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Reimagining finance and social markets
FILE PHOTO: REUTERS
With the Fed raising interest rates again to 5.25 percent per annum, the mood in the stock markets seems to suggest that after a mild recession, it may be time again for wine and roses. With so much liquidity out there looking for attractive returns, global volatility has again reached low levels as if it is the calm before the storm.
Outside finance, scientists are warning about the warming effects of the El Nino, as well as the possible disruption to the Gulf Stream, which basically takes the warm waters off Mexico up the East Coast of North America to the cooler waters of the Northern Atlantic. With global warming, the Greenland ice-cap melting, and melting of the carbon-rich permafrost, scientists think that the Gulf Stream collapse would have a devastating impact on global weather and agricultural food production. If food production is disrupted, on top of the reduction in wheat, grain and fertiliser exports due to the Ukraine war, expect inflation to come back – especially for the emerging markets.
Basically, financial markets do not seem to factor long-term climate change issues into short-term price considerations. We live for the moment. This raises the question: who are the markets really serving?
Finance, of course, is a virtual human creation to serve the real economy, but after four decades of global financialisation, it seems that the real economy is serving financial interests. Markets are getting more and more concentrated. A recent NBER study based on US FATCA reporting showed that a significant portion of offshore financial markets holding $12 trillion in financial assets were held on behalf of a fractional minority – the superrich who seek to avoid taxation, have secrecy and anonymity. The recent shakeout in banking makes big banks bigger than ever and the US equity run-up is led by the Magnificent Seven tech stocks.
How should we reimagine the role of money and finance? Finance is the glue that links those who work for a living (the job market) and those who rely on capital (comprising natural capital such as land and resources and human capital such as intellectual property rights). In both advanced and developing countries, there is a noticeable decline in the share of labour income as a percentage of GDP. In the United States, labour’s share declined from roughly 64 percent to 59.7 percent by 2019. Employee compensation as the percentage of GDP in Malaysia has fallen from 35.5 percent in 2017 to 32.4 percent in 2022.
This secular trend where capital is getting more than its share of global income relative to labour has meant that after the Covid-19 pandemic, labour is pushing for higher wages, which will lead to cost-push inflation. After decades of quantitative easing, when real interest rates (nominal minus inflation) were negative, capital was rewarded more than labour, because those who can borrow money cheaply are effectively doing so at the expense of poor savers and the majority labour force.
However, the hikes in interest rates since 2022 by the leading central banks are finally beginning to restore the balance between labour and capital. Higher positive real interest rates will begin to squeeze the asset bubbles, reduce speculation, and force businesses and consumers to be more efficient. Nevertheless, decades of financialisation have increased short-term consumption through growing debt, resulting in excess consumption and ruthless exploitation of natural capital. Climate warming, created through excess consumption and therefore carbon emission, is nature’s revenge on human excesses.
The Gulf Stream, which flows in a cycle throughout the Atlantic Ocean, reminds us that life moves circularly to restore balance. Warm water meets the cool water and marine life thrives from that natural mixing. Similarly, finance cannot be more and more concentrated without huge social consequences. Economists such as Thomas Piketty have delved into economic history to argue that inequality rises when r (the net rate of return to capital) is greater than g (the growth rate of output).
In the pre-Industrial Revolution era, land was the most important form of capital, which was why the French people rose against the monarchy and landed gentry in the French Revolution because of abuses in land rights and farm labour. Today, intellectual property is valued more than natural capital, because it preserves the rights of the minority who control the technology. With technology increasingly concentrated in large tech platform companies, inequality again has tended to worsen.
Traditionally, there have been two ways in which income and wealth has been redistributed to reduce inequality – higher taxation or voluntary charity by the rich. Islamic finance, for example, has the flow concept of zakat (the obligation of a Muslim to donate a certain proportion of wealth annually to charitable causes) and wakaf (or waqf ), which is the endowment of assets that are donated, bequeathed or purchased for being held in perpetual trust for general or specific charitable causes that are socially beneficial.
The Securities and Exchange Board of India (SEBI) has just launched a Social Stock Exchange (SSE) to institutionalise donations to social enterprises through the existing infrastructure of stock exchange listing, trading and clearing mechanisms. For the first time, a new financial infrastructure is provided to help donors (individuals or corporate) to fund qualified social enterprises to deliver social impact transparently and with accountability. The legal instrument is the trading of a zero-coupon, no-return financial instrument. The buyer or donor does not expect return, but does expect social impact. On top of serving profit-making enterprises, finance can for the first time serve enterprises that deliver social good.
We can now institutionalise wakaf in Islamic finance, because endowments in assets or claims on social enterprises can be achieved with accountability. Social enterprises will be audited to show that the funds they receive are ethically used as promised in their filed documents, much like listed companies file prospectuses. The SSE demonstrates how technological and institutional innovations can reshape finance to serve corporate and individual social responsibilities in imaginative and creative ways.
Central banker Paul Volcker used to say that the only useful banking innovation was the ATM cash machine. Today, SSEs could be the financial innovation that would revolutionise the market in social entrepreneurship.
Copyright: Asia News Network
Andrew Sheng
is a distinguished fellow of Asia Global Institute, University of Hong Kong, and chief adviser to the China Banking Regulatory Commission.
We can now institutionalise wakaf in Islamic finance, because endowments in assets or claims on social enterprises can be achieved with accountability. Social enterprises will be audited to show that the funds they receive are ethically used as promised in their filed documents, much like listed companies file prospectuses.