Hello world. Today’s read touches on a poignant issue and that is the property market in the UK. I’ve previously touched on this issue here where I spoke about the dramatic effect gentrification is having on London. This piece has similarities. The report is from Transparency International UK and they make suggestions that could deter potential criminals laundering their dirty money into the UK property market.
Property in London is a secure investment as the price rarely drops due to excess demand and limited supply. Moreover, if precaution is not applied then inflationary pressures will force most Londoners to look elsewhere for properties which is the reality that most people in London now face, the capital is too expensive for most to afford and it does not help when London is such an attractive place for wealthy foreigners who view properties as secure investments. Market forces do not have to consider morality as they are not actually doing anything wrong from a business perspective; but caution should be applied as the social ramifications could lead to disillusionment from many Londoners, especially those on lower incomes.
London is undergoing rapid transformation. It has been the case since the mid-1990s and it shows no signs of slowing down. With this upsurge of development are qualities lost in the areas that are developed? Are the newer traits and trends in developed areas better than what was there before?
Savilles
London Mayor Boris Johnson has been a stark proponent of inviting wealthy foreign investors to London. In October he suggested that VAT and import tax should be relaxed for our foreign neighbours in order to encourage Foreign Direct Investment (FDI).
“VAT and import duty – those it seems to me are classically things that can be resolved by growing trade and co-operation between London and China, London and Beijing. We need a proper, thoroughgoing free-trade agreement. If the EU won’t do it we can do it on our own”
If this were to occur, many non-domiciles would be spending even more of their wealth in London. The idea of facilitating foreign wealth on new enterprise opportunities in London is one fully supported by the Mayor and several other politicians, including Chancellor George Osborne. The video below outlines some of Johnson’s plans for London. When you combine the Right To Buy scheme proposed by the Government it could be suggested that both the London and National government are looking to create another property boom.
The idea of new business, new stylish housing developments, newer communities and a new beginning for those who concur with the Mayor strike a positive cord. The fact that a prosperity bomb if you like, can explode and a plethora of new businesses can suddenly replaces older ones surely translate to a better, more profitable society. The fact that bigger businesses seek to expand to areas that are ripe for development ensures that plenty of jobs will be created, more of us will work and in a macro sense the economy will grow. Surely this is what we desire….
Or is it the case that newer developments and everything associated with it impose a revised culture that virtually replaces the existing one. Ensuring that this newer culture, this different way of life that imposes itself on existing residents is cohesive with the established culture is not usually a priority for developers or investors. In fact you could suggest that their priorities take precedent because their interests are deemed more important and their main priority is profit maximization. Much of the rhetoric is aimed at what is coming, what the future holds; new developments rarely acknowledge the qualities that the area had or look to uphold or maintain some of the non-monetary merits a community had. So residents that reside in areas that are listed for development are often left marginalised because the rate at which they usually have to adapt is relatively quick and it could be suggested that they no longer feel they are part of their community.
London is undergoing rapid transformation, many people welcome the new age of “prosperity” and many view it as an inevitable outcome of what our society eventually leads to. Nevertheless, there is a growing concern that the rate of change tends to strip away some of the qualities some communities once had, qualities that cannot be monetized, nor measured, nor necessarily tangible, but certainly potent and very much real.
This movement of people towards inner city London is peculiar because it tends to be to areas that were written off by several, deemed not fit for purpose by some, but home to so many who are now marginalised. What is even more striking is the fact that property prices, both rents and house prices are increasing. So demand is inelastic, in the sense that it is relatively unresponsive to a change in price. Therefore if you are a landlord or a developer the profits are virtually guaranteed due to this wave of perpetual inner city London demand.
New Dwelling house pricesNew Dwelling house prices
Both graphs illustrate the rise and rise of property prices and the second graph clearly highlight the disparity between London and another large economic area: the North West.
According to the latest Census, Newham (East London) lost 38% of its white British population. This does suggest that many of its residents are opting for areas such as Essex to reside. On the contrary, between 2001 and 2011 Brixton, an area that used to be associated with a predominately Caribbean demographic has seen ten continuous years of increases. The same is noted in areas such as Hackney, Wandsworth, Camden and Islington. Moreover, Stoke Newington and Dalston have had increases from 15% in 2001 to 26% in 2011. What this highlights is that inner city areas ( mainly Zones 1 & 2 on the Tube map) have gradually become more accessible and more appealing to many.
My qualm lies with the fact that this movement of people inflates prices of rents, property, goods and services and it leaves existing people, many of whom have lived in that area for a long time financially constrained. Should more be done in order to reduce the negativity associated with prices you can no longer afford? Or does the onus lie with the individual? Clearly, this conundrum is not a priority for a government, especially this Tory led coalition that favours individualism and self-sufficiency. They have not hid the fact that they are looking more people to buy their homes. Perhaps they are merely continuing a legacy they prospered from so it is a continuation of what they believe in. It should be noted that I personally believe in helping yourself and becoming self-reliant, but helping each other is critical to upholding what is left of any community. This does seem to be eroding rapidly however. If you can unite and help one another, you are helping yourself whilst helping others and that is the current that binds a community. But this new wave of social cleansing and this message sent out by property developers and the government of profit over people gears our society for something that we are just at the beginning of. The future of London seems to be gearing towards only those that can afford it and prices do not seem to be going down. It will be a shame if the vast majority of London transforms into a city where only those with enough money can afford it. The way government policies are aimed, market power is structured and consumption trends are there only seems to be one outcome. The next twenty years will see the London demographic rapidly transform.
This week’s read comes from Vice Online and it is an explosive read to say the least. Vice’s Greg Palast discusses a certain memorandum that highlights how the global financial crisis unfolded. Certain events seemed to have been choreographed in order for the period of unfettered market capitalism to go unregulated around the world.
I’ve covered the global financial crisis many times on this blog, my piece here, where I elucidate certain facets about the shift in rhetoric about government spending and on this post I display the brilliant documentary from Adam Curtis about the global financial crisis. If you have not seen it, please do. The article from Vice will make even more sense as many of the people in question are featured.
How did the global financial crisis result in large government sector cuts?
The events of 2007 are very well documented. There has been a plethora of texts published, journal articles, books, magazine articles etc. dedicated to covering the horrific downturn of several leading financial markets in 2007. The crash ensured that several billions worth of Sterling, Dollars, Yen and so on were given to numerous financial institutions that were deemed “too big to fail.” The term “too big to fail” is theoretically questionable to say the least, a point I shall discuss further as this piece develops. The significance of the bailout funds were the fact that they were generated from taxes. What was clear however about the government bailouts, particularly in the UK, was the fact that institutions such as Northern Rock (now Virgin Money) and RBS would have collapsed had the government chosen to ignore their pleas and let them fail. It is worth remembering that between 1995-2006 a period of unfettered market capitalism allowed substantial financial products to penetrate several economies. A brand new phenomenon that several households had very little exposure nor knowledge too. It would become clear in the years to follow that this imperfect information would have devastating effects on the entire global economy. This period where credit was “pumped” into the economy was truly unique.
Stock crash
Austerity policies have been discussed in some depth on this blog, my pieces here and here are pieces I wrote, I attempt to ask certain questions about government policy and question the notion that government policy could actually be having an adverse effect on the UK economy. The UK (much like the rest of the areas affected heavily by the global banking crash) have adopted a set of rigid public sector cuts, designed to reduce the large dependency on government for goods and services and also because the current government deem the current debt-to-GDP too high. (86%)
If one were to assess austerity in the UK so far could anyone deem the set of policies a success? Of course, the government intends for their policies to have much longer effects, a legacy effect if you will, but that should not come at the peril of current generations, for governments should dictate policy for both now and the future. Moreover, economists such as Stiglitz, Krugman, Solow, Diamond, Sharpe, Skidelsky and several others all warned against excessive fiscal cuts. There is no empirical evidence of any large economy cutting its way to prosperity. Yet what could easily be described as a gamble or the set of ideologically driven policies have ensured that in the UK and much of the developed world have had their economies remain flat since 2011, having slumped from 2009-2011.
In 2009 the rhetoric around fiscal policy changed. If you go back to Tony Blair’s premiership I do not remember anybody on either side of the House quibbling about government spending, in fact the opposite. The then Shadow Chancellor of the Exchequer George Osborne stated that he would match Labour’s spending. Spending he would later tirade about once he became Chancellor. Moreover, Labour made several economic mistakes one of them was the heavy deregulation of the financial markets that actually allowed a steady and then volatile flow of cheap and available credit to flood the economy. Too many people binged on cheap and available credit and several institutions capitalised on this and were making substantial profits as a result. Making profits is part of our societal fabric and that is not my issue, but in the business world, if a firm does not make profit, eventually that business is driven out and replaced by one that will. This to me that is the essence of capitalism. Why then was RBS, Northern Rock or Lloyds bailed out? Okay, anybody with an account with those firms would have lost their money, which is very unfortunate, but in a market economy, an economy In which proponents of free-market capitalism constantly bombard against government interference, where more than happy to accept taxpayers money. Some clarity would be great because these are the same institutions that support, lobby and advocate for laissez faire policies yet accept the ultimate form of government intervention. This anomaly still baffles me and it is unfortunate that we are still paying the heavy price for the actions of a few financial institutions. Moreover it was the substantial bank bailouts, not excessive government expenditure that caused such a sharp rise in the high levels of public sector debt. Debt that is being tackled with austerity policies. Nothing should ever be “too big to fail” because that is the antithesis of a competitive free market, the kind of market that is encouraged in the UK. The government should have let the failing banks fail so other banks could learn that reckless and irrational behaviour should not be tolerated. It would have been a message of biblical proportions. Without bailing the banks out we would not need austerity and six years and more of lost or flat output. It appears that policy has not favoured the majority of the population who are still readjusting to the large structural changes that have taken place since 2009. The graph below is an economic outlook for the UK and makes for miserable reading.
My main qualm lies with blaming government spending. I have maintained from the outset that some government cuts are good, just like in a household or with your personal consumption; you assess what you are spending and cut what is not required. Fair enough. The extent at which the government in the UK and in several nations in the Euro Zone has undertaken huge public sector cuts and perhaps more importantly, the rate at which they have penetrated society is likely to have long lasting negative effects. So far they have proved highly ineffective in producing genuine economic growth as the graph above displays. It should be noted that anything above zero is “growth,” however, in reality people need what I call tangible growth. If more buildings go up, more roads are finished, more bridges and so on are completed then people up and down the nation will actually see growth for themselves. Obviously all those examples require large labour input. We have not had enough of that in the UK. Those examples also highlight investment and investment has what we call in economics a multiplier effect. Simply put, the government spends £1, that £1 generates more that the initial £1 invested say another £1, then the additional £1 can be reinvested on top of the original £1, so the good or service can generate a much higher multiplier, say £3 in the future. What is important is that it comes from the initial £1 investment. This period (2007-period day) of flat economic activity has needed and needs fiscal investment.
Even with an extremely accommodative monetary policy in the sense that the interest rate has been 0.5% since March 2009 the government’s reluctance to deviate away from an ineffective set of policies is detrimental to the economy. Now is as good a time than ever to undergo strategic and logical investment programmes. Instead, the large public sector cuts have actually been damaging to the government’s deficit reduction plan because unemployment is rising, therefore, transfer payments in the form of Job Seekers Allowances and Unemployment benefits have increased. If the government were to run public sector cuts with substantial investment programmes and run them simultaneously, shifting resources away from areas deemed to be wasting government funds and invest in areas with high returns this would be a better set of policies. Instead, we just have the negativity associated with public sector cuts, which has made the private sector less responsive as a result of the lack of economic activity and weak demand from majority of the public.
It is impossible to cut your way out of a recession; nations need to invest wisely in order to grow. America pulled itself out of recession because their production levels in the late 1930s and early 1940s substantially boosted their economy. The point is, they invested. There was an economic crash and the government invested. The New Deal (America’s recovery plan) took several years to have a noticeable effect on the economy, but it was investment that helped aid their recovery.
The government’s gamble still has not paid off and the UK does not appear to be changing any time soon. Governments need to spend in order to get a return. Without it, our economy shall remain sluggish for some time and this is a direct result of the aftermath of the global banking crisis, not excessive government expenditure.
Globalization has ensured that international borders are heavily relaxed so large and profitable domestic firms from one nation can pursue business interests in other nations without compromising domestic business interests. Several large multinational firms conduct business in several nations and this has become normality in today’s world. It should be noted that large market share of the respective market and large profits are usually strong motives for large firms to pursue business in other nations.
Culture is a complex, multidimensional concept that is crucial to conducting global business. It is a learned, shared, interrelated set of principals that bind members of a certain society. These principals, beliefs, symbols and so on are often embedded into the fibre of that area and amongst certain people, so you could suggest that business must be pragmatic and adopt a polycentric approach in order to fit in as opposed to trying to dictate or impose itself on that culture, especially during the preliminaries of entering a new market. Regardless of firm size, experience, or product or service, cultural implications have a huge impact on longevity and reception to a new brand and failure to understand will almost certainly lead to an exit.
TESCO is the largest supermarket in the UK and they had to pull out of the US market due to “disappointing” performance levels. From 2007 to 2013 TESCO had operated under the brand name of Fresh & Easy. They decided to close some 199 stores across the US. This was also the case for Wal Mart, whose attempts to penetrate the German market ended woefully back in 2006. No matter the size of the firm, or profit levels, a concise and accurate understanding of the cultural differences of the market one wishes to enter is fundamental when conducting global business. TESCO and Wal Mart’s failure to recognise this has led to their respective exits.
McDonalds understand the importance of serving your hosts.
Wal Mart is the largest supermarket in the US, when they wanted to expand into the UK they acquired the well-established firm ASDA. ASDA is still one of the largest supermarkets in the UK and business has been a moderate success. However, Wal Mart’s attempts to enter the German market proved that their myopic and frankly arrogant approach demonstrates that large profits in one market do not always translate to another market. Despite huge levels of revenue and profit, global business cannot function if one domestic firm tries to impose its values onto another culture. It is simply not compatible. Even though Wal Mart has stores in Argentina, Brazil, Mexico, China, Japan, Canada and Puerto Rico, their failure to break into the Europe’s largest economy will have damaged morale amongst senior members of their board.
Acquisitions provide several benefits and the ASDA case proves this, but When Wal Mart tried the same approach in Germany it impeded rather than aided their business. They purchased two second-tier stores, Interspar and Wertkauf. Both of these stores were mainly located in poorer areas and were geographically dispersed, it made business far from easy.
They arrived in Germany in 1997 and established firms such as Lidl, Metro and Aldi already posed a threat, but their board members assumed that their high profits would be sufficient and they could simply expand and take their competitors market share, consumers were loyal to their competitors however. They also tried to import many American traits into the German market and it was not understood. An example of this was 24/7 and Sunday shopping, although ASDA was the first to adopt the 24/7 model, culturally, the UK and the US are extremely similar, so the UK’s acceptance of this came as no surprise, in Germany however it was not the case. It was tremendously unpopular and highlighted a waste in resources.
Culturally German consumers prefer to bag their own goods, a simple study of behavioural traits prior to entering the market would have identified this, but their insistence on bagging their customer’s goods had an adverse effect, often putting people off their stores. Also, when Wal Mart managers insisted that their staff should smile at the customer again this put off many customers. And again, simple preliminary market research would have alerted them to this. According to Peng (2009) they left the German market with just 2% of the overall market share.
Wal Mart also hired an American to head their operations in Germany. Speaking English was a requirement and it damaged morale amongst senior members of the workforce. Productivity suffered as a direct result of the low morale.
Blockbuster Videos also ventured to foreign markets, they entered the Japanese market in the early 1990s and hired several Japanese senior managers to oversee the transition of the new venture. This enabled business to be cohesive and allowed their American counterparts to learn about the new market, Wal Mart’s approach was clearly wrong, one of several mistakes they made and highlights the need for a true understanding of cultural differences.
The TESCO led venture ended in failure for the UK giant
Despite having monopoly power in the UK TESCO could not gain any significant market share in the largest single market in the world.
According to BBC, Ajay Bhalla, professor of global innovation management at Cass Business School, said that at the root of Tesco’s US problems was a failure to understand that the US retail landscape is different from the UK’s.
“The falling star of Tesco in the US is a harsh reminder that scale [economies of scale] is not the recipe for sustainable value creation. For years, Tesco managers paid attention to perfecting the mix of supplier driven cost efficiencies with low prices.
Tesco’s exit from the US is a reminder for managers of the dangers of going blindly for scale and cost leaders, the wheels of which are difficult to reverse if you need to change course to becoming a retailer known for first-class customer experience.”
Understanding and appreciating cultural differences is critical to conducting global business. Without a sound understanding of the new market any firm, regardless of size, product or experience will find it almost impossible to conduct business in that market, hence knowing how deal with potential cultural barriers will alleviate several problems and ensure business can go on.
I first saw this documentary about two years ago on BBC2 and it remains one of the finest, if not the finest documentary I’ve seen. Adam Curtis manages to draw upon what appears to be obscure links and pull them together to identify a big and fascinating picture. If you are looking for some answers to the current financial situation then watching this video is a must.
Peter Schiff is an American investment broker, author and financial commentator. This compilation video is very interesting. What strikes me is the accuracy in which Schiff’s predictions have come to fruition. Check it out, certainly worth a watch.
The Conscience Blog 