The Economics of Pocket-Money

The 16-24 demographic is an interesting one. In days gone by, deference to a maturer, more stable authority was essential to society. Resultantly, young adults could be repressed and disenfranchised, forced to await their turn in the aging process. The early part of last century saw times change. The two wars saw male youths on the front line and their girlfriends in the factories. The erosion of Christian values accelerated. The teenager emerged.

That the teenager is an economic phenomenon should not be underestimated. Youth with disposable income shifted market power. The McDonald brothers in 50s San Francisco were among the earliest beneficiaries. Ray Kroc, eyeing a lucrative chink in the market, commercialised the franchise and gave us perhaps the most enduring brand of the last half-century.

Without exciting youth tendencies, perhaps branding would never have taken off. Mass production could now produce the goods, but to shift them advertising was needed. Andy Warhol, a former commercial illustrator, scandalised the art world when, in 1962, he put up his 32 Campbell’s Soup Cans for display. The painting of 32 uniformly ordered metallic soup cans with differences only in the titling of the soup variety brought to the fore themes of commercialisation, repetitiveness and cultural dullness. Whatever Warhol’s personal opinions, it was clear: advertising had much to overcome.

It was the youth market with their financial clout who propelled ad-men to consider branding in ever more innovative ways. The adolescent had a need to feel valued and esteemed  - something that brands cottoned on to as they began to offer spiritual comfort in material goods. Now, minimum reflection will cause one to observe that the growing pains of adult awareness lead to highly suggestible, unreasonable and downright financially obnoxious young people. Today, in a world where advertising has become ubiquitous, society is found obsessing with youth value.  The result is that  political revolutionaries have been reduced to bland cultural icons recognised only for having some vague alignment to teenage rebelliousness. Sports megastars have been granted the right to tell us what we drink, eat and wear. Brand logos are now so personally sentimental that they are tattooed onto people’s physical bodies. We should be worried on the assault of the brands against basic intelligence.  Advertising is stripping the ability to have a half decent intellectual debate from our society. Not for anything has television been called “the Idiot Box”, or the whole gamut of cinema, radio, newspaper etc as “the Great Stero Opticon.”

It was the activist author, Naomi Klein, who took up this question in her radical work No Logo (1999) to show that not only did the cultural degradation reflect badly on modern consumer society, but also that it was intertwined the sweatshop industries of child labour, poor pay and reinforced bondage. If the reader is unaware of Ms. Klein’s work, let me reproduce it in a nutshell: The artificial branding economy (e.g. mega-millions for Hollywood endorsements) is highly profitable so long as corporations outsource their production needs in order to keep their overheads to an absolute minimum. That outsourcing fosters and encourages labour practices which contravene any form of basic labour provision. However the countries to which they are being outsourced scrap any notion of labour rights in exchange for investment. This heavy deregulation which attracts multinational capital into their country leads to what can only be described as modern bondage.

Now, it is true, that there is a converse argument. To read it, one may flick through to Chapter 11 in Charles Wheelan’s Naked Economics, provocatively entitled “The Good News About Asian Sweatshops.” Here, Wheelan argues that to let the power of the market reign unbridled will allow a trickle-down effect. Sweatshop labour exists because there is a market for it, and the growth of that market will ultimately benefit the bottom-rung employees. Re-adjustment will happen by the forces of the market; any intrusive legislation is bound to hamper the process. Now, one could question how effective the so-called trickle-down effect really is. Yet, more worryingly, is it seriously possible to rule out legislating for humane working conditions? Anyone who is concerned about human rights will automatically cede the argument to Klein. Granted, she goes over the top (she rants against Wal-Mart’s decision to not stock products promoting Satanism because it contravenes their family value system) and her politics become a bit top heavy (she herself is part of the anti-globalization movement, granddaughter of Marxists, daughter of a staunch feminist i.e. left through and through) – but the core tenets of her work remain unassailable.

We need however to be careful of dismissing this network of teenage angst, scheming ad-men, profit-driven multinationals and victimised third-world labour as evil by definition. At the very least, financial capital is induced to flow through, money that would not be otherwise. Arguments must be made to reform and not to destroy. In my view, four things must happen: 1) Western media needs to re-examine its attitude to advertising and be more bold in challenging youth purchasing behaviour, 2) multinationals must be incentivised to work in 3rd world countries with strict labour laws, 3) we must rid ourselves of anti-trade-unions sentiment and realise that they will always be the first port of call for basic labour provision, and 4) the multinationals must engage in the trade-off between stratosphic profits and human rights. These are formidable tasks, but they are achievable. It is no good campaigning against the market – we need to reinvest it with a sense of humaneness.

 

 

 

Food Fight

“Whoever commands the trade of the world, commands the riches of the world, and consequently the world itself .” – Sir Walter Raleigh

The breakdown of the Doha round brought a few intriguing economic trends to the fore. Mandleson’s laissez-faire clashed with Sarkozy’s protectionism. Nath forced a stalemate to a roar of applause from his Indian backers. America was found wanting as it could no longer dictate trade on its terms. Since September 11th a world shift has occurred as the West’s economic clout has slowly, steadily, surely eroded away. A mushrooming Chinese middle class, a surging (if ever poverty stricken) India and the nationalisation-lite of Russian oil have made their mark in the last half decade. Wars cost, and the War on Terror is no different.

The WTO talks revolved around perhaps the most crucial segment of our markets today: food. Agricultural commodities are the very essence of our day to day sustenance. In the West we are apt to forget how basic a requirement this is, provided, as we are, with 24 hour open-on-Christmas supermarkets, stocked with luxury confectionaries of every possible colour and hue. How can it be then that cocoa farmers in Ghana have never even tasted chocolate? The answer lies in raw crop tariffs being low while the limits on processed foods are considerably higher. The cocoa used by Mars in Slough, UK might be sourced from the third world, but the finished product is easily too expensive to be commonly affordable there.

Perhaps the laissez-faire deregulation of all these tariffs could be the miracle cure? It seems unlikely. To be sure, abolishing the tariffs means that Ghana can import and sell chocolate bars for a cheaper price. Broaden this example for more needed commodities and consider what happens. The Cedi might well purchase more, but marginally so. In any case, why would a successful producer of chocolate bars wish to expand its African market, diverting resources away from more profitable ventures? I would venture a guess that if all such tariffs were abolished, it would be the surplus and unsold excess that would find their way back. In other words, the producers would adjust an erratic supply against their First World sales rather than work towards the improvement of the indigenous market.

Now it is fairly obvious that was Ghana allowed to profit from a high export tariff it would reap dividends. Admitted, this is dependent on competing cocoa cultivating countries doing the same, otherwise no-one would simply buy from Ghana. Yet remember that out of the top five major cultivators of the cocoa plant, four are West African. A mutual tariff hike would be in the interests of all of them. For the global market chocolate consumption, a luxury good, is growing not falling, doubling every twenty five to thirty years. West Africa could see real returns which could be used to boost their economy. Industrial plants may have to relocate to the continent to remain competitive. Isn’t, then, the equitable solution to our trade problem to provide weaker countries with strong tariffs and a package of enticements for industrial producers to shift there? Yet I must admit that there is a snag. Come on, do you really think the Americans, the Europeans, the Chinese, the Indians or the Russians would ever allow that to happen?

Private Equity: From Here to Where?

There is an apocryphal story that, before the credit crunch hit home, the head of a $125 billion listed company approached Stephen Schwarzman of the Blackstone group, pleading with him to take him private. The story adequately highlights the soaring expectation placed in the private equity sector. Indeed the five years, from mid-2002 to mid-2007, saw private equity firms enjoy a period of extremely high growth. The consultancy Private Equity Intelligence valued the returns over the period at 25%. The big buyout end of the market was in buyout mood as the KKR buyout of Alliance boots and the mooted Sainsbury’s deal were valued in the double-digit billions. Yet, since last year’s summer, mega-deals have been hard to come by. First Year’s acquisition of the oil services firm Abbot Group and the takeover of Biffa are both less than two billion pounds worth.

Fundraising has rapidly changed. Whilst institutional investors such as banks had previously been fighting to finance the operations of general partners, now the Private Equity Firms (PEFs) find themselves having to pitch ever harder. The nature of the deals have become significantly more low-key, as the sector is advised to return to its ‘buy and build’ ethos. Good management of their current holdings could see them through these times. As sovereign wealth funds increasingly encroach on private sector territory, PEFs will have to maximise the advantage of their experience of business restructuring. Yet an intriguing trend has also emerged in the wake of the crisis. As financial institutions begin to feel the heat, distress deals are becoming ever more common. PEFs are realigning their sights to focus in on purchasing debt, currently being sold extremely cheaply, confident that they will be able to make a profit in the long-term. Take for example Texas Pacific Groups’ purchase of 23% of Bradford Bingley bank. They may also be hoping for later straightforward debt-for-equity swaps.

The credit crunch may have affected the flow of finance, but it is not the only issue that the sector is currently grappling with. There has been strong lobbying either side of the Atlantic to see that the carried interest of PEFS is taxed more heavily. The Republicans staved off the challenge to convert the 15% capital gains tax to a 35% income tax. However Gordon Brown’s government succeeded in raising the tax from 10% to 18%, causing voices to grumble that private equity will be pushed out of London. The past few years saw PEFs accused of short-termism and asset stripping. Trade unions, concerned about these management practices, have been making use of their ties with the Labour party over the prickly issue of job-protectionism. The diversifying of PEFS into into more and more sensitive areas such as children’s homes, alarmed the media and led to calls for far greater disclosure. Issues of privacy also had a more fiscal face. To argue that the KKR – Alliance Boots deal is private and that public accountability is not required has even been admitted by the sector itself to be too much of a stretch. The much-touted recommendations of the Walker report, offering to level out the information imbalance, are privately binding and non-enforceable. Nonetheless it is in the greater interests of PEFs to comply. After all, in the current market, they have to start thinking about the long-term. KKR already is. It is getting listed.