Tuesday20 August 2019 ★ FINANCIAL TIMES 9

Opinion

T

he IMF and the World Bank

are tasked with strengthen-

ing economic stability and

development in emerging

market nations where cor-

ruption is a serious issue. Both institu-

tions have anti-corruption policies in

place, but it is urgent that they pursue a

far more forceful and effective plan.

Anti-corruption was not on the

agenda 75 years ago, when the Bretton

Woods conference led to the establish-

ment of the sister organisations. Now it

needs to be front and centre. This is a

particularly good time for afresh

approach as new leaders take charge.

David Malpass was appointed

president of the World Bank in April,

while theIMF will soon get a new leader

after the resignation of its managing

director, Christine Lagarde, who is

expected to take the helmat the Euro-

pean Central Bank.

The scale of illicit financial flows

poses a rising threat to global financial

stability. In the past, the fund’s response

has mostly been confined to providing

technical assistance to central banks.

Now, it needs to use its leverage to press

national treasuries to be forceful in

applying codes agreed by the Financial

Action Task Force, the global standard-

setter for rules on money laundering

and terrorist finance. It must also push

for transparency on the ownership of

the millions of secretive companies

registered in offshore financial centres,

from the Channel Islands to the Carib-

bean tax havens.

Post-conflict reconstruction has

always been a World Bank priority, but

it needs to be far more effective. For

example, the US special inspector-gen-

eral for Afghanistan reconstruction has

beenpublicly criticalof the bank’s

administration of the multilateral trust

fund programmes in Afghanistan that

have involved outlays of more than

$10bn, but where there has been inade-

quate monitoring of disbursements.

Another hotbed of corruption that

both the fund and the bank need to

address is in extractive industries,

where the theft by leaders of resource-

rich countries of royalties, licence fees

and profits from the development of oil,

gas and minerals causes extreme

poverty and macroeconomic crises.

Without a firm resolve and a more

effective set of tools, the bank will fail to

meet its own goalto eradicate absolute

poverty by 2030.

Bothorganisations have thorough

knowledge of public contracting and its

widespread abuse by so many of their

member countries. Since the late 1970s,

thebank has pursued co-financing

operations with commercial banks,

while it has many partnerships with the

private sector through its affiliate the

International Finance Corporation.

Now,it needs to use these relationships

to make infrastructure development

and governmental procurement more

transparent and accountable.

Time and again, bank projects fail to

meet their objectives and fund pro-

grammes fall short because of the weak-

nesses of independent law enforcement.

The IMFhas recognised this inits work

in Ukraine, where it has partnered with

civil society to push forjudicial reforms.

Both institutions need to learn from this

example and promote similar reforms

in their member countries.

About 25 years ago, theorganisations

argued that tackling corruption was

“too political”. Now they are constantly

encouraged to address governance

challenges by leaders of the G20 and at

their annual meetings. But the

fine-sounding rhetoric has never been

followed up satisfactorily.

The 75th anniversary of the confer-

ence is the right time for the Bretton

Woods sisters to recognise that they

have no choice other thansignificantly

to boost their anti-corruption work if

they are to meet their declared missions

of securing the soundness of the global

financial system, and the development

of the human condition.

The writer is the co-founder of Transpar-

ency International. William Rhodes, presi-

dent and CEO of William R Rhodes Global

Advisors, contributed to this article

World Bank and

IMF should

be tougher

on corruption

Frank

Vogl

This is a particularly good

time for a fresh approach as

new leaders take charge

at both institutions

By contrast, the EU’s most important

tool for participatory democracy,

known as the European Citizens’ Initia-

tive, has been a bit of a flop. Even mass

petitions with more than 1m signatures

have failed to persuade the European

Commission to prepare legislation on

the issues raised by campaigners. Mr

Macron’s “Great Debate”, an effort to

reinvigorate French democracy after

his presidency fell into trouble last year

amid thegilets jaunesprotests, has had

mixed results. Despite 2m online contri-

butions and 10,000 local meetings, most

participants were older, wealthier, well-

educated and urban.

Any attempt at reviving democracy

must include a sustained effort to pro-

tect living standards and improve eco-

nomic opportunities for citizens pushed

to the margins — all the more necessary

in the age of artificial intelligence.

Cleaning up politics and broadening

democratic participation are important,

but no less so is reform of the western

capitalist model itself.

[email protected]

even to shine a light on the dark finan-

cial corners of modern western politics

would not fully address the problem of

political representation.

During the 2008 financial crisis and

its aftermath, a sense of extreme ine-

quality and unfairness has gripped mil-

lions of citizens, coupled with the feeling

that their political institutions offered

too little scope for doing much about it.

As governments bailed out banks,

recouping the money by raising taxes

and cutting the welfare state, citizens

felt they were carrying the can for unac-

countable elites who captured the state

and business world. Slow-burning frus-

tration was intensified by the feeling

that politics is now the preserve of spe-

cial interests.

For some reform-minded politicians

and civic activists, the renewal of

democracy means expanding participa-

tion in public life, creating new forums

to operate alongside traditional parlia-

ments and parties. “Deliberative

democracy”, or citizens’ assemblies,

have brought promising results in Aus-

tralia, Canada and Ireland.

news as you will find in the past century.

Of course, strengthening formal dem-

ocratic processes against foreign med-

dling is essential. Emmanuel Macron,

France’s president, proposesa “Euro-

pean agency for the protection of

democracies” to protect against cyber

attacks and other manipulation. But the

risk with this initiative is that it might

add nothing more than another layer of

ineffective EU bureaucracy.

Under a more ambitious approach,

every European country would pass

laws stipulating total transparency

about the financing of political parties

and candidates, including who pays for

online advertising. Banks, businesses,

lobbying groups, media and others

could likewise be obliged to declare any

foreign financial support. However,

diagnosis and proposed remedies. In

today’s conditions, although the two

sets of problems overlap, it helps to dis-

tinguish between the need to improve

democratic representation on the one

hand, and the need to advance social

cohesion and prosperity on the other.

The focus on Russian interference in

the 2016 US presidential election, and in

various EU votesincluding the UK’s

Brexit referendum, has distracted

attention from the homegrown nature

of the flaws in western democracy. In

the US, suppressing voters’ rights,

gerrymandering congressional districts

and the failure to reform campaign

finance rules have nothing to do with

Russia. The same is true for corruption

and bad governancein individual Euro-

pean countries, and for the insufficient

accountability of EU institutions.

Undeniably, the west’s adversaries

and competitors have learnt how to stir

up trouble. Russia’s tactics involve iden-

tifying a divisive issue, such as race in

the US or migration in Europe, and

whipping up anger on both sides of the

argument in order to obstruct reasoned

debate and paralyse government. Fake

news, spread through social media, is

part of the Russian armoury.

But fake news is also something at

which unscrupulous US and European

politicians shamelessly connive. It is not

exactly new. The forged Zinoviev letter,

which emerged just before the 1924 UK

general election and was connected to

British secret service, the Conservative

party and media intrigues rather than to

Moscow, is as good an example of fake

L

ike cars, personal computers

and the human body, democ-

racies must be fixed from

time to time to work well.

Today, millions of US and

European citizens feel powerless and

unrepresented in political and eco-

nomic systems that respond inade-

quately to their needs. Mistrust of once

deeply respected institutions is wide-

spread. It is becoming fashionable to

speak of a “democratic recession”, or

worse, in western societies.

Every generation is tempted to think

that its challenges are unique. History

teaches otherwise. The first half of the

20th century encompassed the US Pro-

gressive Era, the New Deal and the Brit-

ish Liberal and Labour governments of

1906-14 and 1945-51. In each case, the

motivating spirit of reform was the con-

viction that, to fight off crisis and build a

better society, old forms of political rep-

resentation and economic management

must adapt to far-reaching social and

industrial change.

Democracies can die — of that there

should be no doubt. But they can also be

modernised and restored to good work-

ing order, though never to permanent,

perfect health. Much depends on the

Democracy

needs retooling

to thrive

It can be modernised

and restored to working

order, though never to

permanent, perfect health

T

he expansion of the restau-

rant trade was one of the

unexpected ricochets from

the French Revolution of

1789. As aristocrats lost
      their heads, their chefs lost their jobs.
      Thrown on to the streets, they found a
      new living opening public restaurants
      and feeding hungry revolutionaries.
      Le Grand Véfour, which opened just
      before the upheaval in 1784 in the
      arcades ofParis’s Palais Royal and is still
      running today, was one of the grandest
      examples. Its signaturefricassee de pou-
      let Marengocelebrates one of Napoleon’s
      most famous military victories.
      But if restaurants were born out of
      revolution, many of them may die in
      one, too.The latest technological
      revolution is disintermediating the

intermediary, enabling buyers and sell-

ers to match their needs in faster,

cheaper and more direct ways.

Internet companies, such as Alibaba

and Uber, and venture capitalists have

beenpouring billionsinto food delivery

companiesand “dark kitchen” opera-

tors aiming to move meals from

restaurants or high-turnover industrial

kitchens in cheap locations directly to

consumers’ front doors. Meals on

wheelshas acquired a new meaning.

Having taken on taxi cartels around

the world, Uber’s founderTravis Kalan-

ickis trying to disrupt the restaurant

trade. Last year he invested $150m to

acquire a controlling stake in City Stor-

age Systems, which runs smart kitchens

and has big ambitions to change the way

meals are prepared and sold. Amazon,

the great white shark of ecommerce, has

scented blood in the water and has been

haltingly experimenting with food

delivery. Subject to regulatory clear-

ance,Amazonis leading a $575m invest-

ment roundinDeliveroo, the London-

based food delivery company.

Running a restaurant has always been

a precarious high-churn game but

traditional eateries are increasingly

being challenged by high rents and

wages and near-instantaneous exposure

of their failings on social media.

For the moment, food delivery com-

panies are helping some traditional res-

taurants win incremental business.

Dark kitchenscan also enable them to

de-risk expansion, allowing them to

explore new locations without running

the risk of opening premises there.

Some industry figures warn, however,

that this could prove fool’s gold as food

delivery companies and dark kitchens

develop brands of their own to compete

with the restaurant chains. These data-

rich operators will know their custom-

ers far better than a restaurant ever can.

The most dramatic changes are

occurring inChina, India, Brazil and

Indonesia, where the classic restaurant

trade is under-developed and a clutch of

innovative companies is expanding fast.

There are some 355m usersof food

delivery apps in China, where the two

internet giants, Alibaba and Tencent,

are slugging it out. Their delivery busi-

nesses, Ele.meand Meituan, offer an

increasing range of services, including

convenience store items and flowers. An

estimated 1.8m fooddeliveries are

placed every day just in Beijing.

Naspers, the South African invest-

ment group, has put more than $2bn in

food-delivery companies around the

world, includingiFoodin Brazil and

Swiggyin India, serving 35 countries and

delivering about 100m orders a month.

Larry Illg, chief executive of Naspers’

online food delivery and ventures arm,

says the opportunities are probably

greatest in these fast-developing coun-

tries given the growth in middle-class

demand and inefficiencies in market

structures. In the west, people spend

about 10 per cent of their money and

time on buying and preparing food, he

says. In less developed countries that is

closer to 20 per cent.

The ultimate prize for these compa-

nies is to predict patterns of consump-

tion enabling them to offer even faster

and cheaper deliveries. They can pre-

pare and dispatch the requisite number

of salads to certain districts in Mumbai

before orders have even been placed.

“These companies are increasingly

using data and machine learning to

understand what people want to eat and

when they want to eat it,” Mr Illg says.

“By aggregating supply and demand

you can do a better job of matching.

Restaurants will have to rethink their

model.”

As in so many other areas, technology

is commoditising convenience. But even

the most evangelical technologist

believes that some restaurants will

continue to exist. They will, though,

increasingly live or die by the power of

their brand and the appeal of the

experience they offer.

As Le Grand Véfour discovered at the

outset of the trade, the most important

competitive advantage for any

restaurant is its unique ambience.

[email protected]

Data-rich operators will

know their customers

far better than a

restaurant ever can

A delivery revolution reshapes the food industry

TECHNOLOGY

John

Thornhill

W

hen central banks allow

interest rates to

approach, or fall below,

what is quaintly termed

“the zero lower bound”

there are clear losers. Banks are

presuming that households, obedient to

monetary policy theory, will borrow

more money at still lower rates. In fact,

the reality is that“lower for longer”

prevents a robust recovery because it

makes economic inequality worse.

This is especially true in the US. Many

American householdsare already living

hand-to-mouth, with more debt than

they will ever be able to repay. All lower

interest rates do is make it harder for

those who might be able to save a little to

get a healthy return that might provide

financial resilience today and a secure

retirement in the longer term.

Low interest rates are tough on

vulnerable households; negative rates

are brutal. The simple mathematics of

what happens to a small savings account

shows why post-crisis monetary policy

has made inequality so much worse.

Let’s assume you put $2,000 a year,

over 20 years, into a savings account

paying the historic 5 per cent compound

rate of interest. At the end of these two

thrifty decades, you will have $69,438 to

show for this in nominal terms. In real

(inflation-adjusted) terms you have

$49,598, assuming 2 per cent annual

inflation. So $40,000 earns you an infla-

tion-protected $9,598, or 24 per cent.

Now take the same $2,000 for the

same 20 years and the same 2 per cent

inflation. But imagine instead that you

receive only the 0.5 per cent interest

rate that has been paid, at most, on

small funds since the financial crisis in

the US. Instead of $69,438, you will end

up with only $42,168 in nominal terms

and $30,120 in real dollars — that is, you

will have lost almost 25 per cent. Take

the rates negative — say to minus 0.5 per

cent — and you, hapless saver, are out by

29 per cent.

In a world of ultra-low rates, most

households have no hope of wealth

accumulation, no matter how much

they save. Indeed, they are better off

being profligate.

This damaging result might be accept-

able — might be — if lower rates also

spurred growth that led to real wage

increases. However, American middle-

class wages today are no higherthan

they were in 2001 when inflation is

taken into account. Household income

may be up in real terms, but that’s

largely because many households are

now subsisting on multiple wage

earners as well as on gig employment.

Fully one-third of Americans aren’t

working as much as they would like to.

God knows how hard the other two-

thirds are working to make ends meet,

but we do know that most Americans

havefar more debtthan they have dura-

ble assets. A slightly lower interest rate

on all that debt might make it somewhat

more manageable, but that the debt pile

exists at all is a symptom of the deep

economic malaise that slightly lower

rates only make worse.

The US Federal Reserve’s unconven-

tional post-crisis policy, like that of

many other central banks, has been

founded on an extremely conventional

hypothesis: if low rates spur growth,

then ultra-low rates, or even negative

ones, will make growth happen even

faster and stronger.

But this conventional theory was

crafted in the years following the second

world war, when the US had a robust

middle class with the capacity to borrow

when rates dropped and spend their

debt on durable consumption with long-

term advantages to equality. Put

another way, Americans had enough

financial security to respond to rate cuts

by taking out a bit more debt and spend-

ing it on a new car or even a new home,

boosting demand, employment and

shared prosperity.

Today, with a hollowed out middle

classand far more low-skilled workers

without enough resources to move to

where new jobs might be, the Fed

cannot make low rates stoke sustained

growth no matter how hard it tries.

The Fed believes it has bought itself

some “insurance” with its recent rate

cut. Judging by President Donald

Trump’s tweets in response, this is not

insurance against political risk. It’s also

not insurance against market volatility,

which increased after the cut, in part

because of growing doubts about Fed

policy and rising bond-market risks.

Neither is it insurance against another

financial crisis — the central bank’s

proverbial toolbox is now emptier.

Last, of course, Fed governor Jay

Powell bought no insurance against still

worse inequality and the accompanying

macroeconomic, financial and political

risk. Instead, by cutting rates, the Fed

has just gambled that it can somehow,

some time, figure out how best to

normalise policy or come up with a bet-

ter alternative. Time is not on its side.

The writer is managing partner at Federal

Financial Analytics

Most households have no

hope of accumulating

savings; they are better

off being profligate

Low interest rates are the scourge of the poor and vulnerable

Karen

Petrou

GLOBAL AFFAIRS

Tony

Barber

James Ferguson

                  

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