Revisiting Financing Blue Economy

Blue Economy has suffered a definitional crisis ever since it started doing the rounds almost around the turn of the century. So much has it been plagued by this crisis, that even a working definition is acceptable only contextually, and is liable to paradigmatic shifts both littorally and political-economically. 

The United Nations defines Blue Economy as: 

A range of economic sectors and related policies that together determine whether the use of oceanic resources is sustainable. The “Blue Economy” concept seeks to promote economic growth, social inclusion, and the preservation or improvement of livelihoods while at the same time ensuring environmental sustainability of the oceans and coastal areas. 

This definition is subscribed to by even the World Bank, and is commonly accepted as a standardized one since 2017. However, in 2014, United Nations Conference on Trade and Development (UNCTAD) had called Blue Economy as

The improvement of human well-being and social equity, while significantly reducing environmental risks and ecological scarcities…the concept of an oceans economy also embodies economic and trade activities that integrate the conservation and sustainable use and management of biodiversity including marine ecosystems, and genetic resources.

Preceding this by three years, the Pacific Small Islands Developing States (Pacific SIDS) referred to Blue Economy as the 

Sustainable management of ocean resources to support livelihoods, more equitable benefit-sharing, and ecosystem resilience in the face of climate change, destructive fishing practices, and pressures from sources external to the fisheries sector. 

As is noteworthy, these definitions across almost a decade have congruences and cohesion towards promoting economic growth, social inclusion and the preservation or improvement of livelihoods while ensuring environmental sustainability of oceanic and coastal areas, though are markedly mitigated in domains, albeit, only definitionally, for the concept since 2011 till it has been standardized in 2017 doesn’t really knock out any of the diverse components, but rather adds on. Marine biotechnology and bioprospecting, seabed mining and extraction, aquaculture, and offshore renewable energy supplement the established traditional oceanic industries like fisheries, tourism, and maritime transportation into a giant financial and economic appropriation of resources the concept endorses and encompasses. But, a term that threads through the above definitions is sustainability, which unfortunately happens to be another definitional dead-end. But, mapping the contours of sustainability in a theoretical fashion would at least contextualize the working definition of Blue Economy, to which initiatives of financial investments, legal frameworks, ecological deflections, economic zones and trading lines, fisheries, biotechnology and bioprospecting could be approvingly applied to. Though, as a caveat, such applications would be far from being exhaustive, they, at least potentially cohere onto underlying economic directions, and opening up a spectra of critiques. 

If one were to follow global multinational institutions like the UN and the World Bank, prefixing sustainable to Blue Economy brings into perspective coastal economy that balances itself with long-term capacity of assets, goods and services and marine ecosystems towards a global driver of economic, social and environmental prosperity accruing direct and indirect benefits to communities, both regionally and globally. Assuming this to be true, what guarantees financial investments as healthy, and thus proving no risks to oceanic health and rolling back such growth-led development into peril? This is the question that draws paramount importance, and is a hotbed for constructive critique of the whole venture. The question of finance, or financial viability for Blue Economy, or the viability thereof. What is seemingly the underlying principle of Blue Economy is the financialization of natural resources, which is nothing short of replacing environmental regulations with market-driven regulations. This commodification of the ocean is then packaged and traded on the markets often amounting to transferring the stewardship of commons for financial interests. Marine ecology as a natural resource isn’t immune to commodification, and an array of financial agents are making it their indispensable destination, thrashing out new alliances converging around specific ideas about how maritime and coastal resources should be organized, and to whose benefit, under which terms and to what end? A systemic increase in financial speculation on commodities mainly driven by deregulation of derivative markets, increasing involvement of investment banks, hedge funds and other institutional investors in commodity speculation and the emergence of new instruments such as index funds and exchange-traded funds. Financial deregulation has successfully transformed commodities into financial assets, and has matured its penetration into commodity markets and their functioning. This maturity can be gauged from the fact that speculative capital is structurally intertwined with productive capital, which in the case of Blue Economy are commodities and natural resources, most generically. 

But despite these fissures existing, the international organizations are relentlessly following up on attracting finances, and in a manner that could at best be said to follow principles of transparency, accountability, compliance and right to disclosure. The European Commission (EC) is partnering with World Wildlife Fund (WWF) in bringing together public and private financing institutions to develop a set of Principles of Sustainable Investment within a Blue Economy Development Framework. But, the question remains: how stringently are these institutions tied to adhering to these Principles? 

Investors and policymakers are increasingly turning to the ocean for new opportunities and resources. According to OECD projections, by 2030 the “blue economy” could outperform the growth of the global economy as a whole, both in terms of value added and employment. But to get there, there will need to be a framework for ocean-related investment that is supported by policy incentives along the most sustainable pathways. Now, this might sound a bit rhetorical, and thus calls for unraveling. the international community has time and again reaffirmed its strong commitment to conserve and sustainably use the ocean and its resources, for which the formations like G7 and G20 acknowledge scaling up finance and ensuring sustainability of such investments as fundamental to meeting their needs. Investment capital, both public and private is therefore fundamental to unlocking Blue Economy. Even if there is a growing recognition that following “business s usual” trajectory neglects impacts on marine ecosystems entailing risks, these global bodies are of the view that investment decisions that incorporate sustainability elements ensure environmentally, economically and socially sustainable outcomes securing long-term health and integrity of the oceans furthering shared social, ecological and economic functions that are dependent on it. That financial institutions and markets can play this pivotal role only complicates the rhetorics further. Even if financial markets and institutions expressly intend to implement Sustainable Development Goals (SDGs), in particular Goal 14 which deals with conservation and sustainable use of the oceans, such intentions to be compliant with IFC performance Standards and EIB Environmental and Social Principles and Standards. 

So far, what is being seen is small ticket size deals, but there is a potential that it will shift on its axis. With mainstream banking getting engaged, capital flows will follow the projects, and thus the real challenge lies in building the pipeline. But, here is a catch: there might be private capital in plentiful seeking impact solutions and a financing needs by projects on the ground, but private capital is seeking private returns, and the majority of ocean-related projects are not private but public goods. For public finance, there is an opportunity to allocate more proceeds to sustainable ocean initiatives through a bond route, such as sovereign and municipal bonds in order to finance coastal resilience projects. but such a route could also encounter a dead-end, in that many a countries that are ripe for coastal infrastructure are emerging economies and would thus incur a high cost of funding. A de-risking is possible, if institutions like the World Bank, or the Overseas Private Investment Corporation undertake credit enhancements, a high probability considering these institutions have been engineering Blue Economy on a priority basis. Global banks are contenders for financing the Blue Economy because of their geographic scope, but then are also likely to be exposed to a new playing field. The largest economies by Exclusive Economic Zones, which are sea zones determined by the UN don’t always stand out as world’s largest economies, a fact that is liable to drawing in domestic banks to collaborate based on incentives offered  to be part of the solution. A significant challenge for private sector will be to find enough cash-flow generating projects to bundle them in a liquid, at-scale investment vehicle. One way of resolving this challenge is through creating a specialized financial institution, like an Ocean Sustainability Bank, which can be modeled on lines of European Bank for Reconstruction and Development (EBRD). The plus envisaged by such a creation is arriving at scales rather quickly. An example of this is by offering a larger institutional-sized approach by considering a coastal area as a single investment zone, thus bringing in integrated infrastructure-based financing approach. With such an approach, insurance companies would get attracted by looking at innovative financing for coastal resiliency, which is a part and parcel of climate change concerns, food security, health, poverty reduction and livelihoods. Projects having high social impact but low/no Internal Rate of Return (IRR) may be provided funding, in convergence with Governmental schemes. IRR is a metric used in capital budgeting to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is the difference between the present value of cash inflows and present value of cash outflows over a period of time. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.” The use of “internal” refers to the omission of external factors, such as the cost of capital or inflation, from the calculation. The biggest concern, however appears in the form of immaturity of financial markets in emerging economies, which are purported to be major beneficiaries of Blue Economy. 

The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. Things begin to get a bit more complicated when financialization interferes with environment and natural resources, for then the losses are not just merely on a financial platform alone. Financialization has played a significant role in the recent price shocks in food and energy markets, while the wave of speculative investment in natural resources has and is likely to produce perverse environmental and social impact. Moreover, the so-called financialization of environmental conservation tends to enhance the financial value of environmental resources but it is selective: not all stakeholders have the same opportunities and not all uses and values of natural resources and services are accounted for. 

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Skeletal of the Presentation on AIIB and Blue Economy in Mumbai during the Peoples’ Convention on 22nd June 2018

Main features in AIIB Financing

1. investments in regional members
2. supports longer tenors and appropriate grace period
3. mobilize funding through insurance, banks, funds and sovereign wealth (like the China Investment Corporation (CIC) in the case of China)
4. funds on economic/financial considerations and on project benefits, eg. global climate, energy security, productivity improvement etc.

Public Sector:

1. sovereign-backed financing (sovereign guarantee)
2. loan/guarantee

Private Sector:

1. non-sovereign-backed financing (private sector, State Owned Enterprises (SOEs), sub-sovereign and municipalities)
2. loans and equity
3. bonds, credit enhancement, funds etc.

—— portfolio is expected to grow steadily with increasing share of standalone projects from 27% in 2016 to 39% in 2017 and 42% in 2018 (projected)

—— share of non-sovereign-backed projects has increased from 1% in 2016 to 36% of portfolio in 2017. share of non-sovereign-backed projects is projected to account for about 30% in 2018

Why would AIIB be interested in the Blue Economy?

1. To appropriate (expropriate) the potential of hinterlands
2. increasing industrialization
3. increasing GDP
4. increasing trade
5. infrastructure development
6. Energy and Minerals in order to bring about a changing landscape
7. Container: regional collaboration and competition

AIIB wishes to change the landscape of infrastructure funding across its partner countries, laying emphasis on cross-country and cross-sectoral investments in the shipping sector — Yee Ean Pang, Director General, Investment Operations, AIIB.

He also opined that in the shipping sector there is a need for private players to step in, with 40-45 per cent of stake in partnership being offered to private players.

Projects aligned with Sagarmala are being considered for financial assistance by the Ministry of Shipping under two main headings:

1. Budgetary Allocations from the Ministry of Shipping

    a. up to 50% of the project cost in the form of budgetary grant

    b. Projects having high social impact but low/no Internal Rate of Return (IRR) may be provided funding, in convergence with schemes of other central line ministries. IRR is a metric used in capital budgeting to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is the difference between the present value of cash inflows and present value of cash outflows over a period of time. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.” The use of “internal” refers to the omission of external factors, such as the cost of capital or inflation, from the calculation.

2. Funding in the form of equity by Sagarmala Development Co. Ltd.

    a. SDCL to provide 49% equity funding to residual projects

    b. monitoring is to be jointly done by SDCL and implementing agency at the SPV level

    c.  project proponent to bear operation and maintenance costs of the project

     i. importantly, expenses incurred for project development to be treated as part of SDCL’s equity contribution

     ii. preferences to be given to projects where land is being contributed by the project proponent

What are the main financing issues?

1. Role of MDBs and BDBs for promotion of shipping sector in the country
2. provision of long-term low-cost loans to shipping companies for procurement of vessels
3. PPPs (coastal employment zones, port connectivity projects), EPCs, ECBs (port expansion and new port development), FDI in Make in India 2.0 of which shipping is a major sector identified, and conventional bank financing for port modernization and port connectivity

the major constraining factors, however, are:

1. uncertainty in the shipping sector, cyclical business nature

2. immature financial markets

Financial Fragility in the Margins. Thought of the Day 114.0

If micro-economic crisis is caused by the draining of liquidity from an individual company (or household), macro-economic crisis or instability, in the sense of a reduction in the level of activity in the economy as a whole, is usually associated with an involuntary outflow of funds from companies (or households) as a whole. Macro-economic instability is a ‘real’ economic phenomenon, rather than a monetary contrivance, the sense in which it is used, for example, by the International Monetary Fund to mean price inflation in the non-financial economy. Neo-classical economics has a methodological predilection for attributing all changes in economic activity to relative price changes, specifically the price changes that undoubtedly accompany economic fluctuations. But there is sufficient evidence to indicate that falls in economic activity follow outflows of liquidity from the industrial and commercial company sector. Such outflows then lead to the deflation of economic activity that is the signal feature of economic recession and depression.

Let us start with a consideration of how vulnerable financial futures market themselves are to illiquidity, since this would indicate whether the firms operating in the market are ever likely to need to realize claims elsewhere in order to meet their liabilities to the market. Paradoxically, the very high level of intra-broker trading is a safety mechanism for the market, since it raises the velocity of circulation of whatever liquidity there is in the market: traders with liabilities outside the market are much more likely to have claims against other traders to set against those claims. This may be illustrated by considering the most extreme case of a futures market dominated by intra-broker trading, namely a market in which there are only two dealers who buy and sell financial futures contracts only between each other as rentiers, in other words for a profit which may include their premium or commission. On the expiry date of the contracts, conventionally set at three-monthly intervals in actual financial futures markets, some of these contracts will be profitable, some will be loss-making. Margin trading, however, requires all the profitable contracts to be fully paid up in order for their profit to be realized. The trader whose contracts are on balance profitable therefore cannot realize his profits until he has paid up his contracts with the other broker. The other broker will return the money in paying up his contracts, leaving only his losses to be raised by an inflow of money. Thus the only net inflow of money that is required is the amount of profit (or loss) made by the traders. However, an accommodating gross inflow is needed in the first instance in order to make the initial margin payments and settle contracts so that the net profit or loss may be realized.

The existence of more traders, and the system for avoiding counterparty risk commonly found in most futures market, whereby contracts are made with a central clearing house, introduce sequencing complications which may cause problems: having a central clearing house avoids the possibility that one trader’s default will cause other traders to default on their obligations. But it also denies traders the facility of giving each other credit, and thereby reduces the velocity of circulation of whatever liquidity is in the market. Having to pay all obligations in full to the central clearing house increases the money (or gross inflow) that broking firms and investors have to put into the market as margin payments or on settlement days. This increases the risk that a firm with large net liabilities in the financial futures market will be obliged to realize assets in other markets to meet those liabilities. In this way, the integrity of the market is protected by increasing the effective obligations of all traders, at the expense of potentially unsettling claims on other markets.

This risk is enhanced by the trading of rentiers, or banks and entrepreneurs operating as rentiers, hedging their futures contracts in other financial markets. However, while such incidents generate considerable excitement around the markets at the time of their occurrence, there is little evidence that they could cause involuntary outflows from the corporate sector on such a scale as to produce recession in the real economy. This is because financial futures are still used by few industrial and commercial companies, and their demand for financial derivatives instruments is limited by the relative expense of these instruments and their own exposure to changes in financial parameters (which may more easily be accommodated by holding appropriate stocks of liquid assets, i.e., liquidity preference). Therefore, the future of financial futures depends largely on the interest in them of the contemporary rentiers in pension, insurance and various other forms of investment funds. Their interest, in turn, depends on how those funds approach their ‘maturity’.

However, the decline of pension fund surpluses poses important problems for the main securities markets of the world where insurance and pension funds are now the dominant investors, as well as for more peripheral markets like emerging markets, venture capital and financial futures. A contraction in the net cash inflow of investment funds will be reflected in a reduction in the funds that they are investing, and a greater need to realize assets when a change in investment strategy is undertaken. In the main securities markets of the world, a reduction in the ‘new money’ that pension and insurance funds are putting into those securities markets will slow down the rate of growth of the prices in those markets. How such a fall in the institutions’ net cash inflow will affect the more marginal markets, such as emerging markets, venture capital and financial futures, depends on how institutional portfolios are managed in the period of declining net contributions inflows.

In general, investment managers in their own firms, or as employees of merchant or investment banks, compete to manage institutions’ funds. Such competition is likely to increase as investment funds approach ‘maturity’, i.e., as their cash outflows to investors, pensioners or insurance policyholders, rises faster than their cash inflow from contributions and premiums, so that there are less additional funds to be managed. In principle, this should not affect financial futures markets, in the first instance, since, as argued above, the short-term nature of their instruments and the large proportion in their business of intra-market trade makes them much less dependent on institutional cash inflows. However, this does not mean that they would be unaffected by changes in the portfolio preferences of investment funds in response to lower returns from the main securities markets. Such lower returns make financial investments like financial futures, venture capital and emerging markets, which are more marginal because they are so hazardous, more attractive to normally conservative fund managers. Investment funds typically put out sections of portfolios to specialist fund managers who are awarded contracts to manage a section according to the soundness of their reputation and the returns that they have made hitherto in portfolios under their management. A specialist fund manager reporting high, but not abnormal, profits in a fund devoted to financial futures, is likely to attract correspondingly more funds to manage when returns are lower in the main markets’ securities, even if other investors in financial futures experienced large losses. In this way, the maturing of investment funds could cause an increased inflow of rentier funds into financial futures markets.

An inflow of funds into a financial market entails an increase in liabilities to the rentiers outside the market supplying those funds. Even if profits made in the market as a whole also increase, so too will losses. While brokers commonly seek to hedge their positions within the futures market, rentiers have much greater possibilities of hedging their contracts in another market, where they have assets. An inflow into futures markets means that on any settlement day there will therefore be larger net outstanding claims against individual banks or investment funds in respect of their financial derivatives contracts. With margin trading, much larger gross financial inflows into financial futures markets will be required to settle maturing contracts. Some proportion of this will require the sale of securities in other markets. But if liquidity in integrated cash markets for securities is reduced by declining net inflows into pension funds, a failure to meet settlement obligations in futures markets is the alternative to forced liquidation of other assets. In this way futures markets will become more fragile.

Moreover, because of the hazardous nature of financial futures, high returns for an individual firm are difficult to sustain. Disappointment is more likely to be followed by the transfer of funds to management in some other peripheral market that shows a temporary high profit. While this should not affect capacity utilization in the futures market, because of intra-market trade, it is likely to cause much more volatile trading, and an increase in the pace at which new instruments are introduced (to attract investors) and fall into disuse. Pension funds whose returns fall below those required to meet future liabilities because of such instability would normally be required to obtain additional contributions from employers and employees. The resulting drain on the liquidity of the companies affected would cause a reduction in their fixed capital investment. This would be a plausible mechanism for transmitting fragility in the financial system into full-scale decline in the real economy.

The proliferation of financial futures markets has only had been marginally successful in substituting futures contracts for Keynesian liquidity preference as a means of accommodating uncertainty. A closer look at the agents in those markets and their market mechanisms indicates that the price system in them is flawed and trading hazardous risks in them adds to uncertainty rather than reducing it. The hedging of financial futures contracts in other financial markets means that the resulting forced liquidations elsewhere in the financial system are a real source of financial instability that is likely to worsen as slower growth in stock markets makes speculative financial investments appear more attractive. Capital-adequacy regulations are unlikely to reduce such instability, and may even increase it by increasing the capital committed to trading in financial futures. Such regulations can also create an atmosphere of financial security around these markets that may increase unstable speculative flows of liquidity into the markets. For the economy as a whole, the real problems are posed by the involvement of non-financial companies in financial futures markets. With the exception of a few spectacular scandals, non-financial companies have been wary of using financial futures, and it is important that they should continue to limit their interest in financial futures markets. Industrial and commercial companies, which generate their own liquidity through trade and production and hence have more limited financial assets to realize in order to meet financial futures liabilities in times of distress, are more vulnerable to unexpected outflows of liquidity in proportion to their increased exposure to financial markets. The liquidity which they need to set aside to meet such unexpected liabilities inevitably means a reduced commitment to investment in fixed capital and new technology.

Long Term Capital Management. Note Quote.

Long Term Capital Management, or LTCM, was a hedge fund founded in 1994 by John Meriwether, the former head of Salomon Brothers’s domestic fixed-income arbitrage group. Meriwether had grown the arbitrage group to become Salomon’s most profitable group by 1991, when it was revealed that one of the traders under his purview had astonishingly submitted a false bid in a U.S. Treasury bond auction. Despite reporting the trade immediately to CEO John Gutfreund, the outcry from the scandal forced Meriwether to resign.

Meriwether revived his career several years later with the founding of LTCM. Amidst the beginning of one of the greatest bull markets the global markets had ever seen, Meriwether assembled a team of some of the world’s most respected economic theorists to join other refugees from the arbitrage group at Salomon. The board of directors included Myron Scholes, a coauthor of the famous Black-Scholes formula used to price option contracts, and MIT Sloan professor Robert Merton, both of whom would later share the 1997 Nobel Prize for Economics. The firm’s impressive brain trust, collectively considered geniuses by most of the financial world, set out to raise a $1 billion fund by explaining to investors that their profoundly complex computer models allowed them to price securities according to risk more accurately than the rest of the market, in effect “vacuuming up nickels that others couldn’t see.”

One typical LTCM trade concerned the divergence in price between long-term U.S. Treasury bonds. Despite offering fundamentally the same (minimal) default risk, those issued more recently – known as “on-the-run” securities – traded more heavily than those “off-the-run” securities issued just months previously. Heavier trading meant greater liquidity, which in turn resulted in ever-so-slightly higher prices. As “on-the-run” securities become “off-the-run” upon the issuance of a new tranche of Treasury bonds, the price discrepancy generally disappears with time. LTCM sought to exploit that price convergence by shorting the more expensive “on-the-run” bond while purchasing the “off- the-run” security.

By early 1998 the intellectual firepower of its board members and the aggressive trading practices that had made the arbitrage group at Salomon so successful had allowed LTCM to flourish, growing its initial $1 billion of investor equity to $4.72 billion. However, the miniscule spreads earned on arbitrage trades could not provide the type of returns sought by hedge fund investors. In order to make transactions such as these worth their while, LTCM had to employ massive leverage in order to magnify its returns. Ultimately, the fund’s equity component sat atop more than $124.5 billion in borrowings for total assets of more than $129 billion. These borrowings were merely the tip of the ice-berg; LTCM also held off-balance-sheet derivative positions with a notional value of more than $1.25 trillion.

The fund’s success began to pose its own problems. The market lacked sufficient capacity to absorb LTCM’s bloated size, as trades that had been profitable initially became impossible to conduct on a massive scale. Moreover, a flood of arbitrage imitators tightened the spreads on LTCM’s “bread-and-butter” trades even further. The pressure to continue delivering returns forced LTCM to find new arbitrage opportunities, and the fund diversified into areas where it could not pair its theoretical insights with trading experience. Soon LTCM had made large bets in Russia and in other emerging markets, on S&P futures, and in yield curve, junk bond, merger, and dual-listed securities arbitrage.

Combined with its style drift, the fund’s more than 26 leverage put LTCM in an increasingly precarious bubble, which was eventually burst by a combination of factors that forced the fund into a liquidity crisis. In contrast to Scholes’s comments about plucking invisible, riskless nickels from the sky, financial theorist Nassim Taleb later compared the fund’s aggressive risk taking to “picking up pennies in front of a steamroller,” a steamroller that finally came in the form of 1998’s market panic. The departure of frequent LTCM counterparty Salomon Brothers from the arbitrage market that summer put downward pressure on many of the fund’s positions, and Russia’s default on its government-issued bonds threw international credit markets into a downward spiral. Panicked investors around the globe demonstrated a “flight to quality,” selling the risky securities in which LTCM traded and purchasing U.S. Treasury securities, further driving up their price and preventing a price convergence upon which the fund had bet so heavily.

None of LTCM’s sophisticated theoretical models had contemplated such an internationally correlated credit market collapse, and the fund began hemorrhaging money, losing nearly 20% of its equity in May and June alone. Day after day, every market in which LTCM traded turned against it. Its powerless brain trust watched in horror as its equity shrank to $600 million in early September without any reduction in borrowing, resulting in an unfathomable 200 leverage ratio. Sensing the fund’s liquidity crunch, Bear Stearns refused to continue acting as a clearinghouse for the fund’s trades, throwing LTCM into a panic. Without the short-term credit that enabled its entire trading operations, the fund could not continue and its longer-term securities grew more illiquid by the day.

Obstinate in their refusal to unwind what they still considered profitable trades hammered by short-term market irrationality, LTCM’s partners refused a buyout offer of $250 million by Goldman Sachs, ING Barings, and Warren Buffet’s Berkshire Hathaway. However, LTCM’s role as a counterparty in thousands of derivatives trades that touched investment firms around the world threatened to provoke a wider collapse in international securities markets if the fund went under, so the U.S. Federal Reserve stepped in to maintain order. Wishing to avoid the precedent of a government bailout of a hedge fund and the moral hazard it could subsequently encourage, the Fed invited every major investment bank on Wall Street to an emergency meeting in New York and dictated the terms of the $3.625 billion bailout that would preserve market liquidity. The Fed convinced Bankers Trust, Barclays, Chase, Credit Suisse First Boston, Deutsche Bank, Goldman Sachs, Merrill Lynch, J.P. Morgan, Morgan Stanley, Salomon Smith Barney, and UBS – many of whom were investors in the fund – to contribute $300 million apiece, with $125 million coming from Société Générale and $100 million from Lehman Brothers and Paribas. Eventually the market crisis passed, and each bank managed to liquidate its position at a slight profit. Only one bank contacted by the Fed refused to join the syndicate and share the burden in the name of preserving market integrity.

That bank was Bear Stearns.

Bear’s dominant trading position in bonds and derivatives had won it the profitable business of acting as a settlement house for nearly all of LTCM’s trading in those markets. On September 22, 1998, just days before the Fed-organized bailout, Bear put the final nail in the LTCM coffin by calling in a short-term debt in the amount of $500 million in an attempt to limit its own exposure to the failing hedge fund, rendering it insolvent in the process. Ever the maverick in investment banking circles, Bear stubbornly refused to contribute to the eventual buyout, even in the face of a potentially apocalyptic market crash and despite the millions in profits it had earned as LTCM’s prime broker. In typical Bear fashion, James Cayne ignored the howls from other banks that failure to preserve confidence in the markets through a bailout would bring them all down in flames, famously growling through a chewed cigar as the Fed solicited contributions for the emergency financing, “Don’t go alphabetically if you want this to work.”

Market analysts were nearly unanimous in describing the lessons learned from LTCM’s implosion; in effect, the fund’s profound leverage had placed it in such a precarious position that it could not wait for its positions to turn profitable. While its trades were sound in principal, LTCM’s predicted price convergence was not realized until long after its equity had been wiped out completely. A less leveraged firm, they explained, might have realized lower profits than the 40% annual return LTCM had offered investors up until the 1998 crisis, but could have weathered the storm once the market turned against it. In the words of economist John Maynard Keynes, the market had remained irrational longer than LTCM could remain solvent. The crisis further illustrated the importance not merely of liquidity but of perception in the less regulated derivatives markets. Once LTCM’s ability to meet its obligations was called into question, its demise became inevitable, as it could no longer find counterparties with whom to trade and from whom it could borrow to continue operating.

The thornier question of the Fed’s role in bailing out an overly aggressive investment fund in the name of market stability remained unresolved, despite the Fed’s insistence on private funding for the actual buyout. Though impossible to foresee at the time, the issue would be revisited anew less than ten years later, and it would haunt Bear Stearns. With negative publicity from Bear’s $38.5 million settlement with the SEC regarding charges that it had ignored fraudulent behavior by a client for whom it cleared trades and LTCM’s collapse behind it, Bear Stearns continued to grow under Cayne’s leadership, with its stock price appreciating some 600% from his assumption of control in 1993 until 2008. However, a rapid-fire sequence of negative events began to unfurl in the summer of 2007 that would push Bear into a liquidity crunch eerily similar to the one that felled LTCM.

Conjuncted: Financialization of Natural Resources – Financial Analysis of the Blue Economy: Sagarmala’s Case in Point.

The financialization of natural resources is the process of replacing environmental regulation with markets. In order to bring nature under the control of markets, the planet’s natural resources need to be made into commodities that can be bought or sold for a profit. It is a means of transferring the stewardship of our common resources to private business interests. The financialization of nature is not about protecting the environment, rather it is about creating ways for the financial sector to continue to earn high profits. Although the sector has begun to rebound from the financial crisis, it is still below its pre-crisis levels of profit. By pushing into new areas, promoting the creation of new commodities, and exploiting the real threat of climate change for their own ends, financial companies and actors are placing the whole world at the risk of precarity.

A systemic increase in financial speculation on commodities mainly driven by deregulation of derivative markets, increasing involvement of investment banks, hedge funds and other institutional investor in commodity speculation and the emergence of new instruments such as index funds and exchange-traded funds. Financial deregulation over the last one decade has for the first time transformed commodities into financial assets. what we might call ‘financialization’, is thus penetrating all commodity markets and their functioning. Contrary to common sense and what civil society assumes, financial markets are going deeper and deeper into the real economy as a response to the financial crisis, so that speculative capital is structurally being intertwined with productive capital – in this case commodities and natural resources.

Marine ecology as a natural resource isn’t immune to commodification, and an array of financial agents are making it their indispensable destination, thrashing out new types of alliances converging around specific ideas about how maritime and coastal resources should be organized, and to whose benefit, under which terms and to what end? The commodification of marine ecology is what is referred to as Blue Economy, which is converging on the necessity of implementing policies across scales that are conducive to, what in the corridors of those promulgating it, a win-win-win situation in pursuit of ‘sustainable development’, entailing pro-poor, conservation-sensitive blue growth. What one cannot fail to notice here is that Blue Economy is close on heels to what Karl Marx called the necessary prerequisite to capitalism, primitive accumulation. If in the days of industrial revolution and at a time when Marx was writing, natural resources like lands were converted into commercial commodities, then today under the rubric of neoliberalism, the attack is on the natural resources in the form of converting them into speculative capital. But as commercial history has undergone a change, so has the notion of accumulation. Today’s accumulation is through the process of dispossession. In the green-grabbing frame, conservation initiatives have become a key force driving primitive accumulation, although, the form that primitive accumulation through conservation takes is very different from that initially described by Marx, as conservation initiatives involve taking nature out of production – as opposed to bringing them in through the initial enclosures described by Marx. Under such unfoldings, even the notional appropriation undergoes an unfolding, in that, it implies the transfer of ownership, use rights and control over resources that were once publicly or privately owned – or not even the subject of ownership – from the poor (or everyone including the poor) in to the hands of the powerful.

Moreover, for David Harvey, states under neoliberalism become increasingly oriented toward attracting foreign direct investment, i.e. specifically actors with the capital to invest whereas all others are overlooked and/or lose out. Central in all of these dimensions is the assumption in market-based neoliberal conservation that “once property rights are established and transaction costs are minimized, voluntary trade in environmental goods and bads will produce optimal, least-cost outcomes with little or no need for state involvement.”. This implies that win-win- win outcomes with benefits on all fronts spanning corporate investors, the local communities, biodiversity, national economies etc., are possible if only the right technocratic policies are put in place. By extension this also means side-stepping intrinsically political questions with reference to effective management through economic rationality informed by cutting-edge ecological science, in turn making the transition to the ‘green economy’ conflict-free as long as the “invisible hand of the market is guided by [neutral] scientific expertise”. While marine and coastal resources may have been largely overlooked in the discussions on green grabbing and neoliberal conservation, a robust, but small, critical literature has been devoted to looking specifically into the political economy of fisheries systems. Focusing on one sector in the outlined ‘blue economy’, this literature uncovers “how capitalist relations and dynamics (in their diverse and varying forms) shape and/or constitute fisheries systems.”

The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. Things begin to get a bit more complicated when financialization interferes with environment and natural resources, for then the losses are not just merely on a financial platform alone. Financialization has played a significant role in the recent price shocks in food and energy markets, while the wave of speculative investment in natural resources has and is likely to produce perverse environmental and social impact. Moreover, the so-called financialization of environmental conservation tends to enhance the financial value of environmental resources but it is selective: not all stakeholders have the same opportunities and not all uses and values of natural resources and services are accounted for. This mechanism brings new risks and challenges for environmental services and their users that are excluded by official systems of natural capital monetization and accounting. This is exactly the precarity one is staring at when dealing with Blue Economy.

Momentum of Accelerated Capital. Note Quote.

Distinct types of high frequency trading firms include independent proprietary firms, which use private funds and specific strategies which remain secretive, and may act as market makers generating automatic buy and sell orders continuously throughout the day. Broker-dealer proprietary desks are part of traditional broker-dealer firms but are not related to their client business, and are operated by the largest investment banks. Thirdly hedge funds focus on complex statistical arbitrage, taking advantage of pricing inefficiencies between asset classes and securities.

Today strategies using algorithmic trading and High Frequency Trading play a central role on financial exchanges, alternative markets, and banks‘ internalized (over-the-counter) dealings:

High frequency traders typically act in a proprietary capacity, making use of a number of strategies and generating a very large number of trades every single day. They leverage technology and algorithms from end-to-end of the investment chain – from market data analysis and the operation of a specific trading strategy to the generation, routing, and execution of orders and trades. What differentiates HFT from algorithmic trading is the high frequency turnover of positions as well as its implicit reliance on ultra-low latency connection and speed of the system.

The use of algorithms in computerised exchange trading has experienced a long evolution with the increasing digitalisation of exchanges:

Over time, algorithms have continuously evolved: while initial first-generation algorithms – fairly simple in their goals and logic – were pure trade execution algos, second-generation algorithms – strategy implementation algos – have become much more sophisticated and are typically used to produce own trading signals which are then executed by trade execution algos. Third-generation algorithms include intelligent logic that learns from market activity and adjusts the trading strategy of the order based on what the algorithm perceives is happening in the market. HFT is not a strategy per se, but rather a technologically more advanced method of implementing particular trading strategies. The objective of HFT strategies is to seek to benefit from market liquidity imbalances or other short-term pricing inefficiencies.

While algorithms are employed by most traders in contemporary markets, the intense focus on speed and the momentary holding periods are the unique practices of the high frequency traders. As the defence of high frequency trading is built around the principles that it increases liquidity, narrows spreads, and improves market efficiency, the high number of trades made by HFT traders results in greater liquidity in the market. Algorithmic trading has resulted in the prices of securities being updated more quickly with more competitive bid-ask prices, and narrowing spreads. Finally HFT enables prices to reflect information more quickly and accurately, ensuring accurate pricing at smaller time intervals. But there are critical differences between high frequency traders and traditional market makers:

1. HFT do not have an affirmative market making obligation, that is they are not obliged to provide liquidity by constantly displaying two sides quotes, which may translate into a lack of liquidity during volatile conditions.
2. HFT contribute little market depth due to the marginal size of their quotes, which may result in larger orders having to transact with many small orders, and this may impact on overall transaction costs.
3. HFT quotes are barely accessible due to the extremely short duration for which the liquidity is available when orders are cancelled within milliseconds.

Besides the shallowness of the HFT contribution to liquidity, are the real fears of how HFT can compound and magnify risk by the rapidity of its actions:

There is evidence that high-frequency algorithmic trading also has some positive benefits for investors by narrowing spreads – the difference between the price at which a buyer is willing to purchase a financial instrument and the price at which a seller is willing to sell it – and by increasing liquidity at each decimal point. However, a major issue for regulators and policymakers is the extent to which high-frequency trading, unfiltered sponsored access, and co-location amplify risks, including systemic risk, by increasing the speed at which trading errors or fraudulent trades can occur.

Although there have always been occasional trading errors and episodic volatility spikes in markets, the speed, automation and interconnectedness of today‘s markets create a different scale of risk. These risks demand that exchanges and market participants employ effective quality management systems and sophisticated risk mitigation controls adapted to these new dynamics in order to protect against potential threats to market stability arising from technology malfunctions or episodic illiquidity. However, there are more deliberate aspects of HFT strategies which may present serious problems for market structure and functioning, and where conduct may be illegal, for example in order anticipation seeks to ascertain the existence of large buyers or sellers in the marketplace and then to trade ahead of those buyers and sellers in anticipation that their large orders will move market prices. A momentum strategy involves initiating a series of orders and trades in an attempt to ignite a rapid price move. HFT strategies can resemble traditional forms of market manipulation that violate the Exchange Act:

1. Spoofing and layering occurs when traders create a false appearance of market activity by entering multiple non-bona fide orders on one side of the market at increasing or decreasing prices in order to induce others to buy or sell the stock at a price altered by the bogus orders.

2. Painting the tape involves placing successive small amount of buy orders at increasing prices in order to stimulate increased demand.

3. Quote Stuffing and price fade are additional HFT dubious practices: quote stuffing is a practice that floods the market with huge numbers of orders and cancellations in rapid succession which may generate buying or selling interest, or compromise the trading position of other market participants. Order or price fade involves the rapid cancellation of orders in response to other trades.

The World Federation of Exchanges insists: ― Exchanges are committed to protecting market stability and promoting orderly markets, and understand that a robust and resilient risk control framework adapted to today‘s high speed markets, is a cornerstone of enhancing investor confidence. However this robust and resilient risk control framework‘ seems lacking, including in the dark pools now established for trading that were initially proposed as safer than the open market.

Data Governance, FinTech, #Blockchain and Audits (Upcoming Bangalore Talk)

This is skeletal and I am febrile, and absolutely nowhere near being punctilious. The idea is to note if this economic/financial revolution, (could it even be called that?) could politically be an overtone window? So, let this be otiose and information disseminating, for a paper is on its way forcing down greater attention to detail and vastly different from here. 

Data Governance and Audit Trail

Data Governance specifies the framework for decision rights and accountabilities encouraging desirable behavior in data usage

Main aim of Data Governance is to ensure that data asset are overseen in a cohesive and consistent enterprise-wide manner

Why is there a need for Data governance? 

Evolving regulatory mechanisms and requirements

Could integrity of data be trusted?

Centralized versus decentralized documentation as regards use, hermeneutics and meaning of data

Multiplicity of data silos with exponentially rising data

Architecture

Information Owner: approving power towards internal + external data transfers + business plans prioritizing data integrity and data governance

Data steward: create/maintain/define data access, data mapping and data aggregation rules

Application steward: maintain application inventory, validating testing of outbound data and assist master data management

Analytics steward: maintain a solutions inventory, reduce redundant solutions, define rules for use of standard definitions and report documentation guidelines, and define data release processes and guidelines

What could an audit be?

It starts as a comprehensive and effective program encompassing people, processes, policies, controls, and technology. Additionally, it involves educating key stakeholders about the benefits and risks associated with poor data quality, integrity and security.

What should be audit invested with?

Apart from IT knowledge and operational aspects of the organization, PR skills, dealing with data-related risks and managing a push-back or a cultural drift handling skills are sine qua non. As we continue to operate in one of the toughest and most uneven economic climates in modern times, the relevance of the role of auditors in the financial markets is more important than ever before. While the profession has long recognized the impact of data analysis on enhancing the quality and relevance of the audit, mainstream use of this technique has been hampered due to a lack of efficient technology solutions, problems with data capture and concerns about privacy. However, recent technology advancements in big data and analytics are providing an opportunity to rethink the way in which an audit is executed. The transformed audit will expand beyond sample-based testing to include analysis of entire populations of audit-relevant data (transaction activity and master data from key business processes), using intelligent analytics to deliver a higher quality of audit evidence and more relevant business insights. Big data and analytics are enabling auditors to better identify financial reporting, fraud and operational business risks and tailor their approach to deliver a more relevant audit. While we are making significant progress and are beginning to see the benefits of big data and analytics in the audit, this is only part of a journey. What we really want is to have intelligent audit appliances that reside within companies’ data centers and stream the results of our proprietary analytics to audit teams. But the technology to accomplish this vision is still in its infancy and, in the interim, what is transpiring is delivering audit analytics by processing large client data sets within a set and systemic environment, integrating analytics into audit approach and getting companies comfortable with the future of audit. The transition to this future won’t happen overnight. It’s a massive leap to go from traditional audit approaches to one that fully integrates big data and analytics in a seamless manner.

Three key areas the audit committee and finance leadership should be thinking about now when it comes to big data and analytics:

External audit: develop a better understanding of how analytics is being used in the audit today. Since data capture is a key barrier, determine the scope of data currently being captured, and the steps being taken by the company’s IT function and its auditor to streamline data capture.

Compliance and risk management: understand how internal audit and compliance functions are using big data and analytics today, and management’s future plans. These techniques can have a significant impact on identifying key risks and automating the monitoring processes.

Competency development: the success of any investments in big data and analytics will be determined by the human element. Focus should not be limited to developing technical competencies, but should extend to creating the analytical mindset within the finance, risk and compliance functions to consume the analytics produced effectively.

What is the India Stack?

A paperless and cashless delivery system; a paradigm that is intended to handle massive data inflows enabling entrepreneurs, citizens and government to interact with each other transparently; an open system to verify businesses, people and services.

This is an open API policy that was conceived in 2012 to build upon Aadhaar. The word open in the policy signifies that other application could access data. It is here that the affair starts getting a bit murky, as India Stack gives the data to the concerned individual and lets him/her decide who the data can be shared with.

So, is this a Fintech? Fintech is usually applies to the segment of technology startup scene that is disrupting sectors such as mobile payments, money transfers, loans, fundraising and even asset management. And what is the guarantee that Fintech would help prevent fraud that traditional banking couldn’t? No technology can completely eradicate fraud and human deceit, but I believe technology can make operations more transparent and systems more accountable. To illustrate this point, let’s look back at the mortgage crisis of 2008.

Traditional banks make loans the old fashioned way: they take money from people at certain rates (savings deposits) and lend it out the community at a higher rate. The margin constitutes the bank’s profit. As the bank’s assets grow, so do their loans, enabling them to grow organically.

Large investment banks bundle assets into securities that they can sell on open markets all over the world. Investors trust these securities because they are rated by third party agencies such as Moody’s and Standard & Poor’s. Buyers include pension funds, hedge funds, and many other retail investment instruments.

The ratings agencies are paid by investment banks to rate them. Unfortunately, they determine these ratings not so much by the merits of the securities themselves, but according to the stipulations of the banks. If a rating fails to meet the investment banks’ expectations, they can take their business to another rating agency. If a security does not perform as per the rating, the agency has no liability! How insane is that?

Most surprisingly, investment banks can hedge against the performance of these securities (perhaps because they know that the rating is total BS?) through a complex process that I will not get into here.

Investment banks and giant insurance firms such as AIG were the major dominoes that nearly caused the whole financial system to topple in 2008. Today we face an entirely different lending industry, thanks to FinTech. What is FinTech? FinTech refers to a financial services company (not a technology company) that uses superior technology to bring newer and better financial products to consumers. Many of today’s FinTech companies call themselves technology companies or big data companies, but I respectfully disagree. To an outsider, a company is defined by its balance sheet and a FinTech company’s balance sheet will tell you that it makes money from the fees, interest, and service charges on their assets—not by selling or licensing technology. FinTech is good news not only for the investors, borrowers and banks collectively, but also for the financial services industry as a whole because it ensures greater transparency and accountability while removing risk from the entire system. In the past four to five years a number of FinTech companies have gained notoriety for their impact on the industry. I firmly believe that this trend has just begun. FinTech companies are ushering in new digital business models such as auto-decisioning. These models are sweeping through thousands of usual and not-so-usual data sources for KYC and Credit Scoring.

But already a new market of innovative financial products has entered into mainstream finance. As their market share grows these FinTech companies will gradually “de-risk” the system by mitigating the impact of large, traditional, single points of failure. And how will the future look? A small business might take its next business loan from Lending Club, OnDeck, Kabbage, or DealStruck, instead of a traditional bank. Rather than raising funds from a venture capital firm or other traditional investor, small businesses can now look to Kickstarter or CircleUp. Sales transactions can be processed with fewer headaches by Square or Stripe. You can invest your money at Betterment or Wealthfront and not have to pay advisors who have questionable track records outperforming the market. You can even replace money with bitcoin using Coinbase, Circle, or another digital-currency option. These are the by-products of the FinTech revolution. We are surrounded by a growing ecosystem of highly efficient FinTech companies that deliver next-generation financial products in a simple, hassle-free manner. Admittedly, today’s emerging FinTech companies have not had to work through a credit cycle or contend with rising interest rates. But those FinTech companies that have technology in their DNA will learn to ‘pivot’ when the time comes and figure it all out. We have just seen the tip of this iceberg. Technically speaking, the FinTech companies aren’t bringing anything revolutionary to the table. Mostly it feels like ‘an efficiency gain’ play and a case of capitalizing on the regulatory arbitrage that non-banks enjoy. Some call themselves big data companies—but any major bank can look into its data center and make the same claim. Some say that they use 1,000 data points. Banks are doing that too, albeit manually and behind closed walls, just as they have done for centuries. FinTechs simplify financial processes, reduce administrative drag, and deliver better customer service. They bring new technology to an old and complacent industry. Is there anything on the horizon that can truly revolutionize how this industry works? Answering this question brings us back to 2008 as we try to understand what really happened. What if there was a system that did not rely on Moody’s and S&P to rate the bonds, corporations, and securities. What if technology could provide this information in an accurate and transparent manner. What if Bitcoin principles were adopted widely in this industry? What if the underlying database protocol, Blockchain, could be used to track all financial transactions all over the globe to tell you the ‘real’ rating of a security.

Blockchain can be defined as a peer-to-peer operated public digital ledger that records all transactions executed for a particular asset (…) “The Blockchain maintains this record across a network of computers, and anyone on the network can access the ledger. Blockchain is ‘decentralised’ meaning people on the network maintain the ledger, requiring no central or third party intermediary involvement.” “Users known as ‘miners’ use specialised software to look for these time stamped ‘blocks’, verify their accuracy using a special algorithm, and add the block to the chain. The chain maintains chronological order for all blocks added because of these time-stamps.” The digitalisation of financial service opens room for new opportunity such as to propose new kind of consumer’s experience as well as the use of new technologies and improve business data analysis. The ACPR, the French banking and insurance regulatory authority, has  classified the opportunities and risks linked to the Fintech such as the new services for uses, better resilience versus the difficulty to establish effective supervision, the risks of regulation dumping and regarding clients interest protection such as data misuse and security. The French Central Bank is currently studying blockchain in cooperation with two start-ups, the “Labo Blockchain” and “Blockchain France”. In that context, blockchain is a true financial service disruption, according to Piper Alderman “Blockchain can perform the intermediating function in a cheaper and more secure way, and disrupt the role of Banks.”

Hence, leading bank wants to seize that financial service opportunity. They are currently working on blockchain project with financial innovation firm, R3 CEV. The objective is that the project delivers a “more efficient and cost-effective international settlement network and possibly eliminate the need to rely on central bank”. R3 CEV has announced that 40 peer banks, including HSBC, Citigroup, and BNP Paribas, started an initiative to test new kind of transaction through blockchain. This consortium is the most important ever organized to test this new technology.

And what of security? According to the experts “the design of the blockchain means there is the possibility of malware being injected and permanently hosted with no methods currently available to wipe this data. This could affect ‘cyber hygiene’ as well as the sharing of child sexual abuse images where the blockchain could become a safe haven for hosting such data.” Further, according to the research, “it could also enable crime scenarios in the future such as the deployment of modular malware, a reshaping of the distribution of zero-day attacks, as well as the creation of illegal underground marketplaces dealing in private keys which would allow access to this data.” The issue of cyber-security for financial institutions is very strategic. Firstly, as these institutions rely on customer confidence they are particularly vulnerable to data loss and fraud. Secondly, banks represent a key sector for national security. Thirdly they are exposed to credit crisis given their role to finance economy. Lastly, data protection is a key challenge given financial security legal requirements.

As regard cyber security risks, on of the core legal challenge will be the accountability issue. As Blockchain is grounded on anonymity the question is who would be accountable for the actions pursued? Should it be the users, the Blockchain owner, or software engineer? Regulation will address the issue of blockchain governance. According to Hubert de Vauplane, “the more the Blockchain is open and public, less the Blockchain is governed”, “while in a private Blockchain, the governance is managed by the institution” as regard “access conditions, working, security and legal approval of transactions”. Where as in the public Blockchain, there is no other rules that Blockchain, or in other words “Code is Law” to quote US legal expert Lawrence Lessing. First issue: who is the block chain user? Two situations must be addressed depending if the Blockchain is private or public. Unlike public blockchain, the private blockchain – even though grounded in a public source code – is protected by intellectual property rights in favour of the organism that manages it, but still exposed to cyber security risks. Moreover, a new contractual documentation provided by financial institutions and disclosure duty could be necessary when consumers may simply not understand the information on how their data may be used through this new technology.

‘Disruption’ has turned into a Silicon Valley cliché, something not only welcomed, but often listed as a primary goal. But disruption in the private sector can have remarkably different effects than in the political system. While capital forces may allow for relatively rapid adaptation in the market, complex political institutions can be slower to react. Moreover, while disruption in an economic market can involve the loss of some jobs and the creation of others, disruption in politics can result in political instability, armed conflict, increased refugee flows and humanitarian crises. It nevertheless is the path undertaken….