Britain's increasing inequality

I thought the days of Charles Dickens' Oliver Twist were over, but obviously not. A report by the charity Oxfam has found that the five richest families in the UK are wealthier than the bottom 20% of the entire population and the gap between the rich and the rest of the population has grown significantly over the last two decades.

According to the report:

The agency warned that just five UK households have more money than the poorest 12.6 million Britons - almost the same number of people as those living in households below the UK poverty line.

Oxfam's figures also show that over the past two decades the wealthiest 0.1 percent have seen their income grow nearly four times faster than the least well off 90 percent of the population. In real terms, that means a wealthy elite have seen their income grow by £24,000 a year, enough to buy a small yacht or a sports car, whilst the bottom 90 percent of Britons' incomes have gone up by only a few pounds a week. The average UK salary is £26,500-a-year.

Ben Phillips, Oxfam's Director of Campaigns and Policy, said: "Britain is becoming a deeply divided nation, with a wealthy elite who are seeing their incomes spiral up, whilst millions of families are struggling to make ends meet.

"It's deeply worrying that these extreme levels of wealth inequality exist in Britain today, where just a handful of people have more money than millions struggling to survive on the breadline."  

Growing numbers of Britons are turning to charity-run foodbanks, yet at the same time the highest earners in the UK have had the biggest tax cuts of any country in the world.

With billions in welfare cuts still to come and increasing pressure to offer more tax cuts for the rich, the charity is asking all political parties to audit how their emerging policies would affect economic inequality in the UK.

Britain's five richest families

1 Duke of Westminster (£7.9bn) is UK’s richest landlord. Owns 190 acres in Belgravia.

2 Reuben brothers (£6.9bn)  Self-made Monaco-based billionaire brothers Simon and David, with money in property.

3 Hinduja brothers (£6bn) London-based Srichand and Gopichand run Hinduja Group involved in industries from trucking to banking.

4 Cadogan family (£4bn) Former Chelsea FC chairman, owns Cadogan Estates and most of Chelsea in West London.

5 Mike Ashley (£3.3bn) Sports Direct chief, Newcastle United owner.

Worldwide problem

Of course, inequality is not a UK specific problem. There are growing levels of inequality in other countries too. Indeed, we seem to be living in a world in which the tiny super rich seem to lord it over the rest of us.

Oxfam warns that "extreme inequality is creating a vicious circle where wealth concentrated in the hands of a few is used to buy political influence which is used to rig the rules in favour of a small elite and perpetuate inequality."

"Such extreme inequality is to the detriment of social mobility and is also increasingly understood to undermine both the pace and sustainability of economic growth."

Anti-Wall Street protests spread across America

What's changed in America since the Great Recession of 2008? Not much really. The bankers are still taking home big bonuses like they always have done, while with corporate profits have reached record levels. It's business as usual on Wall Street. However, real unemployment is now about nearly the same level as the Great Depression. With the US economy slowing down, it seems there's more pain in store for middle and lower class Americans.

It is therefore no surprise to learn about protests against Wall Street and corporate greed. The 'Occupy Wall Street' protests, which have received little attention so far in the mainstream US media, is gathering momentum across across the country. The Times of India reports:

The Occupy Wall Street protests entered their third week here with protesters dressed up as "corporate zombies" marching through Wall Street, the city's financial hub.

People used social networking sites Facebook and Twitter to spread their message and garner support for their cause.

Support groups like 'Occupy Boston', 'Occupy Philadelphia', 'Occupy Chicago' were also created online.

In a radio interview, New York Mayor Michael Bloomberg said the protests should not target Wall Street officials, "who make USD 40,000 or USD 50,000 a year and are struggling to make ends meet. That is the bottom line. Those are the people who work on Wall Street or in the finance sector."

In Manhattan, hundreds of people responded to calls from organisers and came dressed up as zombies, walking around the financial institutions clutching fake money.

They held up signs that read 'Down with the World Bank', 'How to fix the deficit: End the war, tax the rich,' 'End corporate personhood,' and 'Say no to corporate America.'

People have camped out on the streets, sleeping on sidewalks. Some supporters of the protests have distributed blankets, sleeping bags and food items to demonstrators.

In Chicago, people gathered outside the Federal Reserve Bank while protesters camped out near City Hall in Los Angeles.

Similar marches against corporate America, greed on the Wall Street and government bailouts to financial giants during the economic crisis were held in downtown Boston.

The protests, which began with a handful of people camping in front of the New York Stock Exchange on September 17, got a philip and nationwide attention after over 700 protestors were arrested over the weekend by the police as they tried cross the Brooklyn Bridge.

Similar rallies are being planned in places like St Louis, Kansas City, Hawaii, Tennessee, Minneapolis and Baltimore, according to 'Occupy Together', the unofficial hub for all events springing up across the country in solidarity with the Occupy Wall Street movement.

The American elite love to praise protesters in other countries, especially those where they want to see regime change, but they have been silent on these protests at home. If the economic situation doesn't improve in America - and I don't see that happening for some time - these protests are likely to continue and spread. The Arab Spring seems to have arrived in America!

European economic woes

The men in suits from the European Commission and the IMF have descended on Dublin. Ireland is in serious economic trouble. Its banks are virtually bust and its budget deficit (32%) is the worst in Europe. The Irish public are already enduring severe austerity measures including raised taxes and reduced salaries. The days when Ireland’s economy was known as the “Celtic Tiger” are truly over.

Ireland experienced a classic property boom from 2000 to 2006. During this time banks became reckless with their lending. Then when the bubble finally burst the loans turned bad, and the banks and the economy suffered. This has happened in other countries too. The problem for Ireland is that, being part of the single European currency (Euro), it doesn’t have the necessary tools, like devaluing its currency and lowering interest rates, to stimulate growth.

There are fears that the crisis in Ireland could spread to other European countries like Portugal and Spain. Hence the urgency to deal with the Irish crisis and avert a contagion that might result in another economic downturn. Unemployment within many European countries has increased and economic growth remains sluggish. Added to this are measures taken by governments to cut public spending in order to reduce their deficits. This is likely to slow economic growth further and result in more unemployment.

IMF

When the IMF gets involved, you know there are serious problems. This is an organisation which emerged at the end of World War II to assist the reconstruction of a devastated Europe. It was founded on the belief that markets often worked badly, and there is a need to put international pressure on countries to stop their economies going into a slump. Although the ideas and intentions behind it were good, the IMF has evolved into something very different today. It is now part of a new “Washington Consensus” – a consensus composed of itself, the World Bank and the US Treasury – that believes in market fundamentalism. It has made mistakes in all areas it has been involved: development, crisis management, and countries making the transition from communism to capitalism.

Nobel Prize winning economist Joseph Stiglitz says about the IMF in his book “Globalization and its discontents”:

“The Fund believes it is fulfilling the tasks assigned to it: promoting global stability, helping developing countries in transition achieve not only stability but also growth. Until recently it debated whether it should be concerned with poverty – that was the responsibility of the World Bank – but today it has even taken that on board as well, at least rhetorically. I believe, however, that it has failed in its mission, that the failures are not just accidental but the consequences of how it has understood its mission.”

Social contexts

The problem with many of the technocrats in institutions like the IMF is that they are short-sighted about the effects of their policies. They’re driven by a blind faith in markets. They often do not know a country well, yet propose solutions for that country as though they know everything about it. Globalization can be beneficial for many people, but it can cause a lot of misery too. One has to be mindful of the social contexts within countries before implementing policies; if not, policies can be counterproductive.

Cuts in government spending will inevitably increase unemployment. This has the potential of increasing social tension. It is important that governments are wary of this as they pursue deficit reductions. In Europe, far right nationalist parties have made gains in recent elections. The rise of the Third Reich before World War II occurred under very depressed economic conditions. Such conditions, as well as wounded national pride, provided a perfect platform for the Nazis to take control of Germany. While Europe is still a long way from the levels of fascism that led to World War II, history has shown far right parties are capable of exploiting economic downturns for their political advantage.

It’s likely the whole of Europe will experience low growth as a result of cuts in many countries. Severe austerity measures could even push the region back into recession, which will have global implications. The people likely to suffer the most are the poor. It’s important governments do not destroy basic safety nets. It remains to be seen if contagion is avoided and the single European currency will survive. Many economists predict a new “normal” of higher unemployment rates, lower growth and lower levels of public services. For countries like Ireland, their economic woes are just beginning.

Globalization and the illusion of stability

I am nearing the end of reading “The Black Swan” by Nassim Nicholas Taleb. It’s a very interesting book, and I recommend it you anyone curious about the possibility of Black Swans or the highly improbable events that affect our lives. The author explains the fallibility of using the median in the Gaussian bell curve for making predictions, while in reality many things defy this logic.

In chapter 15 he predicts the possibility of Black Swans occurring in our current highly globalized world:

“I spoke of globalization in Chapter 3; it is here, but it is not all for the good: it creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial institutions have been merging into a smaller number of very large banks. Almost all banks are now interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks (often Gaussianized in their risk measurement) – when one falls, they all fall. The increased concentration among banks seems to have the effect of making financial crisis less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur...I shiver at the thought. I rephrase here: we will have fewer but more severe crises. The rarer the event, the less we know about its odds. It means that we know less and less about the possibility of a crisis.”

He continues by saying that in a network there are a few nodes that are highly connected while others are barely so. Although networks seem more robust, because a random hit is more likely to affect a poorly connected spot, they are more vulnerable to Black Swans because if there is a problem with a major node, this will have a major impact on the rest of the network.

Actually this is quite an accurate prediction of the present economic crisis, and considering the book was published in 2007, Taleb was clearly ahead of his times. He favours a larger number of smaller banks rather than a small set of very big banks. In such a scenario, banks can be allowed to go bust, without tax payer funded bail-outs, and new ones take their place. This would allow the banking industry per se to be more resilient and reduce the risk of a major crisis unfolding when one bank fails.

Once the current crisis has passed, the government should consider breaking up the current nationalised behemoths such RBS and Lloyds Banking Group. A more diversified banking industry is probably to everyone’s benefit. As well as that, there must be more effective regulation. Recently, an anonymous whistleblower has accused the Financial Services Authority (FSA) of being complacent in its dealings with building societies, which is quite a major indictment of the financial services regulator.

Bankers face backlash

As the Credit Crunch continues to bite, there is seething public anger here in Britain against senior bankers for their apparent professional incompetence and excessive (“fat-cat”) pay. The latest banker to face intense public ire is Sir Fred Goodwin, the former chief executive of the Royal Bank of Scotland (RBS), after it was revealed that he earns a £693,000 per year pension following his early retirement last year. RBS, one of the largest banks in UK, came near to collapse in October 2008 in the wake of the credit crisis, and it has since been effectively nationalised, with the government holding 84% of the shareholding. It seems totally unfair to many people that bankers, such as Sir Goodwin, can be so lavishly rewarded for their seemingly poor performance.

Actually, there is nothing illegal at all with Sir Goodwin’s pension, and bankers have been enjoying fat-cat pay for decades. This thirst for vengeance against bankers is really just a symptom of the current economic situation and the public’s desire to apportion the blame. Senior executives like Sir Goodwin should rightfully take a greater proportion of the blame, for they were responsible for making the decisions that got the banks into this mess, but while the public indulges in a hatred towards a few senior bankers, there are some serious lessons to be learned about the way many companies, in particular banks, have done and how they could perform better.

Dressed in dark suits, white shirts, and red ties, bankers generally give the impression of being extremely dull, conservative characters, but this is all for show. Even before the current banking crisis, there have been a number of instances in which the lending strategies of banks have caused major problems. In 1982, big American banks lost almost everything they had previously made because Latin American countries, to whom they had been lending to, all defaulted on their loans at the same. Then a decade later, these banks again came close to bankruptcy after the property market collapsed, which required a taxpayer-funded bailout of half a trillion US dollars.

Paul Moore, former head of Group Regulatory Risk at HBOS, had warned the board that they were taking undue risk by basing their growth on “excessive consumer credit based on massively increasing property prices which were caused by the very same excessively easy credit”. He was dismissed from his job in 2005 by the CEO, and he was replaced by someone who had no experience of carrying out a risk manager position of any type. In a statement, he compared the CEO of HBOS to an emperor who was blinded by “money, power and pride”, and anyone who stood in his way was labelled a “trouble maker” or “spoil sport”. People who did notice that the emperor was “naked” were too scared to speak up and point out the fact.

The current banking crisis shows what happens when CEOs are driven by just one thing: greed. A certain amount of greed in necessary, but it should not be the overriding concern for a business. Neither should a firm be dominated by a single voice, something which is deeply ingrained in the British civil service. Jack Welch, the former CEO of General Electric (GE), described this single voice as “superficial congeniality”. As CEO of GE, from 1981 to 2001, he went about dismantling this culture of “superficial congeniality” and replacing it with a culture of debate, argument and decentralized authority. GE was the most successful company of the twentieth century, and continues to be the world’s tenth largest company.

Unfortunately, today we are paying for the mistakes of greedy, short-sighted, domineering CEOs of large banks, and the government is yet again using our money to bail them out. This is not the first time this has happened, and it probably won’t be the last. Bankers, after all, are humans and we all have a tendency to increase risk taking when things seem stable, while ignoring the possibility of a crisis that that kind of attitude could produce.

Cochin International Airport: a model for Kerala and India

Back in the 1980s, when I was in my early teenage years, I would go on holidays to Kerala, India, with my parents. We would invariably fly to Bombay in western India, and then take a domestic flight south to Cochin. I remember the small airport in Cochin well. After a flight adjacent to the Indian coastline, the aircraft would swoop down and upon landing, the pilot would immediately apply full reverse thrust and generous braking to slow the aircraft down, as the runway was short. The airport terminal was small; at best, it was capable of handling a couple of flights at any one time. When aircraft arrived or departed from the terminal, the building would reverberate with the sound of the jet engines, making conversation difficult. The airport was actually a naval airbase on Wellington Island that was converted for civilian use.

Everything changed at the end of the 1990s when a new, bigger airport was opened in Nedumbassery, 30km from Cochin city centre. The new airport, which replaced the old naval airport, was the result of a public-private partnership (PPP), with the government only having a minority stake. The government of Kerala, unable to provide funding for the entire project, sought private funding, and the response from Non Resident Indians (NRIs), who had long desired an international airport in Cochin to avoid having to take a detour via Bombay, was overwhelmingly positive. Nearly 10,000 NRIs from 30 countries contributed to the project. The total project cost Rs3.15 billion (about US$68.4 million), which was low cost compared to many other airports. This was the first time an international airport in India was built with only a minority (13%) central government stake.

Today, Cochin Airport is the fourth busiest airport in India in terms of international traffic, with passenger traffic continuing to grow. It handles more than 400 services in the domestic sector and more than 300 services in the international sector per week. It has a 3,400m long runway, which is the second longest in India, and besides Mumbai, Delhi, Chennai, Bengaluru and Hyderabad, it is capable of handling all types of commercial aircraft including the Airbus A380. The duty free shops, which currently contribute a substantial amount of the airport revenues, have also earned the reputation of being amongst the lowest priced in the Asia-Middle East region. Recently the airport has opened one of the largest cargo centres in India, providing a major boost to the movement of perishable cargo from Kerala.

There are plans afoot by Cochin International Airport Limited (CIAL), the public company that owns the airport, to build an aerotropolis (airport city) around the airport. To fund this ambitious plan, CIAL will tie up with two international airport developers, and float 26% of its equity between April and December 2009. The aerotropolis project will develop 450 acres of land with a view to increasing non-aeronautical revenue. The aerotropolis will include, among other things, the following:

• Aircraft Maintenance, Repair and Overhaul (MRO) facility
  
• Aviation Academy
  
• Star/budget hotels
  
• 18-hole world class golf course
  
• Convention/exhibition centre
  
• Amusement parks
  
• Shopping malls
• Food Court
  
• Super Speciality Hospital
  
• IT park

The aim is to increase non-aeronautical revenue to such a level that the airport will be able to operate profitably without depending so much on aeronautical revenue, so that by 2015 the airport will be able to scrap aircraft landing charges to airlines.

For a state that has always been very sceptical about free markets, the success of Cochin Airport demonstrates what can be achieved through collaboration between government and private enterprise. One of the main reasons for the airport’s success is that the government has not interfered in its management, leaving all decisions to be made by the board of directors. The present Chief Minister of Kerala, V S Achuthanandan, is also the chairman of the board. Having a chief minister as the head of the board helps to get clearances quickly and certain benefits from the government; and in turn the airport, aware of its social responsibility, provides employment and opportunities to many people, promotes tourism, and acts as an essential gateway for Kerala to the outside world.

Kerala is notorious for the large number of strikes, due to powerful trade unions and political parties, which bring the state to a grinding halt on a frequent basis and cause massive losses to the state exchequer. Many companies either avoided setting up office in Kerala or moved out from the state for this particular reason. While other southern states like Karnataka and Tamil Nadu experience rapid economic growth, Kerala is a laggard in comparison. It has become dependent on remittances from NRIs abroad, which contribute a substantial part of the economy. This is an indefensible position. The success of the new airport at Cochin, which has been a model for other new airports in the region, shows what can be achieved through benevolent capitalism. When government maintains a hands-off approach, private enterprise can deliver the goods to the benefit of all, providing that it also maintains a sense of social responsibility.

The Black Swan

Before the discovery of Australia, Europeans were convinced that all swans were white, based on empirical evidence. The discovery of the first black swan in Australia, therefore, was a major surprise because it contradicted the general theory. The occurrence of unexpected, random events that underlie our lives (or “Black Swans”) is the theme of the international best-selling book “The Black Swan” by Nissim Nicholas Taleb. I am currently reading this book, and I’m only up to chapter 3 but I’m riveted.

Taleb uses events such as 9/11, the market crash of 1987, the Asian tsunami of December 2004, the demise of the Soviet Union, etc to demonstrate the occurrence of Black Swans in our everyday life. He says:

“A small number of Black Swans explain almost everything in our world, from the success of ideas and religions, to the dynamics of historical events, to elements of our personal lives.”

Since the industrial revolution, the occurrence of Black Swans has been increasing. He believes the more progress we make, the more Black Swans we are likely to encounter and the more unpredictable life will be.

Taleb is from a Greek Orthodox Levantine family in what is now known as Lebanon. He recalls how for centuries, different ethnic and religious communities in the Levant had managed to co-exist quite peacefully. Whatever occasional conflict there was was usually within Muslim and Christian communities, but rarely between Muslims and Christians. The Lebanese “paradise” suddenly evaporated in the mid-seventies when a bitter, bloody civil war between the Maronite Christians and the Muslim communities broke out and lasted a decade and a half. Hardly anyone saw the war coming or imagined it would last as long as it did. Taleb was just a teenager when the war broke out, but it is clear the war had a major impact on his mind and his subsequent interest in the highly improbable.

Taleb is convinced that it is virtually impossible for anyone, however learned they may be, to predict with any certainty the course of events due to the possibility of Black Swans. We have a tendency to “focus on those pure, well-defined, and easily discernible objects like triangles, or more social notions like friendship or love, at the cost of ignoring those objects of seemingly messier and less tractable structures”, a trait which Taleb describes as “Platonicity”. We adjust to the highly improbable only after it occurs, while the “experts” among us, believing they are experts in their fields, are as baffled like the rest of us, except that they are able to narrate what happened better than the general population. The irony is that these experts are usually more highly paid than the rest us.

The current financial crisis that is affecting us, commonly known as “the credit crunch”, is an example of a Black Swan. In its wake, we have seen the collapse of large seemingly solid financial institutions, companies going bust, redundancies increasing, and social tensions rising. People are comparing it to the Great Depression of the 1930s. Yet one person, an economist called Dean Baker, did forewarn of an impending crisis in August 2002, basing his analysis on the US-government house-price-data from 1953 to 1995. He correctly pointed out that the US housing market was over-inflated but, despite his repeated attempts, he was unable to convince the Board of Governors of the Federal Reserve for the need for action. The sub-prime lending crisis, which was initially blamed for causing the crisis, was only part of a bigger problem affecting the $20 trillion US housing market.

If a security analyst had warned on 10 September 2001 of the need for all cockpits to have bulletproof in planes, 9/11 could have been averted, but it is likely that the analyst would have suffered the same fate as Dean Baker. The airlines and authorities, because of the huge costs and inconvenience involved in undertaking such a scheme, would have ignored his warnings.

Almost every day, as I listen to the radio, I hear news presenters asking experts how long and how deep the current recession will last. Some say one year, some two years. Even the Governor of the Bank of England cannot give a definitive answer. Initially, many experts predicted UK would suffer a shallow recession; now they talk of a deep recession. What is indisputable is that very few people never expected the current crisis to affect us in such a dramatic way. It is probably wise, therefore, to avoid making predictions on when we will come out of this recession and let events take their course which, unfortunately, will entail more pain for many households. We are remarkably poor at making predictions in a complex world because we consistently fail to factor in the possibility of Black Swans. I may as well avoid listening to those experts on the radio and use my time more wisely instead.