Thursday, July 20, 2017

Blockchain the Transformer

Do yourself a favour and read this to “get it” about blockchain and why it matters… or try to make time stand still.

This from Kevin Cooney – ASB’s National Manager Rural:

It's vital that New Zealand's agri industry pays close attention to blockchain development and ensures we are well positioned to capture our share of new value this technology could unlock.

Mention blockchain and agriculture in the same breath, and the image of a heavy duty chain towing one farm vehicle behind another pops into my mind.

Turns out, that's a handy analogy. Like a physical chain, blockchain connects parties directly with one another to enable fast, secure, and borderless transactions.

Blockchain is often confused with digital currency bitcoin and "dark-web" encrypted networks, which means it's often thought of as esoteric and, perhaps, something to be feared.

That's unfortunate. Blockchain will transform the way buyers and sellers connect, regardless of where they are in the world. It will allow radical transparency of a product's origins and journey to end-customers, even if it becomes part of a finished product. Think fast, secure, transparent, low-cost, peer-to-peer transacting.

Blockchain's ability to record and store data makes it ideally suited for both food provenance applications and the deluge of data expected from future precision-farming applications connected by sensors and digital networks.

Its potential to eliminate inefficiency in traditional agri supply chains will also impact strategic thinking and positioning for agri industry companies. Indeed, blockchain could completely reshape the way New Zealand markets, sells and records the provenance of our produce to the world.

For this reason it's vital that New Zealand's agri industry pays close attention to blockchain development and ensures we are well positioned to capture our share of new value this technology could unlock.

The CEO of blockchain solutions start-up Kickr, David Cassidy, has summed up blockchain's inevitability best: "Those that still ask the question whether blockchain is a passing fad or will form a long-term part of business architectures are genuinely in the dark."

So what is blockchain all about?

At its simplest, blockchain forms a trusted network for buying and selling goods. The technology itself is a digital chain, of which the links are replicated databases that correspond with verified or trusted user companies or businesses.

This distribution of databases across all users is more robust in many respects than the traditional, centrally-controlled, single database that businesses use and rely on today. Its greater transparency in peer-to-peer dealings lends itself more readily to meeting growing demands for rigorous traceability.

Blockchain databases record and update in a synchronised fashion for each transaction that occurs on the blockchain. As no one party can change data without the others seeing and verifying it, it's said to be tamper-proof and therefore highly secure (on current technologies).

When combined with other software, such as a "smart contracts", users of a blockchain have the following benefits:

Buyers and sellers can transact directly, and instantly, rather than having to go through and rely on intermediaries (such as banks, trading and clearing houses);

Borderless transactions;

Automated contract execution that removes credit risk in real (or near as real) time;

Identity verification for counterparties;

Superior transparency with secure record trail;

Low transaction costs.

How might farmers use it?

Early trials transacting agri commodities using blockchain demonstrate its potential to sell agri outputs (such as wheat, wool, meat, livestock, wood or fruit) direct to end-buyers in a way that's fast, secure, with high confidence about origin and food safety.

Across the Tasman, Commonwealth Bank of Australia (CBA) was recently involved in a trial testing blockchain's integration with sensor technology. This saw CBA collaborate with a US bank to help a US-based cotton business sell a cotton shipment to its own marketing arm in Australia.

Instead of waiting for payment from CBA under the usual manual letter of credit arrangement, the cotton business was paid automatically with the necessary verification triggered automatically through sensor-based, physical tracking of the shipment in real time.

Here, blockchain provided greater certainty, reduced errors and accomplished in minutes what usually takes days.

Imagine the potential in the opportunity to also integrate a blockchain solution with data-gathering devices that use 'Internet of Things' technology. Buyers might have access to live on-farm and downstream logistics data giving them all details necessary to determine amounts, quality and status of livestock or produce, for verification, inspection and pricing. This sort of efficiency could lessen the information advantage some intermediaries exploit for their share of margin. Customers and end-users will embrace this technology.

Walmart Stores, one of the world's largest retailers, is harnessing blockchain to catalogue huge amounts of data for managing food recalls.

With traditional methods it can take days, if not weeks, to trace an item from shipment through to retailer following a customer complaint. But with a blockchain database, Walmart believes it can determine all necessary details how and where the food in question was grown and who it was inspected by right down to individual packages.

This enables strategic product withdrawals that companies and consumers can have confidence in, due to the detail and integrity of the data.

The saving to Walmart from tracing and recalling just a few packages as opposed to an entire product line across multiple stores is significant.

While it's still early days, excitement about blockchain is growing as awareness of its practical applications develop.

Allowing trusted groups to trade seamlessly at low cost with radical transparency has huge value potential in a world of future scarcity where consumers are concerned about food safety and provenance, and our large food customers seek lean, transparent solutions for managing food waste and supply chain inefficiency.

New Zealand's strength in agri production and commodity supply chain management give us a tremendous opportunity to lead the world in developing food and agri blockchain solutions that connect, shorten and sharpen global supply chains.

However, as for any innovation, we risk losing strategic ground if we don't invest to understand technology such as blockchain, and its potential to transform the global agri supply chain and associated services. Collaboration between industry and government and across the supply chain is critical.

Australia understands this. The Australian Government has recently released a scientific study of blockchain, which was funded in its 2016 budget. As well as highlighting Australia's claim to be a global leader in the technology, the study found supply chain management, including trade finance reform, is a "highly promising" use-case for blockchain. Pointing the way, it implores companies and regulatory authorities to work together to develop its commercial uses.

New Zealand should take note. We must strengthen our focus on developing a world-class national ecosystem to co-ordinate and engage all elements necessary to building the thriving best-in-breed agri tech industry necessary for this to happen.

Blockchain might just be the vital link that enables New Zealand's farming industry to capture our holy grail of more margin.

Monday, June 26, 2017

The Business of Tax

ONE of the hottest debates in economic policy at the moment is how to ensure companies are paying the optimal amount of tax. On the right, politicians think that a lower corporate-tax rate will lead to more business investment and thus faster economic growth. Hence the initial stockmarket enthusiasm after President Donald Trump was elected on a platform that included cuts in business taxes. On the left, the belief is that business is not paying its “fair share” of tax and that it can be further squeezed to pay for spending commitments. Hence the promise of the Labour Party in Britain’s recent election campaign to push the corporate-tax rate up to 26% (from 19%).

How do these theories translate into practice? To find out the effect on business investment, The Economist took the corporate-tax rates in OECD countries and divided them into quartiles from highest (1st) to lowest. Then we calculated the five-year average in each quartile for gross fixed capital formation as a share of GDP.


As the top chart shows, the relationship is not very strong. The countries with the highest tax rates generate less investment than those with the lowest, but there is not much difference. That is probably because the decision to invest in a country depends on a lot more than tax. The underlying growth rate of the economy and the regulatory climate also play a big part. Independent of their tax rates, for example, South Korean and Turkish companies are investing a lot. Perhaps they are catching up with mature economies, perhaps they are over-investing.

What about the tax take? The picture is complicated here, too. Lower tax rates may just work by pinching revenues from other countries. For example, Ireland, with a 12.5% rate, earns a higher proportion of GDP in revenues than France, at 34.4%. And the headline tax rate may not be decisive. Countries with high rates (like America) tend to offset them with allowances and deductions that bring down the effective rate that companies pay.

The idea of using tax levels to boost revenues does not get much support, either. Most countries sit within the 2-3%-of-GDP range (see bottom chart). The countries with the lowest corporate-tax rates receive a bit less in taxes. But the difference between the top and bottom quartiles is only 0.9% of GDP. Grabbing this extra chunk might be useful revenue, but when public spending is 40% of GDP or so, other sources of funding are a lot more important.


The countries with the highest tax takes (over 4% of GDP) tend to be those, like Australia and Norway, with plenty of natural resources. They can take advantage of captive businesses. But that is not an option for most developed nations, especially given the potential for tax competition. OECD countries are trying to co-operate to stop companies from gaming the international tax system. But it is a tricky task; one man’s tax avoidance is another man’s legitimate business planning.

Two other things are worth remembering. The first is that companies are merely legal entities. To the extent they pay more taxes, they must get the money to do so from elsewhere. Politicians on the left think the money comes from shareholders. But it is not as simple as that (and even if it were, those shareholders may represent the pension funds of citizens). For instance, a large company might not want to reduce the profits it pays out to shareholders for fear of becoming a takeover target. So it could move some of its operations to a lower-tax regime. Or it could recoup the loss by charging consumers more, or by paying workers less.

Second, countries do not just want to attract businesses for the taxes they pay but for the workers they employ and for the extra revenues they create for local suppliers. The effective tax take firms generate (on wages, sales and property taxes) is much higher than the tax on profits alone. So there are dangers in driving business away, something Britain needs to contemplate after the Brexit vote.

Some argue that the profits tax should be abolished. Governments should look through the corporate structure and tax shareholders directly. The problem is that many shareholders, such as pension funds and charities, are tax-exempt, and others are based in low-tax regimes. That would also create incentives for individuals to incorporate to cut their tax bills. So such a move should await much more sweeping tax reform. In the meantime, governments will have to make do with what they currently get. There is no magic trick for collecting a lot more.

From The Economist June 17th edition

Monday, May 22, 2017

The Paris Treaty on Climate Change

Matt Ridley notes in respect of the Paris Treaty on Climate change that:

….. the economist Bjorn Lomborg calculated how much the pledges would reduce warming, using standard models and generous assumptions about how quickly the reductions would be achieved and how long they would be sustained.

He found that all the promises made by the US, China, the EU and the rest of the world, if implemented from the early 2000s to 2030, and then sustained through the rest of the century, would reduce the expected rise in global temperature by only 0.17°C in the year 2100. That is to say, instead of rising by 2, 3 or 4 degrees or so by the time our great grandchildren are adults, world average temperature would rise by 1.83, 2.83 or 3.83 degrees. Lomborg put it this way: “Current climate policy promises will do little to stabilise the climate and their impact will be undetectable for many decades”. A different study by scientists at MIT came to similar conclusions. The INDCs add up to the square root of zilch.

However, and this is the crucial point, Lomborg also points out this invisible achievement would come at a staggering cost, somewhere between $1 trillion and $2 trillion a year: “Paying $100 trillion for no good is not a good deal”.

Friday, May 5, 2017

Cohen on Liberalism and Free Speech

Liberalism does not only fail to satisfy the new conservatives who are storming to power across the west. It fails to satisfy many who call themselves “liberal”. It is simultaneously too hard and too soft an ideology to bear. It demands tolerance. But we do not want to be tolerated as if we were poor relations. We want respect, approval and freedom from criticism and insult. In our wilder moments, we want, in our vanity, to be loved.

To paraphrase the paraphrase of Voltaire, the liberal view of sexual tolerance used to be: “I may disapprove of who you take to bed, but I will defend to my death your right to bed them.”

Just as liberals used to tolerate free speech, except when the speaker was inciting violence, so they allowed free love between consenting adults. Few now care about defending rights to the death. Many turn authoritarian and maintain you have no right to disapprove.To recap, the great mid-20th century movement for homosexual rights culminated in the recommendation of the Wolfenden report of 1957 that sexual acts between consenting adults in private should be decriminalised. It did not say that fundamentalist Christians, Jews, Muslims or ordinary secular homophobes must stop believing that homosexuality was a sin. Indeed, their freedom of speech guaranteed their freedom to disapprove. They simply lost the power to call for the police to raid bedrooms.

Equally, the old liberal insistence that free speech must be tolerated, except when it incited violence, did not mean that an audience must approve of a speaker. It remained free to argue back, denounce or satirise in the most robust manner. It just could not call on the authorities to ban speakers or the police to arrest them for “hate speech” when the speech was not so hateful it provoked attacks on its targets.Farron was being a true liberal. He disapproved of homosexuality but was prepared to defend gay rights

The strange controversy the leader of the Liberal Democrats began when he equivocated on whether he believes homosexuality is a sin shows how dead the old liberalism is. On the record, Tim Farron supports “equal rights for LGBT people and LGBT rights in this country and overseas”. But he also believes Christianity is “the most important thing in the universe bar nothing”.

The contortions he put himself through as he dodged questions about homosexuality’s “sinfulness” suggested he took his Bible literally and had dwelt on the murderous condemnations of homosexuality in Leviticus, echoed by St Paul, for longer than is healthy.

If he once did and has now changed his mind, so what? Farron was being a true liberal. He disapproved of homosexuality but was prepared to defend gay rights, just as I disapprove of religious fundamentalists but am prepared to defend their freedom to worship. Even by the low standards of 21st-century culture wars, the Farron “controversy” was absurd.

To give the absurdity a sinister twist, there is a genuine story about religion and equal rights that no one covers because it does not fit into the stereotypes of news coverage, where reactionaries are always conservative or Christian and the convergence of the far left and far right is always ignored.

Jeremy Corbyn worked for Iranian state television and spoke at Khomeinist ralliesin London. Everywhere he went, he looked a willing collaborator with a regime that flogs and executes gay men, treats women as second-class citizens and imprisons trade unionists.

If Corbyn was questioned on this, which he never is, he might say he does not approve of every aspect of Shia theocracy. But he worked for it, and was paid by it, and never found the courage to speak out on Iranian television for the victims of its oppression. A liberal society that condemns one politician who bothers God, but gives a free pass to another who works for a queer-bashing, queer-killing regime is so lost that it may never find its way home again.A liberal society that condemns a politician who bothers god, but not one who works for a queer-killing regime, is lost

At second glance, however, perhaps liberal society isn’t making a complete fool of itself. For why shouldn’t a gay man or lesbian be repelled by Farron’s contortions? At some level, they may suspect that although he will defend them he does not approve of them. Why should they accept that as good enough?

To broaden it out, why must a feminist fed up with seeing women portrayed as lumps of meat accept that she must struggle for years to find a link between pornography and rape? Why should a Muslim incensed by the anti-Muslim bigotry of the worst of the right, or a Jew incensed by the antisemitism of the worst of the left, wait until their enemies incite violence? Why not no-platform or call for dangerously fuzzy laws against hate speech before the tipping point?

For those who practise it, toleration is a hard principle to live with. It forces you to engage with enemies you abhor in argument when you don’t believe they have an argument worth hearing.

Concealed within the hardness is a soft centre, one that is too insipid for many to digest. Emotionally, it feels vapid to say that you must win arguments rather than call for the police. It can feel like an act of treason to dignify misogynists, racists or homophobes by agreeing to argue with them in the first place.

But however much the dismissal of tolerance, and the flight to a politically correct authoritarianism, makes emotional sense, practically it has been a disaster. Trump won in part because tens of millions of Americans had had it with being told what to think. Some were genuine bigots. Others could be won over if only “liberals” stopped upholding an illiberal policing of thought.

Unless they understand how they drive so many into the welcoming embrace of the right, Trump’s four-year presidency could stretch to eight. In Britain, we will have at least five more years of Conservative rule. Basic self-interest ought to persuade liberals not to provide justifications for censorship and control when the right – and the right alone – has the power to deliver both.

The politically correct movement is not only an intellectual and practical failure, it fails on the more basic level of human psychology.

You cannot demand respect from others. You can only earn it. You cannot force others to admire you, endorse your lifestyle and drop even private doubts about you. You can only persuade them to see what good there is in you. And if you don’t know by now you that cannot compel others to love you, you never will. All you can do – and all you should want to do – is take the deal when a politician says: don’t ask if I respect you, ask if I respect your rights.

Opinion by Nick Cohen, Journalist.

As originally printed in The Guardian.

Friday, April 7, 2017

Neo wowsers and Regulation

Alcohol Bans in India and the United States

by Alex Tabarrok on April 6, 2017 at 7:29 am in Economics, Food and Drink, Law, Travel | Permalink

The Indian Supreme Court has just banned sales of alcohol within 500 meters of a national highway. The ban affects not just liquor stores but tens of thousands of restaurants and hotels. In response, the Rajasthan Public Works Department announced that they would now recategorize highways in urban areas as roads! Other states may follow suit. (David Keohane at the FT has further background on the India ban.)

Lost in the shenanigans is that even if the ban were implemented perfectly it’s not at all obvious that it would reduce traffic accidents. Alcohol can be easily stored and if you are thirsty driving 500 meters doesn’t seem like very far to go to buy alcohol.

Entire counties in the United States have banned alcohol but that doesn’t seem to have reduced traffic fatalities. It may even have increased fatalities because residents of dry counties drive to a wet county to find a bar and then they drive drunk for longer distances as they head home.

Wednesday, March 15, 2017

Something has to give

Money Illusion

This misalignment is serious. Lights orange to very pink indeed. As ever – when ??!!

From The Economist – Buttonwood -  March 4th 2017:

Interest rates and investment returns

Low rates usually mean low returns; so why are markets so buoyant?


IF THERE is one aspect of the current era sure to obsess the financial historians of tomorrow, it is the unprecedentedly low level of interest rates. Never before have deposit rates or bond yields been so depressed in nominal terms, with some governments even able to borrow at negative rates. It is taking a long time for investors to adjust their assumptions accordingly.

Real interest rates (ie, allowing for inflation) are also low. As measured by inflation-linked bonds, they are around -1% in big rich economies. In their latest annual report for Credit Suisse on global investment returns, Elroy Dimson of Cambridge University and Paul Marsh and Mike Staunton of the London Business School look at the relationship between real interest rates and future investment returns. Very low real rates have in the past been associated with poor future equity returns (see chart).

That may come as a nasty shock for state and local-government pension funds in America. They have to assume a future rate of return on their investments when calculating how much they need to contribute to their plans each year. Most opt for 7-8%, a level that has prevailed for years. That return looks highly implausible at a time when ten-year Treasury bonds yield just 2.4%.

There is a strong incentive not to change these assumptions. CalPERS, a Californian state pension fund, has cut its assumed return from 7.5% to 7%. But even that small shift will cost the state $2bn a year in extra contributions.

Why should low real rates and low returns be linked? One reason is that very low real rates are associated with times of economic difficulty, and thus periods when corporate profits are under threat. But a low real interest rate also means a low cost of capital for companies, which ought to be good news. Indeed, central banks ease monetary policy to try to drive down interest rates, and thus encourage business investment.

There has been some recovery in business investment since the last recession. But that recovery has not been as robust as might have been expected, given the low cost of capital. In a recent speech, Sir Jon Cunliffe, deputy governor of the Bank of England, noted that “in the 40 years to 2007, business-investment growth averaged 3% a year. In the eight years since the crisis it has averaged 1.5% annually.”

A number of possibilities could explain this decline, including a lack of access to finance. Banks have been boosting their capital ratios in recent years and have been more reluctant to lend. But another factor relates to the “hurdle rate” companies use before they decide whether to invest. A survey by the Bank of England indicates that firms are still using a hurdle rate of 12%, around the average of the rate of return on investment they have achieved in the past.

In other words, despite the big fall in the cost of borrowing since the crisis, the hurdle rate has not come down. Since the risk-free rate is in effect zero, the bank says British firms are now looking for a 12-percentage-point margin compared with one of seven points before the crisis. This could be a version of “money illusion”, when people fail to adjust their expectations for nominal returns as inflation declines (in this case, both real and nominal expectations ought to have fallen).

There is an alternative explanation for the failure of expectations to shift. Both businesses and investors, realising that the economic outlook is uncertain, may be demanding a higher risk premium for starting new projects or buying shares. That explanation is a little hard to square, however, with the repeated new record highs being scaled by stockmarkets or with the high valuations afforded to American equities.

Since the market low in March 2009, dividends have risen by 48% in real terms and real share prices have risen by 167%, according to Robert Shiller of Yale University. The cyclically-adjusted price-earnings ratio (or CAPE), which averages profits over ten years, is 28.7, its highest level since April 2002. In the past, very high CAPEs have been associated with low future returns.

Indeed, having analysed the data, Messrs Dimson, Marsh and Staunton reckon global investors are expecting a risk premium of 3-3.5% relative to Treasury bills—a level that is lower, not higher, than the historic average. So something does not add up. American pension funds are optimistic. Businesses are cautious. Shares are trading on very high valuations. Not all these assumptions can be proved right.

Wednesday, March 1, 2017

Where Rashid and Juliet can’t wed

Many countries make it hard to marry someone from another religion – change is needed

Around two dozen countries have no provision for civil marriage

ARMAN DHANI, an Indonesian journalist who is Muslim, broke up with his Catholic girlfriend of five years when he reached the heartbreaking conclusion that they would never be able to marry. Indonesian officials refuse to register inter-faith marriages because the law does not mention them. “My mother said: ‘If you want to marry her she must convert to Islam,’” he says. “But I didn’t want to make her betray her religion.” He felt he could not change religion either. “If I converted to Catholicism I would become dead to other Muslims.”

Indonesia is one of about two dozen countries with no provision for civil marriage. Others include Israel, Jordan, Lebanon and almost all Arab states. Only unions conducted according to the rules of officially recognised religions can be registered. In Indonesia children of unregistered unions cannot get birth certificates, without which they struggle to receive health care or schooling.

Some couples of differing faiths, or none, go abroad for a civil ceremony. Each year about 3,000 couples from the Middle East get married in Cyprus, which brands itself the “island of love”.

Campaigns to introduce civil marriage are afoot in many countries. But governments often fear angering politically powerful religious groups. In Lebanon marriages and other matters of family law, such as divorce and inheritance, are left to the religious courts of 18 Muslim, Christian and other sects. This allows politicians to sidestep the tricky task of crafting family laws that would be acceptable to leaders of all those faiths. In Indonesia, says Mr Dhani, both Muslim and Christian leaders fear that an inter-faith marriage would inevitably end up with one of the partners converting.

In many places, anyone who dares to wed across religious lines faces ostracism—and perhaps even violence. Getting rid of legal barriers would not remove all the risks. But it would help, a bit.

As published in The Economist 18th February