True and Fair Lecture, Worshipful Company of Chartered Accountants in England and Wales
“Globalization and its Discontents – With Acknowledgement to J. Stiglitz”
Fayez Choudhury | IFAC Chief Executive Officer
Sep 20, 2016 | Great Hall, Moorgate Place London | English
Firstly, my thanks for the kind invitation to be with you this evening, and to deliver the third True & Fair lecture. I think it’s a fine tradition to have commenced in these hallowed halls.
I’ve chosen to talk about something close to my heart: globalization—and our profession’s deep engagement in the global economy.
Now, as you might have gathered, my family didn’t hail from the shores of Great Britain.
I like to think that I am product of early globalization … born in Bangladesh, school in Australia, Singapore and the UK, University in the UK and then a working career in the UK, Africa, and the USA. My wife has an even more international background. But, our kids—born and brought up in the USA—are smarter, and more globally focused, than we ever were at their age.
So from wherever we hail, the truth is that most of us are beneficiaries of this great wonder … globalization … the greatest source of wealth creation that humanity has ever seen. However, rapid wealth creation has also raised major questions about fairness and inequality in society.
Those of you with a keen eye will have noted my acknowledgement to Joseph Stiglitz, Nobel Prize-winning Economist, and former Chief Economist at my old shop, the World Bank.
Published in 2002, his book Globalization and its Discontents became a US best-seller. Fourteen years later, some of his warnings are more prescient than ever.
In my time this evening, I’m going to set out my lecture in three parts.
- I will start by outlining the inexorable Eastward shift in global trade and commerce;
- I’ll then highlight some of the deep societal risks we face as a consequence of this extraordinary and rapid change; and
- I’ll conclude by putting the profession at the heart of the global economy, and talk more about the vital importance of the role we can and must play.
First, the Business Move from East to West
The desire to trade and to create wealth is of course part of the human condition—and so, it appears, is the desire to look east for new trade and commerce opportunities.
Ancient Europe went to the Far East via the Silk Road; and then fast clippers made sea routes increasingly profitable, leading to the rise of entities like the East India Company. Columbus of course sailed west in search of the New World, but the point is this: as prosperity grew, so did innovation.
Steam, internal combustion, and then jet engines provided new horsepower that made moving things around our planet easier, faster, and more profitable. And finally, the Internet and smart phones have connected consumers and businesses in ways that continue to change almost daily.
Perhaps what has been most surprising is the pace—and the uneven pace—at which change has occurred. In 1960 when Ghana became independent, its GDP was greater than that of South Korea—and of course we know what today’s picture is.
But it is the rise of China—and indeed the BRICs generally—over the past 20 years that has changed the global economy forever.
China only began opening its economy to international trade in the late 1970s. In 1972, annual bilateral trade between the United States and China was less than $100 million.1 Two-way investment in each other’s markets was close to zero. And only a handful of American jobs relied on Chinese trade.
Today, well over a $650 billion dollars of goods and services flow between them and nearly a million US jobs depend on producing goods and services sold to China. Tellingly, of that $650 billion, $500 billion is US imports from China and $150 billion is US exports to China.
There’s a reason why FedEx—the company that invented airborne logistics and is the world’s largest express freight carrier—is considered a “bell weather stock” of the US economy.
Simply: when the economy is doing well, more people are buying and selling goods, and therefore are shipping more packages. The company’s stock price chart closely mirrors a chart of US GDP.
Three years after Stiglitz published his book in 2002, FedEx announced it would redraw the map of global aviation logistics by relocating its Asia Pacific Hub from Subic Bay in the Philippines to Guangzhou, China.
At the time, Fred Smith, the company’s CEO and President said “we need to go where our customers want us to go.”
Guangzhou is on the Pearl River Delta—a region that produces over a third of China’s exports. It’s known as the world’s factory floor. The World Bank says the delta is also the world’s largest urban area. At end of 2013, its 9 largest cities were home to more than 57m souls.
But this region’s story is more than just a microcosm of China’s extraordinary rise. It’s a telling example of just how far, and how fast, globalization has arrived.
From China to Bangladesh, to India and to Vietnam, to Indonesia and Malaysia, and places in between, factories are assembling products sold and bought by Western consumers in shops, and online.
FedEx didn’t just move its Asia hub to the Pearl River Delta because of China’s economic growth, but because it recognized that the intra-Asian market offers immense potential as its middle classes grow, and their consumption increases.
China’s “trade awakening” was some 35 years ago. In that time, the cities of the Pearl River Delta have transformed into industrial powerhouses producing garments, toys, electronics, and textiles for the world. And in the last decade, it has begun to see advanced manufacturing, high-tech, and service sector industries emerge.
And I wonder what Mao would have made of the fact that in 2013 China overtook the United States as the biggest sales market for Rolls Royce Motor Cars. More than 1,000 Phantoms, Ghosts, and Wraiths made it to China that year.
But the spectral names of Rolls’ cars may have come back to haunt the marque.
Last year, the brand’s sales crashed by 54%, dropping China to third behind the USA and the Middle East.
The story of “why” Rolls’ sales dropped is far more interesting. And it leads me to part two of my discussion tonight: vox populi risk, and globalization’s discontents.
At the beginning of this year in a joint paper, Citigroup’s Global Chief Political Analyst, and the former Director of Carnegie Europe, coined the phrase “vox populi risk”—which this audience will know is from the Latin “voice of the people.”
The drivers for Citi’s paper were simple. Pricing geopolitical risk is hugely important to investors, and always has been. The Dutch East India Company was the first listed company because it wanted to share the risk of losing its ships to piracy.
But Citi’s paper got a lot of media attention because it declared the demise of the assumptions of the post-Cold War era in which most money managers and investors have grown up.
Citi defines four main Vox Populi risk categories:
- Election risk;
- “Flash mob democracy mass protest risk”;
- Referendum risk; and
- Geopolitical risk.
Beyond the Arab Spring color revolutions that began in mid-2009 with the Green Revolution in Iran, the Occupy Wall Street (and, indeed, St Pauls’ Cathedral forecourt) movement received global interest. Railing against a wide range of economic concerns, the movement was at its heart a disorganized, inchoate protest against globalization, “banker greed,” and general social and economic inequality.
Meanwhile, here in Europe, the unthinkable began to solidify into the plausible. And then the plausible became shocking reality.
From Russia’s annexation of Crimea and its proxy war in Ukraine, to the Scottish referendum which nearly changed forever the UK’s composition, to the restless Catalonians. And of course—Brexit: an earthquake.
Wherever we look, it appears society and politics are becoming more and more discontent. And with the fracturing of consensus—the abandonment of the sensible center—we are seeing elections and politicians moving further and further to the extremes.
Outsiders who say and do outrageous things are suddenly mainstream. Let’s take a quick look:
- In Italy: The comedian Beppe Grillo’s 5-Star Movement;
- In France: Marine LePen’s National Front;
- In the UK: Nigel Farage’s successful UKIP campaign for Brexit; and to a lesser extent, the hard Left takeover of Her Majesty’s Opposition;
- In Austria: a re-run of the Presidential election soon—a re-run awarded by the courts after an appeal by the Far Right candidate, beaten in the original vote by a scant 31,000 votes;
- In Germany: the far right Alternative for Germany party which has just achieved the 5% of the electorate vote it needed to gain seats in the Bundestag; and
- Of course, in the USA, there’s Donald Trump and his wall-building.
Whether left or right, what unites them all is a mix of populism, nationalism, and an aversion to globalization.
And you have to wonder: why is that people are falling for their siren songs? What happened to looking for smart politicians who could build consensus around centrist ideas?
Partly, the answer appears to be that we’re in something of a perfect “discontent-producing” storm.
New, non-mainstream politicians espousing populist, nationalist, anti-immigration views are either a response to—or cause of—more protests and referenda.
This hotbed of public angst, as Citi’s paper points out, is converging with stagnant global growth, high public expectation that governments should do something about it, but limited public trust that they can do something about it; and, meanwhile, many governments have either limited structural or fiscal capacity for major reform.
A few minutes ago, I mentioned the 50% drop in sales for Rolls Royce cars in China. And I also mentioned the transformation of the Pearl River Delta into the world’s factory floor.
Rolls Royce saw a slump in sales because President Xi’s government launched a crackdown on corruption. Conspicuous consumption was suddenly out.
Meanwhile, in 2010 at a Foxconn factory in Shenzen—one of the Pearl River Delta’s largest cities—18 workers attempted suicide to protest working conditions. Fourteen succeeded. They were among 400,000 employees at the factory churning out smartphones and tablets sold by a range of tech providers. They made 137,000 iPhones a day, or around 90 a minute.
And as your BBC reported last year, on the outskirts, the largest industrial city in inner-Mongolia, the rush for the rare earths that enable production of the world’s smart phones has created a vast toxic sludge “lake.”
Elsewhere in the world, the collapse of a garment assembling factory in my native country, Bangladesh, made global news because it killed more than 1,100 workers. Shoddy construction; shoddy governance; shoddy greedy owners who wanted to cash in on globalization’s benefits.
It’s not just manufactured items being assembled in a global logistics chain. Labor has been globalized too. The sky-scrapers announcing Dubai’s rapid growth and Qatar’s entry to the world’s soccer stage were largely constructed by imported labor, the poor treatment of whom has created international outrage.
Extraordinarily rapid globalization, and the creation of a vast interconnected logistic chain, has wrought remarkable gains to the world’s economy, but it has also come with great human and environmental costs.
Back in the United States, Goldman Sachs’ economics research team produced a note in July this year entitled “The Workforce: Is There an App for That?”
Focused just on US employment and structural change in the economy, it identified a decline in labor demand for routine manual occupations over the last 15 years. This has likely contributed to the long-term decline of prime-age participation rates for less-educated men.
And here in the United Kingdom, citing research from Credit Suisse’s Global Wealth Databook, Oxfam last week highlighted the wealth disparity: the richest 1% owns 20 times more than the UK’s poorest 20%.
The left behind. The disenfranchised. The exploited.
The truth is, I fear, that we have taken for granted the stability globalization has generated, and which has delivered among the most peaceful and prosperous years in world history.
Following Brexit, Prime Minister May has made much of the need to bridge the gap between these “haves and the have-nots.” She is right. I believe she has been also been right to highlight corporate governance as being part of the solution.
Whichever way you cut it, globalization has created a sizeable number of citizens who are suspicious of it; mistrustful of incompetent and corrupt politicians; and fearful of immigration and foreign-born workers.
In their desire for change, they see renegade politicians as authentic voices, railing against the mysterious elites and vested interests.
And that gives nationalist-leaning anti-globalization and anti-immigration populists a platform from which they are garnering a surprisingly swift and large following of “discontents.”
As Brexit shows, public concerns about mass immigration and national way of life can no longer be dismissed as fringe issues. They are very much mainstream and we must do better at addressing those concerns.
Which brings me to part three: what the accounting profession is doing to support the global economy, and to support fairness.
While of course I don’t pretend we have all the answers, what I can do is make a great case for the profession’s role in the global economy.
And in doing so, I want to impress upon you the importance of speaking out about what it is we do, and especially now with anti-globalization and nationalism on the rise.
Last year, IFAC engaged the independent, and highly respected UK consultancy Cebr, to help us draw the profile of the global accountancy profession.
They estimate that there are almost 3 million licensed and regulated professional accountants who IFAC ultimately represents through its PAOs, like the ICAEW.
These accountants are estimated to have a value-add to the global economy of almost a quarter trillion US dollars.
And the broader accountancy ecology—people identified by national employment statistics as working in accountancy or a related or supporting field—contributes well over half a trillion US dollars a year.
Their research also shows strong correlations between the share of accountants in the work force to growth in GDP; to rankings of the Human Development Index; and to the rankings for a country in Transparency International’s Corruption Index.
They are significant numbers, and in part they reflect why ours is a voice that is credible, significant, and central to discussions about the global economy.
And we are part of those discussions. IFAC, on a regular basis on behalf of the global profession, is in contact with multi-lateral partners including the OECD, UNCTAD, the IMF, the World Bank and other development banks, aid agencies, and international regulatory agencies. Meanwhile, our G-20 submission this year was focused on how to build trust and integrity into the heart of the global economy.
But individually, and collectively, we need to do more.
There are a number of significant areas which are critical to the national and global landscapes where the accountancy profession has knowledge and credibility, and where our voices can be influential and must be heard.
They are all also issues which contribute in some way to the atmosphere of angst and distrust which underpin much of the discontent that I talked about earlier. I would like to touch on some of them this evening.
Smart Regulation: IFAC undertook a global survey last year on the state of regulation around the world. We had some 350 respondents from all the continents representing a wide array of sectors. We followed this up with roundtables in Hong Kong and then London, the latter in partnership with ICAEW. The messages that came back were strong and surprisingly consistent. Regulation was overly complex, costly, fragmented and stifling innovation and growth. No one argues that regulation is not needed. But what is needed is to have smarter regulation, fit for purpose, evidence based, developed in consultation with the regulated and other key stakeholders, and subject to periodic ex post impact analysis. The accountancy profession needs to be a strong voice on these issues.
Fairness in Taxation: I mentioned earlier the public sentiment about corporations not paying their fair share, at the expense of citizens—Edward Heath’s “the unacceptable face of capitalism.” This is an extremely complex area requiring the balancing of concepts of fairness and maintaining national competitiveness on the one hand, while maintaining a level playing field and transparency at the global level. The OECD BEPS project is a great start, signaling the international community’s willingness to collaborate. But the proof of the pudding will be in the eating, and whether the consensus achieved can hold when things move to the implementation stage is, many fear, doubtful. Taxation is a specialism that is squarely in the bailiwick of the accountancy profession: we need to be a strong voice on this issue.
Fraud and Corruption: The cancer of corruption—as it is aptly called—is endemic, and Transparency International estimates that it can cost global GDP up to USD$1 trillion a year. This of course is not a new issue, but one which has received, fortunately, new prominence on the international stage. The accountancy profession is well placed to be part of the effort. At the entity level we are skilled at forensic accounting and well versed on effective corporate governance arrangements and whistleblower policies. At the national and international levels, we can help in the development of effective regimes to prevent and detect corruption. We need to be a strong voice on this issue.
A High Performing Public Sector: Participation in private sector funding is entirely optional: we choose whether we wish to invest or transact with a private sector entity or not. Participation in a government’s finances is not: we are obliged under the force of law to pay all taxes and duties the government levies on us. Meanwhile, the government regulates the private sector to ensure that they maintain, inter alia, appropriate standards of financial transparency and probity. But who regulates government in these areas? The answer is the government itself, and in most cases in the area of public sector financial management, it allows itself far more latitude and laxness then it demands from the private sector, which it regulates. In the significant majority of countries, the consequence is poor financial information; poor decision making; huge liabilities being handed down to future generations; and no real means to hold elected officials accountable. We need to be a strong voice on this issue.
Supporting Small- and Medium-Sized Enterprises: It is well established that SMEs provide by far the bulk of private sector employment and private sector growth. When we see that the public is increasingly intolerant of the dominance of big business, and when the economists tell us that the increasing disparity in income distribution is a source of significant risk to the economy and the social equilibrium, then clearly nurturing the growth of the SME sector is a priority. There is empirical evidence from around the world that when SMEs are advised by professional business advisors they perform significantly better. The accountancy profession and the breadth of business services they provide are thus crucial to growth in the SME sector. We must join in advocating for issues which can help stimulate growth of this sector such as reduction of burdensome, disproportionate regulation; easier and more innovative access to financing; and reduced vulnerability to being victims of fraud and corruption. We need to be a strong voice on this issue.
Beyond Financial Reporting: Investors and other interested parties increasingly find that financial reporting alone does not capture the more holistic information that is wanted about an entity. The emphasis on financial results, without the accompanying narrative of how those results are achieved, in part contribute to an increasing sense that corporate entities are driven by the notion of shareholder value and financial returns, rather than acknowledging a broader responsibility to a wider set of stakeholders. Integrated Reporting (or IR) is gaining more and more attention from reporting entities and stock markets around the world for telling this broader story of how entities add value by utilizing not only financial capital but also human capital, natural capital, manufacturing capital and so on. This enhanced notion of transparency and accountability would be a significant step forward. We need to be a strong voice on this issue.
But to speak out with legitimacy and credibility on these issues we also have to mindful of our own profession, and continue our efforts to create a global profession bound by common standards and a strong ethical code. As a profession, we are probably the most intensely self-regulating one. IFAC administers a compliance program that ensure all our member organizations around the world comply, or are on a structured journey toward complying, with our seven statements of membership obligations. We also monitor the capacity of the national professional accountancy organizations to license and regulate the local profession to appropriate standards. We advocate for the importance of a strong accountancy profession as an underpinning for economic development to the donor agencies, and systematically interact with them to partner on capacity building efforts around the world. A globalized world needs a globalized accountancy profession—and we are working on it.
So there you have it.
This apparent retreat from globalism, and globalization—and the lack of trust in institutions that is precipitating it—is something about which we must be acutely aware.
As I’ve said, IFAC’s goal is to forge a global profession, bound by global standards and acting in the public interest.
But if the move to looking inwards—to rebuilding national boundaries or walls, to short-term national interest—instead of acting in the global public interest, becomes entrenched, then our work becomes that much harder.
It has been a pleasure to be with you this evening—and to expand upon a very contemporary problem, that has been decades in the making.
In this third True & Fair lecture, I have attempted to examine both the truth and the fairness of globalization.
Yes, globalization has major problems. But the alternative is far, far worse.
I believe it is incumbent on all of us, in the public interest, to continue to speak the language of common ground, collaboration, and global public interest.
Ours is a powerful voice, and it needs not only to be an antidote to demagoguery and political opportunism—it must be part of a far more important discussion: Globalization 2.0.