Julia Stockdale-Otárola, OECD Public Affairs and Communications Directorate
In 1988, Iranian filmmaker Abbas Kiarostami took his camera into a primary school in Teheran and asked the kids a simple question: “Did you do your homework?” Of the many justifications for not doing it, the most reasonable was no doubt, “My baby sister keeps coming and biting my back”. Nobody claimed their parents stopped them from doing it though. Unlike Spain, where this month CEAPA, a confederation of 12 000 parents’ associations, called for a nationwide weekend homework strike.
Gracia Escalante, a mother of two and a social worker, explained some of the reasons behind the call: “My family will be on strike as a way of making more visible the view that the current system of homework in Spain is appallingly inefficient and socially divisive.”
Even some teachers support the strike. Alvaro Caso, who doesn’t assign any homework to his students, explains that he believes: “Children spend enough time at school and have enough work to do during the day. If a teacher is doing their job right, there is no need for any more – at least in primary education.”
Former acting Education Minister and now Government Spokesperson Iñigo Méndez de Vigo considers that the strike “is a bad idea“, although he added that this question “could be the subject of debate in the national education pact” that the government will “immediately set in motion in the Lower House of Parliament”. In the meantime, the regional governments of Madrid, the Canary Islands, and Murcia have approved recommendations to reduce homework time.
All sides in the debate quote data from the OECD PISA project that show that the Spanish 15-year olds spend more time on homework than most, at nearly 8 hours a week compared to an OECD average of nearly 6 (that’s less than half the time students in Shanghai spend). Does it do any good? The PISA figures show that on average across OECD countries, for each hour per week students spend doing homework, they score 4.5 points higher in reading and mathematics and 4.3 points higher in science.
However, Spanish students are in the bottom half of PISA rankings, suggesting that spending more time doing homework doesn’t always translate into higher student achievement compared to other countries, although you could also argue that without homework the gap would be bigger. The discrepancy between efforts and results might be explained by what some argue to be the difference between homework versus “busywork”. That is to say that there is such a thing as good and bad quality homework and that there’s a point when children get to a point of oversaturation. Drawbacks of a heavy workload include boredom, burnout, increased stress, lack of sleep and less time for family and extracurricular activities.
Harris Cooper conducted a comprehensive analysis of the correlation between student achievement and homework. This study found a positive correlation, however it notes that this is much stronger at the high school level than in primary school. Cooper suggests the 10-20 minute rule: every year no more than 10 minutes should be added to the time spent on homework. Following this approach, a child in the first grade would be assigned 10 minutes of homework, while a secondary student in year 9 would be assigned no more than 90 minutes of homework. The only problem with this approach is that not all children take the same amount of time on each assignment.
More generally, as you’d expect, the averages in all these studies hide a number of important differences, some of which are constant across countries and time. The conversations with Kiarostami gradually paint a fascinating picture not just of the pupils’ attitudes to education and child raising, but of family life and Iranian society at the time in general. It becomes clear that one of reasons for not doing homework was poverty – there was nowhere to study at home, or the parents were illiterate, so it was left to older brothers and sisters to give what help they could.
Today, poverty can still be a barrier to learning, whatever the country. An OECD study showed that this is the case even when all students, including the most disadvantaged, have easy access to the Internet. A digital divide, based on socio-economic status, still persists in how students use technology. Advantaged students are more likely than disadvantaged students to search for information or read news on line.
All things considered, it would seem that some homework is worthwhile, an “opportunity for learning” as PISA says, although it may also reinforce socio-economic disparities in student achievement. The OECD report gives some practical suggestions on how to help, such as providing a quiet place for disadvantaged students to complete their assignments if nowhere is available at home. If nothing else, that would maybe stop the baby biting her brother.
More work? More play? What’s really best for high school students? Laura Capponi gives a student’s view on OECD Insights
Dr. Klaus Moosmayer, Chief Compliance Officer, Siemens AG, and Chair of the BIAC Task Force on Anti-Bribery/Corruption, and Dr. Ulrike Desimoni, Senior Counsel Compliance Legal, Siemens AG. These comments are a contribution to a public consultation on foreign bribery and the liability of legal persons by the OECD Working Group on Bribery.
Business has on many occasions underlined the fundamental importance of compliance, which should be understood not just as adherence to the law and internal company rules, but as a key component of business integrity. It is true that a corporation may in certain cases create an environment that encourages employees, officers, and agents to pay bribes to secure business. Yes, but the corporation can also do the opposite. It can establish an effective compliance system. Effective compliance increases the likelihood of detection of offenses in the company and thus has a positive impact not only on detection and prosecution but also on prevention.
This is because compliance systems have a strong potential for deterrence within the company. Companies should therefore be urged to carry out effective compliance work in order to prevent white-collar crimes, shed light on internally detected misconduct, and disclose it to the authorities. In return, the compliance measures should be taken into consideration when setting the amount of the financial penalty in the event of a violation of the law, even to the extent of waiving a sanction on the company.
When imposing sanctions, the conduct of the company (on which the financial penalty is to be imposed) both before and after the offense must be taken into consideration. This includes the company’s unreserved assistance in clarifying the facts of the case but also the implementation or subsequent introduction of compliance measures, which can be understood as a clear indication of the company management’s commitment to acting in accordance with the law.
The fact that bribes were detected – and that needs to be emphasised – does not necessarily mean the established compliance system failed. In fact, it shows that the compliance system worked: Bribes were detected.
With regard to the 2010 UK Bribery Act, which – like anti-bribery law in some other countries – contains a compliance defence rule, Kenneth Clarke, Secretary of State for Justice highlights: “The objective of the Act is not to bring the full force of the criminal law to bear upon well run commercial organizations that experience an isolated incident of bribery on their behalf. So in order to achieve an appropriate balance, section 7 provides a full defence. This is in recognition of the fact that no bribery prevention regime will be capable of preventing bribery at all times.“
In our view, when it comes to the level of sanctions, different and adequate types of sanctions for legal persons are already in place, either criminal or non-criminal ones. These include fines, confiscation disgorgement, debarment from public procurement and other penalties like dissolution and publication.
While some focus mainly on the liability of companies, the ‘role’ the individual may have must not be disregarded. in In September 2015, the US Department of Justice (DoJ) released its policy on Individual Accountability for Corporate Wrongdoing (“Yates memorandum”), which correctly signalled a priority of pursuing, punishing and deterring individual (executives, manager) wrongdoers. According to the Yates approach, “the most effective way to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing.” The policy and its six key steps to guide prosecutors and civil attorneys at DoJ in conducting and evaluating corporate investigations clearly show the need to focus on individual wrongdoers in addition to companies. Individuals, not only companies are accountable.
- The global economy remains in a low-growth trap, but more active use of fiscal policy will raise growth modestly. Investment and trade are weak, weighing on drivers of consumption such as productivity and wages.
- Policy uncertainties and financial risks are high. But low interest rates create a window of opportunity
- Fiscal, structural, trade policies need to be interwoven for gains. Reducing trade costs raises growth but trade restrictions put jobs at risk. Expansionary fiscal initiatives to boost growth and reduce inequality would not impair fiscal sustainability. The success of fiscal initiatives depends on structural policy ambition.
- Collective action enables greater gains at lower political cost.
Extracts from editorial by OECD Chief Economist Catherine Mann[…] The projections in this Economic Outlook offer the prospect that fiscal initiatives could catalyse private economic activity and push the global economy to the modestly higher growth rate of around 3½ per cent by 2018. Durable exit from the low-growth trap depends on policy choices beyond those of the monetary authorities – that is, of fiscal and structural, including trade policies – as well as on concerted and effective implementation. Collective fiscal action undertaken by all countries, including a more expansionary stance than planned in many countries in Europe, would support domestic and global growth even for those economies, who by virtue of specific circumstances, need to consolidate their fiscal positions or pursue a more neutral stance. […] This Economic Outlook argues that the current conjuncture of extraordinarily accommodative monetary policy with very low interest rates opens a window of opportunity to deploy fiscal initiatives. Fiscal space has been created by lower interest payments on rolled-over debt, which also increases gauges of market access and of debt sustainability. On average, OECD economies could deploy deficit- financed fiscal initiatives for three to four years, while still leaving debt-to-GDP ratios unchanged in the long term. A front-loaded effort could allow deficit finance to taper sooner and put the debt-to-GDP ratio sustainably on a downward path.
The key is to deploy the right kind of fiscal initiatives that support demand in the short run and supply in the long run and address not just growth challenges but also inequality concerns. These include soft investments in education and R&D along with hard investment in public infrastructures. Such fiscal initiatives would improve outcomes for demand and supply potential even more for economies suffering from long-term unemployment, when undertaken collectively, and when fiscal initiatives are complemented by country-specific structural policies put together in a coherent package.[…] Against this backdrop of fiscal initiatives, reviving trade growth through better policies would help to push the global economy out of the low-growth trap, as well as support revived productivity growth. In this Economic Outlook trade growth is projected to increase from a dismal ratio of global trade-to-GDP growth of around 0.8 to be about on par with global output growth – remaining much less than the multiple of 2 enjoyed over the last few decades. This sluggish trade growth compared to historical experience shaves some 0.2 percentage point from total factor productivity growth – which may seem minor – but is meaningful given the slow productivity growth of some 0.5% per year during the post- crisis period.
Some argue that slowing globalization would temper the brunt of adjustments to workers and firms. This Economic Outlook suggests that protectionism and inevitable trade retaliation would offset much of the effects of the fiscal initiatives on domestic and global growth, raise prices, harm living standards, and leave countries in a worsened fiscal position. Trade protectionism shelters some jobs, but worsens prospects and lowers well- being for many others. In many OECD countries, more than 25% of jobs depend on foreign demand. Instead, policymakers need to implement the structural policy packages that create more job opportunities, increase business dynamism, promote successful reallocation and enhance policies to ensure that gains from trade are better shared. Fortunately, the country-specific policy packages that make fiscal initiatives more effective in promoting demand growth and supply potential also help to make growth more inclusive.
The transition path to a more balanced policy set and higher sustainable growth involves financial risks. But so too does the status quo dependence on extraordinary monetary policy. Pricing distortions in financial markets abound. Yield curves are still fairly flat, with negative interest rates. Pricing of credit risk has narrowed even as issuance of riskier bonds has increased. Real estate prices continue to advance in many markets, even in the face of attempted tempering by macro-prudential measures. Expectations in currency markets are on edge as evidenced by high measures of currency volatility. These financial distortions and risks expose vulnerable balance sheets of firms in emerging markets, and challenge bank profitability and the long-term stability of pension schemes in advanced economies.
The fiscal initiatives in conjunction with trade and structural policies, as outlined in the scenarios in this Economic Outlook, should revive expectations for faster and more inclusive growth, thus allowing monetary policy to move toward a more neutral stance in the United States at least, and possibly other countries as well. The risk of a growing divergence in monetary policy stances in the major economies over the next two years could be a new source of financial market tensions even as growth picks up, thus putting a premium on collective action by countries to revive growth in tandem.
In sum, policymakers should closely examine fiscal space; low interest rates enable many countries to boost hard and soft infrastructure and other growth-enhancing initiatives. Avoiding trade pitfalls, coupled with social measures to better share the gains from globalization and technological change, are key policy priorities. Using the window of opportunity created by monetary policy and following through on fiscal and structural measures should raise growth expectations and create the necessary momentum for the global economy to escape the low-growth trap.
Projections by country (country notes)
Remarks by OECD Secretary-General Angel Gurría
Stijn Lamberigts, PhD researcher at the University of Luxembourg and junior affiliated researcher at the Institute of Criminal Law of the KU Leuven. These comments are a contribution to a public consultation on foreign bribery and the liability of legal persons by the OECD Working Group on Bribery.
Corporations in general, and multinationals in particular, wield substantial financial and socio-economic power. They can and do commit different types of offences through the individuals that work for them. Faced with this reality, the use of corporate criminal liability (CCL) has increased over time. However, CCL raises many theoretical and practical questions. To what extent can corporations be held criminally liable for offences requiring a mens rea element? How should criminal proceedings be conducted against corporations? Who will represent the corporation throughout an investigation or trial? To what extent do corporations benefit from procedural safeguards that were historically conceived for individuals?
These questions have been answered differently around the world. Some systems base CCL on a model of vicarious liability, whereas others favour an anthropomorphic model. Procedural questions, such as those above, on how corporations should be tried and how fair trial rights should apply to corporations, are often overlooked.
Whereas the applicability of some fair trial rights to corporations may be easily accepted, other rights such as the right to silence and the privilege against self-incrimination, are less obvious when corporations are suspected of a criminal offence. These rights were traditionally developed to protect individuals against physical or psychological compulsion. If they are to be applied in the corporate context, several questions arise, such as: which of the corporation’s employees can invoke these rights? All employees? Only middle or top management? Only the corporation’s legal representatives? What would be the impact if corporations could rely on the privilege against self-incrimination and refuse to hand over self-incriminating documents?
The (un)availability of the privilege against self-incrimination and the right to silence can substantially impact defence strategies available to corporations. If they cannot rely on these rights when confronted with a demand for incriminating evidence by prosecuting authorities, the choices available to corporations are limited. Corporations can have good reasons for deciding to cooperate with prosecuting authorities in an effort to obtain the most favourable outcome, for example because they want to avoid the stigma that can come with criminal conviction. Then, they are likely to cooperate, for example by handing over evidence of any wrongdoing. Conversely, a corporation may decide that it does not want to cooperate with the prosecuting authorities. In such cases, the right to silence and the privilege against self-incrimination are particularly relevant.
The question about whether a corporation can rely on the privilege against self-incrimination and the right to silence has been answered differently in different jurisdictions. The variety of approaches can be particularly challenging in the context of cross-border corporate wrongdoing, such as bribery of foreign public officials.
The US approach is very clear: corporations, like other collective entities, cannot benefit from self-incrimination clause of the Fifth Amendment. This Supreme Court doctrine can be traced back to Hale v Henkel handed down at the beginning of the 20th century and the cases that further developed the doctrine. The exclusion of corporations from the scope of these rights was based on several arguments, some of which have lost their appeal over time. The Supreme Court considered that, as the privilege against self-incrimination is a purely personal privilege, it cannot be exercised by corporate employees or agents on the corporation’s behalf as it feared the detrimental impact on the prosecution of cases in a business context. Nevertheless, the US Supreme Court has accepted that corporations can benefit from several other fundamental rights.
The Belgian Court of Cassation’s approach is at the other end of the spectrum. It was confronted with a case in which a financial institution had been required to produce self-incriminating evidence and failure to do so could result in a fine. The Court of Appeal had excluded evidence that was produced under that threat as it considered that the right to silence had been infringed. Its judgment was confirmed by the Court of Cassation on 19 June 2013 (Case P.12.1150.F).
The European Court of Human Rights, which has handed down several cases dealing with the right to silence and the privilege against self-incrimination in the context of natural persons, gives no detailed answer to the aforementioned question.
The Court of Justice of the European Union (CJEU) has ruled on the right to silence and the privilege against self-incrimination of undertakings in the context of competition law. It should be stressed that EU competition law is not considered to be criminal in nature by the CJEU. Thus, it may be that the CJEU would be more generous when corporations face classic criminal sanctions instead of punitive administrative sanctions. The Court’s position can be summarized as follows: undertakings cannot refuse to hand over incriminating documents when the European Commission issues a Decision based on Council Regulation (EC) 1/2003, nor can they refuse to answer its questions, except where answering a question would entail an admission of an infringement of competition law.
The recently adopted EU Directive 2016/343, which includes a provision on the right to silence and the privilege against self-incrimination, excludes legal persons from its scope. The Preamble to the Directive makes it clear that legal persons can nevertheless rely on existing legislative safeguards and case law.
In conclusion, several uncertainties have been highlighted. Whether and how procedural safeguards are to be applied when a corporation is being prosecuted, is a complex question, which has been answered differently by various countries. The wide variety of approaches taken in Europe and elsewhere highlight some of the challenges in the field.
A world society is emerging where nation states are dominant, but in a complex, multi-polar world in which the poles – including business, civil society, and multilateral agencies – are developing various forms of power through alliances and shared objectives (or even common enemies). In the global system that is emerging, economic growth and the technological advances that underpin it have to be geared to meet human ends. Global governance has to be built on three pillars which reflect this complexity: political vision; realistic goals; and operational strategies.
This is the sense of the UN Human Development approach, the OECD Better Life Initiative, and the UN 2030 Sustainable Development Agenda to which the G20 Hangzhou consensus lends support. Is the vision of global leadership as expressed by these bodies adequate to steer the world community out of the enduring crisis?
The 2030 Agenda implies a new relationship between the economy, nature, and society, and as such it has caught the mainstream political parties off balance. The Right is mainly on the economic leg; the Left on the social leg; the Greens on the ecological leg. The result is that the policy-making institutions, politically neutral, have a special responsibility. The OECD, in the nascent coalition of multi-lateral agencies, has the advantage of having pioneered its triangular policy paradigm almost since its foundation. This is now becoming a tripod, with governance at its apex.
The heart of the policy problem is that the economic, social and ecological systems have different logics. This means that policy coherence is both increasingly important and increasingly difficult. It has to be sought at all levels of decision-making, right down to cities and local communities where it is easier to achieve concertation between the stakeholders. At the level of the macro debate, policy coherence is complicated by the fact that the policy sciences are, by their very nature, silos. Economic, ecological, and social theory do not readily mix. Policy-makers can only get at the massive structural problems of today by systemic reforms which cross the boundaries of ministerial departments and the policy sciences. That is why systems thinking is needed for policy coherence.
This mutation in policy-making will not succeed if it remains the affair of a policy-making elite. Already, something like a popular movement appears to be building up. Way ahead of the policy-makers and the academics, people in cities, towns, and villages across the world are responding to the sustainability movement. For necessity is the mother of invention – as reflected in protest movements to avert climate disaster and to resist expropriation from historic “commons”.
Given the complexity of the goals of global governance, the leadership needs to explore the implications of alternative scenarios (futures) as a guide to today’s decisions. In that sense it has a pedagogical role, even rhetorical, since it engages in a “conversation” in and around possible decisions. Given the turbulence of the geo-political and geo-economic scene, its role is likely to become more important as predicting the future becomes more difficult while creating it becomes more necessary. And faced with the complex web of interactions between the SDGs, the context in which policies are formulated is vital. Success will depend on the extent to which, for example, “centres of government” are willing to collaborate.
There are two consequences. First, certain “chunks” of the SDG map are forced onto the policy agenda by the geo-political and geo-economic context. This is the case of the impressive commitments made at the G20 Hangzhou Summit, for example with regard to “a globally fair and modern international tax system”, green financing, energy collaboration, climate, inclusive and interconnected development, and illicit financial flows.
The second contextual reality is the need to pursue action in real-world decision-making contexts, national and sub-national. This is where the OECD can make a considerable contribution, because of its long-standing tradition of peer reviews, now extending down to the city, regional and local levels of public policy. The Multi-Dimensional Country Reviews of the OECD Development Centre are of particular interest in this regard.
Given the long and rocky road to the SDGs, regular monitoring of achievements and failures will be vital. This involves the publication of statistical indicators, an area in which the OECD has an important role to play. But more is at stake because sustainable development reflects a shift in opinion across the world. Policy-makers and citizens are in effect learning their way into the future, and emulation is an important stimulant for progress.
Progress is linked to security. After World War II, NATO and the OECD were the two arms of the Western strategy to provide security and prosperity. European economic and social progress was seen as the bulwark against Soviet communism, and the Marshall Plan was the instrument. Progress and security were thus linked. Today the progress-security nexus is quite different. The challenge of world progress – reconciling economy, nature and society – is much more complex. The security threats are more diffuse, ranging from nuclear conflict to climate change and terrorism.
The people of the world are now faced with living together on a finite planet, in an ever-expanding universe that they are beginning to explore. The fundamental challenge facing global governance is whether security risks and threats will undermine and overwhelm the immense power for progress that the new technological revolution brings. The SDGs can be part of the response if sustainable development, the Brundtland vision, becomes a popular movement. So too can the Hangzhou consensus, if the commitment of the major G20 powers to the SDGs extends to peace and security aspects of the UN 2030 Agenda.
The hope that this will be the case depends on whether, despite a certain amount of sabre rattling, a complementary force to economic interdependence is on the move. The great historical civilisations now appear to be embarked on a global process of convergence/competition. Interaction and mutual fertilisation in philosophy, culture, sport, education and travel are all everyday realities for the connected peoples of the world. On this fertile soil, a new global humanism could, in the long run, be the best shield against xenophobia, populism, and terrorism.
The creative society and the new technological revolution Issues paper by Ron Gass
50 Years of reconciling the economy, nature and society Ron Gass, OECD Yearbook 2011
NAEC and the Sustainable Development Goals: The Way Forward Mathilde Mesnard, OECD Insights
It’s not just the economy: society is a complex system too Gabriela Ramos, OECD Insights
Markus Schuller, founder of Panthera Solutions
The OECD Financial Roundtable on October 27 gathered together 20 representatives from the banking industry, fintech companies, and other financial services, as well as trade unions and other experts, in addition to the OECD delegations. The topic Fintech: Implications for the shape of the banking sector and challenges for policy makers allowed for an intense debate, especially among the 20 mostly private sector participants.
Ironically, both Fintechs and big banks lobbied for level playing fields, arguing that the respective “other” benefits from a regulatory advantage. It also became evident that the big banks try to justify their existence by highlighting their large capital and client base, expressing interest in cooperating with Fintechs by offering scalability. The latter is claiming to add a moment of disruption to financial services, opening it to a wider audience by democratising financial services. Whether the race is decided through competition or cooperation, regulatory “sandboxes” were presented as appreciated tools to level the playing field for both.
At Panthera, we are asset allocation specialists. As such, the Fintechs named Robo-Advisors in the field of asset management are of most interest for us. Inspired by the OECD FRT, we looked at whether Robo-Advisors deliver on the promise of adding a disruptive moment to our market segment. For that purpose we introduce two asset allocation penalties as indicators of disruption.
As we concluded in our article “Man at the centre of the investment decision”, the underperformance of professional investors versus the market portfolio is dominated by two structural factors, cost penalty and behavior gap penalty. Cost penalty is defined as the amount of under-performance caused by transaction costs, management fees, distribution fees, etc. Behavior gap penalty is the contribution of the human factor to a biased perception of reality caused by cognitive dissonances. Indicators of the penalty along the investment process can be certain market timing techniques, the application of flawed portfolio optimisation techniques, minimising career-risk as primary objective, and other expressions of cognitive biases.
As highlighted in a previous article, professionals managing other people´s money like regional banks, private banks, wealth managers, investment companies, (multi-) family offices, etc. are confronted for the first time in decades with a situation that forces them to:
- either grow aggressively in size to play a shaping role in the industry´s concentration process
- take on the competition with Robo-Advisor Fintechs in offering low-cost, fully automated wealth management solutions
- position themselves as leaders in an investment management niche via an innovation-driven competitive edge
- or accept to be squeezed out of the market.
Options 1 and 2 are out of reach for most of the investment service providers listed above as they are too small, too conservative, and/or too loaded with overhead costs. Assuming they want to survive, Option 3 is the only one left for the vast majority of professional money managers.
If Option 3 it is, getting trapped in pseudo-innovations like risk parity will be insufficient. Consequently, a learning organisation with a continuous improvement cycle is a prerequisite for establishing and maintaining the innovation-driven competitive edge of an investment process in the chosen niche. Many will not manage to reinvent themselves.
Like Big Pharma during the 2000s, which benefitted of windfall profits due to rent-seeking oligopolies, the asset management industry is increasingly dominated by a handful of multi-trillion-dollar players like Vanguard, BlackRock or State Street. Big Pharma was compensating its lack of innovation ability by re-investing its windfall profits into biotechs, refilling its product pipeline with the ideas of promising start-ups.
We see similar patterns occurring in the asset management industry, where Robo- Advisors convert from stand-alone B2C (business to consumer) providers to either white-label B2B2C providers or useful take-over candidates for the big players. With Vanguard launching its Personal Adviser Service already mid 2014, Charles Schwab following with its Schwab Intelligent Portfolios in 2015 and BlackRock taking over FutureAdvisor shortly after, the big players benefit from the momentum of digitalisation.
Here, the weakness of the Robo-Advisory start-ups become obvious. Their offering is lacking the disruptive element. All they offer is a more compelling user interface as improved distribution channel, lower production, and end-consumer costs compared to traditional money managers. In that, they are powerful enough to put pressure on the small-to-medium sized money managers, but have no leverage on disrupting the industry’s oligopoly. The explanation lies in four reasons:
- Robo-Advisors help investors to minimise their cost penalty. By still relying on traditional portfolio construction techniques of the first generation (Mean-Variance Optimization, MVO, etc.), they are offering identical services like thousands of established money managers. As such, they don’t offer disruptive innovation at the head of the asset management industry, but simply an evolution of presenting those methods – user interface – and distributing them differently – cheaper fee-model and no intermediaries along the distribution channel. Having talked to several Robo-Advisor executives, their responses can be summarized as: “we definitely have other issues than the portfolio construction methods used”. They consciously ignore, that, although their traditional techniques have been performing well since 2009 through a historical anomaly, they failed in raising significant assets under management because they lack competitive edge in portfolio construction.
- Related to reason 1 – neither the big players nor their emerging rivals are significantly reducing the behaviour gap penalty. Their rebalancing and cost average techniques are helping investors to apply some self-discipline. Though this does not hold investors back from overruling those techniques in times of turmoil, when the pro-cyclical temptation is shown to be the highest. This blind spot on the behaviour gap penalty is explained by the first generation portfolio construction models used, as for those, the human factor in investing does not exist. Unsurprisingly, this is less of a problem for the big players, given that the start-ups are not challenging them with taking the lead.
- The big players remain more competitive than Robo-Advisors because, while applying identical portfolio construction techniques, they can offer their advisory services even cheaper by still making money on the investment products chosen or through transaction fees. Charles Schwab, for instance, manages to charge zero fees for their Robo-Advisory service. It cannot get cheaper than that. Furthermore, the big players can scale their Robo-Advisory business through their enormous asset base.
- Both the big players with their Robo-Advisory front-end and the Robo-Advisor start-ups acknowledge in the meanwhile that retail and institutional investors need to have a human client advisor as back-up. By responding to that need, both are either hiring client advisors themselves or offering white label solutions of their platforms to RIAs/IFAs (registered investment advisors/independent financial advisers). Given the stronger balance sheets and better scalability of brand and existing customer base, the big players with Robo-Advisory front-ends enjoy a competitive edge.
In short, Robo-Advisor Fintechs are currently not revolutionising the asset management industry as they lack a disruptive element, but are helping accelerate the concentration process to produce even larger players.
Emerging regional economies have proved resilient to the slowdown in both economic growth and international trade seen in recent years. For Central America in particular, the challenge involved sustaining the impact of reduced demand for its products from key partners like the United States and the European Union – in 2015 extra regional trade decreased by 11.2%. Despite this, a growth of 1.5% in intraregional trade in the same period has helped the region maintain healthier levels of growth. In line with UNCTAD’s argument that regional trade is an essential part of developing countries’ inclusive development and poverty reduction, Central America has indeed made strides in developing its industries through increased value-added trade within its members. Taking advantage of specialization and complementarities between the different economies in the isthmus, the region has boosted regional production networks to enhance productivity.
After the United States, Central America is the second market for its own products – 32.7% of its exports remain within the region. And while main export products reaching external markets are commodity-intensive (with top products including coffee, sugar, bananas and plantains, and fruits) agroindustry and industrial products make up 90% of trade within the economies in the region. Industrial products alone make up 65.9% of the total, pointing to the increased value-added of intraregional trade in sectors like medicines; plastic packaging items; food preparations; bakery and pastry products; water, mineral and carbonated; paper containers; insecticides, rat poison and anti-rodents.
As trade within the region is more sophisticated and diverse than trade with external partners, economies in the region could leverage intraregional trade to move away from commodity-based economies. Market forces have indeed supported the development of regional value chains in the Central American market. Examples include Unipharm Group, a pharmaceutical company with presence in all countries in the region and in six other markets in Latin America and the Caribbean. With operations based in Guatemala and Mexico, Unipharm develops, produces and trades over 1,200 pharmaceutical products throughout the region.
Because the development of these chains has been spontaneous, however, most of the opportunities the private sector has focused on remain biased to trade between neighbouring countries. The textile production chain, for instance, developed full-package production capacity in Central America’s northern triangle (Guatemala, Honduras, and El Salvador). And most intraregional trade is carried out between neighboring countries – besides the above, for example, Costa Rica and Panama have more intensive commercial links than do more distant peers (see table).
Central America: Intraregional Exports per Country (2015) Participation rates (%)
|Exporting Country||Destination of exports|
|Costa Rica||El Salvador||Guatemala||Honduras||Nicaragua||Panama||Total|
|Total intraregional trade|
Source: Secretariat for Central American Economic Integration (SIECA)
Taking advantage of cross-border coordination and exploiting the benefits of economies of scale is crucial to advance in this line. Policymakers addressing this issue have focused on initiatives to reduce the time and cost of international freight, strengthen cross-border coordination, and implementing trade facilitation measures. This points in the right direction. As shown by the experience of the Association of Southeast Asian Nations (ASEAN), the consolidation of the intraregional market – which makes up 24% of total trade – has been a vital factor for it to become the world’s fastest-developing economic region.
A combination of tariff reform, a strong emphasis on the facilitation of trade flows, and a focus on services have strengthened ASEAN’s participation in global trade. But it has also supported the development of more sophisticated value chains. Singaporean instant food and beverage firm Super Group has expanded its production to over 300 different items for consumption throughout the region in 3 decades. This example also shows how the diversification and specialization through regional production networks increases and shapes the regional trade. Super developed joint-ventures in the Philippines in 2004, built a production base in Malaysia in 2005-2006 and in China in 2010-2011.
Services, too, have become more relevant in intraregional trade. Indonesian company WIKA expanded its operations and diversified its core business, from electrical supplies and pipe fitting to construction, engineering procurement and investments more broadly.
In fact, we often overlook the opportunities available in the region, and some key industries have the potential to help insert Central America in global trade more actively. But as we move forward, policymakers need to focus on raising productivity and nurturing the development of higher value-added production networks. To do this, Ministers of Trade and Economic Integration are already working on a region-wide agenda to facilitate trade, boost infrastructure investment, and foster the development of regional value chains. And they’re also working in tandem with the private sector to explore hitherto unforeseen opportunities. Adapting policies to accommodate these efforts will prove crucial in years to come, and allow the region to harness a larger market size and boost productive capacity.
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