for blockchain where circumstances of citizens everywhere, particularly the most disadvantaged, will be hugely improved.

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Notes

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