[Final]Can Natural Disaster Ever be Good to Economy?

Hurricanes, earthquakes, and wildfires … America and the world have been entangled by natural disasters recently. The natural disasters never could be considered as a positive force because of the destruction and death the bring. However, disasters also tend to make reconstruction the primary task for the government, making it easier for public money to flow into hard-hit regions. Economically, in what case would natural disasters be a boost to the regional economics? It depends the previous economic status of the affected region and the immediate assistance efficiency from the government.

In Sichuan, China, where a magnitude 8 earthquake took place in 2008, is an example how the local economy can recover and even expand during the post-disaster reconstruction. Poor infrastructure exacerbated the damage, leading to an official death toll of 87,150 and 4.8 million people homeless, according to the BBC News. The economic loss was estimated at $191 billion, the second highest in absolute number in history, according to 2013 CATDAT Damaging Earthquake Database. The noteworthy part was that the central counties in 2008 Sichuan earthquake, WenChuan and Ya’an, were neither a raw material production base nor manufacturing zone. Actually, these counties were poor. Thus, the earthquake did not hurt the Chinese exports or GDP to any great degree.

The rebuilding efforts cost the Chinese government almost $150 billion, equivalent to a fifth of its entire tax revenues for a single year, according to the state media of China in 2008. Quickly after the earthquake happened, the National Development and Reform Commission of China announced a reconstruction plan that “envisages buildings 169 hospitals and 4,432 primary and middle schools to replace collapsed structures. Another 2,600 schools that remained standing will be strengthened. More than 3 million homeless rural families will get new houses and 860,000 apartments in the city will be built.”

Relying on such tremendous capital investment, the regional economy of Sichuan was able to recover in an amazing speed. Here is the chart associated with the Gross Regional Product(GRP) of Sichuan from 1998 to 2010.The blue, yellow, and green line respectively indicate the GRP of Sichuan, of the hardest hit region of Sichuan in 2008 earthquake, of else of Sichuan, in the form of percent of Chinese GDP. The pinkish line represents the GRP per capital as ratio to Chinese GDP.

The graph tells that before the earthquake happened, the hardest hit region in Sichuan earthquake, which is composed of the ten serious-damaged counties, generated about 0.25% of Chinese GDP. Meanwhile, the Sichuan generated about 4.1% of Chinese total GDP.

By 2010, 2 years after the earthquake, the GRP of Sichuan and the GRP of non-central damage area of Sichuan both not only recovered but even had growth.

“The GRP level of the worst-hit area of Sichuan decreased by 35.4% in 2008 compared to the 2007 level. After three years of reconstruction, the region had still not returned to its pre-earthquake GRP level, but the GRP level of the rest of Sichuan experienced a boom in those three years because of the reconstruction demand stimulus,” according to a studies conducted by MOE Key Laboratory of Environmental Change and Natural Disaster of the Beijing Normal University.

The GRP per capital in Sichuan had a huge growth; however, it is meaningless considering the tragic death tolls.

In a article published by China Daily , by 2012 when reconstruction basically completed, the Deputy-Governor of Sichuan Gan Lin said, Sichuan was the fastest growing of the major economic provinces in China. China Daily asserts “the quake zone has seen unprecedented changes.” Governor Gan said, during the past four years, Sichuan’s GDP doubled more than 2 trillion yuan ($317 billion), enabling its per capita GDP to surpass $4,000.

*A noteworthy point for the above statement is the “go west” strategy to increase inland development formulated by the State Council in 2000 also plays an significant factor to Sichuan’s growth.

“When something is destroyed you don’t necessarily rebuild the same thing that you had,” said Mark Skidmore, an economics professor at Michigan State University. “You might use updated technology, you might do things more efficiently.” With massive amount of national resources, “the disasters allow new and more efficient infrastructure to be built, forcing the transition to a sleeker, more productive economy in the long term, a New York Times article commented on the Sichuan Earthquake in July, 2008.

More practical and explicit reflection of the benefits from 2008 earthquake to Sichuan region comes from the 7.0 magnitude Sichuan earthquake in Ya’an. According to the BBC report, “none of the buildings built since the Sichuan earthquakes collapsed.” The quality of housing for sure has improved.

However, the previous economic condition of the hardest hit region in Sichuan earthquake facilitated the recovery session. A New York Times article wrote about one month after the earthquake, “only 1 percent of China’s population lives in the hardest hit quake-affected area, in northern Sichuan Province. Those residents account for an even smaller share of China’s economic output, because many of them are impoverished farmers.” In other words, these areas might not receive this much of national investment or resources within short period of time.

The economic affects brought by Northridge earthquake in 1994 was a different story. That 6.7 magnitude quake struck an area of 2,192 square miles in the San Fernando Valley, causing 57 people killed and 11,800 injuries. It is still ranked by CNN Money as the most expensive earthquake in American history, costing $44 billion.

In the research “The Northridge Earthquake, USA and its Economic and Social Impacts” conducted by Professor William J Petak from University of Southern California and Research Fellow Shirin Elahi from University of Surrey explains the difficulty of reconstruction for Northridge area, “Northridge earthquake was a direct hit on an urban area and the scale of losses caused by the earthquake far exceeded expectations.”

Unlike regions in Sichuan, US has a large concentration of localised industries, such as the entertainment and aerospace industries in southern California, which was severely undermined by the earthquake, the research argues. Moreover, unlike most people lived in Sichuan’s affected regions were rural farmers, San Fernando Valley supports half of the city of Los Angeles’ population. “Approximately 48% of the population were homeowners – middle class and therefore not obviously insecure- yet many proved to be vulnerable to the hazard,” the Northridge Earthquake research claims.

Another important factor that determines the success of reconstruction after catastrophe is how effective and efficient the state or the federal government respond to the recovery assistance. The highly-centralized government system allowed the Chinese government to respond Sichuan Earthquake immediately, ordering national assistance and resources investment. Kevin L. Kliesen, Economist from Federal Reserve Bank of St. Louis wrote in his article “The Economics of Natural Disaster,” explains the difference in American government, “although emergency funds for food and shelter are usually disbursed immediately by Presidential directive, monies for longer-term rebuilding efforts are often appropriated by Congress with a substantial lag.” The research “The Northridge Earthquake, USA and its Economic and Social Impacts” criticizes the reaction from the government during the Northridge Earthquake. The research attacks the lack of “a desire for a recovery to reproduce a return to normalcy, and achieve the status quo of the socio-economic and built environment prior to the earthquake.” Many federal, state and local officials were not willing to sacrifice their own political, economic, social or environmental agenda to cooperate to help the affected regions, the research asserts. They were at best willing to make adjustment.

An extreme case is the Haiti’s response to earthquake. The Bernard L. Schwartz Chair in Economic Policy Development Martin Neil Baily wrote in an article for Brookings that Haiti, which is too poor to manage the immediate recover after hurricane, has to wait international aid to get basic rebuilding, leaving alone economic growth. It is so difficult for Haiti to recover.

The study of economy in disasters is not new. In 1969, Douglas Dacy and Howard Kunreuther, two young analysts at the Institute for Defense Analyses, published a book called “The Economics of Natural Disasters.”  It was probably one of the first attempts to measure the economic influence of catastrophe. The book argues that the dreadful Alaska earthquake of 1964 helped the Alaska economy by garnering government loans and grants for rebuilding.

“We got a lot of hate mail for that finding,” said Kunreuther, now a professor of business and public policy at the Wharton School of the University of Pennsylvania.

The theory of economic boom from disasters also received criticism.“Over any reasonably relevant period of time, society is not made wealthier by destroying resources,” Donald Boudreaux, an economics professor at George Mason University, said. If it were, “Beirut should be one of the wealthiest places in the world.” Economist Frédéric Bastiat labeled the disastrous economy theory as “the broken window fallacy” in his article “What is Seen and What is not Seen.” Bastiat compares the disaster reconstruction to fix a broken window. It costs $100 dollar to fix a window. The repairman and window shops got money because the window owner pays it. In the reconstruction case, the money comes from tax payers or just money printers. The natural disaster could be an economic boost to a region, but it always is an economic downturn for the whole nation.

In conclusion, the theory model of disastrous benefits for economy should be viewed as that the areas that would not receive national resources or investment during the normal time becomes privileged after suffering catastrophe. It also gives these areas more opportunity and capital to develop during the reconstruction period. The previous economic condition of the affected region and the efficiency of government assistance determine the success of the recovery. Despite to the regional growth, we should never be positive toward disasters because it never generates economy but merely redirects capital and resources to recover a definite loss of wealth.

California’s market-based response to climate change tries to avoid the problems with markets

A layer of smog rests over the Los Angeles Basin in Sept. 2007. (Flickr user vlasta2, CC BY-NC-ND 2.0)

When California Gov. Jerry Brown signed major climate legislation in June, he returned to the spot where his predecessor, Arnold Schwarzenegger, signed his own climate law more than ten years earlier: Treasure Island.

It was an apt location. The artificial island in the San Francisco Bay was created in the 1930s to showcase California’s grandeur for the World’s Fair. Likewise, these climate bills are intended largely to demonstrate to the world that California is leading on climate change.

Schwarzenegger signed Assembly Bill 32 into law in 2006, setting the stage for the creation of California’s cap-and-trade program. A concept that’s been around for only a few decades, cap-and-trade aims to create financial incentives for polluters to adopt more eco-friendly technologies and reduce their greenhouse gas emissions. Brown extended the program to 2030 on Treasure Island and created more ambitious targets.

The state’s goal is to reach 1990 levels of greenhouse gas emissions by 2020, despite a projected population increase of nearly 37 percent over 1990. In 2017, that goal was toughened to reach 40 percent below 1990 levels by 2030.

But so far, it’s been hard to measure the cap-and-trade program’s success, and market-based approaches to the environment can have many of the same flaws and failures found in other kinds of markets. The state’s efforts to address these flaws led to redundant “complementary” policies, meaning that the centerpiece of California’s climate policy actually only plays a small part in its emissions reductions.

A modern cap-and-trade system is designed to reduce greenhouse gas emissions through a flexible market rather than one-size-fits-all regulation. By putting a price on greenhouse gases and creating a market to trade them, the system creates economic incentives for firms to reduce their emissions in the way that’s most cost-effective. To reach the state’s 2020 goal, emissions will need to be about 15 percent below a “business as usual” scenario.

The California Air Resources Board keeps track of the state’s greenhouse gas emissions. This chart from CARB’s 2017 Scoping Plan shows emissions from 2000 to 2014.

To illustrate how this works in practice, let’s imagine you run a natural gas power plant and you produce 100 tons of CO2-equivalent in a year (in reality, this figure would be much higher). Knowing that you emit 100 tons, the California Air Resources Board would issue you 100 carbon credits. You’d get most of them for free, but a few would need to be purchased on the market, either from the state or from other polluters. The idea is that you would save money by taking steps to reduce your emissions rather than purchasing credits, and then if you use fewer than what you’re given for free, you can sell the rest and make a profit. The total number of credits given by the state decreases every year to encourage emissions reductions.

California’s cap-and-trade system began on Jan. 1, 2013, with large power plants and industrial facilities. It was expanded to fuel distributors in 2015, meaning that cap-and-trade now affects about 85 percent of greenhouse gas emissions in the state. Some major companies in the state, like electric utility Pacific Gas and Electric, which serves nearly two-thirds of California’s geographic area, have said they support the program as the best way to address climate change.

In the United States, California has the most extensive cap-and-trade system, which affects all companies emitting more than 25,000 tons of CO2-equivalent in a year. By 2018, its market will be linked to both the Quebec and Ontario emissions markets (more on this later). There’s also a regional cap-and-trade system for electric utilities in New England, and there have been others in the past, such as one created in the 1990s to reduce acid rain-causing emissions. But no nationwide emissions trading system exists today in the U.S. The last big effort to create one, the Waxman–Markey bill in 2009, passed in the House but fell through in the Senate after facing opposition from senators from coal-reliant states.

So far, emissions auctions in California have raised nearly $5 billion for the state, according to the state Legislative Analyst’s Office. State law requires this money to be spent on projects that further reduce greenhouse gas emissions. More than $1.3 billion has been spent on the state’s high-speed rail project, and nearly $700 million each has been spent on low carbon vehicle incentives and affordable housing programs.

Critics of cap-and-trade policy say it’s burdensome for businesses and have pointed to high-profile companies like Toyota moving their operations out of California. But USC environmental economist Kate Svyatets said the state has been successful in balancing competing interests: economic freedom and environmental protection.

“A lot of businesses, instead of being overburdened, they make money,” Svyatets said. “It’s possible to have both a cleaner environment and economic growth, and California shows how to achieve it.”

For most economists, cap-and-trade is the “preferred solution” for regulating greenhouse gas emissions, UCLA researcher Ann E. Carlson wrote in the Harvard Journal on Legislation. Other methods of emissions control, like a carbon tax or mitigation rules, require direct government enforcement and are not as economically efficient as a market system can be — they impose a price on carbon on the state rather than letting one emerge through economic activity.

“It’s hard for the government to decide exactly how many carbon credits to allow,” Svyatets said. “The carbon experts say it’s not expensive enough yet. It’s still better than nothing, but it’s not expensive enough for some companies to switch to clean technology.”

But though California’s cap-and-trade system is designed to create price incentives to reduce emissions, it has not been very instrumental in doing so. The emissions cap each year has been higher than actual emissions in the state, meaning that the emissions trading system does not have the chance to seriously affect how polluters behave. Prices on the emissions market also fell precipitously in 2016 as a court case made the program’s future uncertain. They’ve since rebounded but remain near the state-mandated price floor.

When emission credits don’t cost enough, it becomes cheaper for firms to pollute than to invest in methods that would reduce their emissions in the long term. The European Union is an example of this. It started its cap-and-trade system in 2005, but the European Commission allowed too many credits in the market. Prices fell to ineffective levels by 2008, and companies were profiting off the EU’s mistake by selling the extra credits.

As in California, the prices have since stabilized. At the time of writing, the allowance to emit a ton of greenhouse gases costs roughly $7 in the EU, compared to $13 on California’s market. The 2017 price floor in California is $13.57.

This chart from the European Commission of the European Union shows how the EU’s greenhouse gas emissions have changed since 1990. The data are shown as an index, with 100 being the 1990 level.

Carlson said that when emissions trading systems don’t work, “policymakers may need to enact complementary policies to address those market failures.” California has supplemental requirements like the Renewable Portfolio Standard, which requires an increasing portion of electricity sold in the state to come from renewable and emissions-free sources, and the Low Carbon Fuel Standard, which requires gasoline and diesel fuels to be less “carbon-intensive.”

These policies are perhaps the greatest limit to cap-and-trade’s effectiveness. The complementary policies are responsible for about 80 percent of emissions reductions, with cap-and-trade in place to “sweep up remaining cuts,” according to MIT researchers’ interviews with California officials.

All three policies were created together in what the researchers have called an “insurance” policy to “create a mechanism that could make up emission reduction efforts that were lost if any of the major complementary policies were to fail.” In a way, this means that cap-and-trade in California is intended to be largely a backup plan in case the state’s other policies are not enough. This limits the role that the market has and therefore the incentive for polluters to reduce emissions in the most cost-effective way.

One common issue in many markets is a lack of competition or the monopolization of resources, but despite some speculative activities in emissions trading, anti-competitive behavior hasn’t been a problem in large markets like the European Union or California. German researchers found that those kinds of issues only arise in small trading pools, such as the RECLAIM market for nitrous oxide and sulfur oxide emissions in Southern California.

“Firms within the same industry do not want to sell allowances to buyers with whom they [otherwise] compete,” the researchers wrote. But in large cap-and-trade systems with diverse stakeholders, this has not been a problem.

To make emissions trading systems even more competitive, governments have sought to link their markets with others, allowing credits to be sold across them. More buyers and sellers of emissions means more competition and less room for market abuse.

“If you have a very small market, what if nobody wants to buy your allowances? Just imagine you want to sell a used car or your cell phone or something,” Svyatets said. “If it’s just you and I in this market and nobody else, what if I don’t want your cell phone? What if I don’t want your car?”

But linkages introduce a problem seen in other cases of cross-jurisdictional common markets, like the European Union. When the Greek debt crisis struck that country in 2008, leaders at the European Central Bank found their hands tied when it came to monetary policy to relieve the nation’s ensuing recession. According to UCLA researcher Juliet Howland, linked emissions trading systems could face a similar problem in which one government “may not be able to regulate the price of carbon credits in order to prevent serious damage to [its] economy.” The MIT researchers found through their interviews that California’s system was intended to be flexible for linkages with other western states (which later abandoned their cap-and-trade ambitions), but were concerned that it could be hurt by linkages to weaker cap-and-trade markets.

Linked emissions systems don’t even have to be geographically close — California’s market is linked to the province of Quebec and soon to Ontario, while the European Union has started the process of linking its system to Australia’s. The thought is that in tackling a global problem, it doesn’t matter where greenhouse gas emission reductions happen as long as they happen somewhere.

But California has taken steps to ensure local benefits for its cap-and-trade program. Twenty-five percent of funds are automatically earmarked for high-speed rail, plus 20 percent go to affordable housing and 10 percent to transit systems. All revenues from the sales of emission credits on auction go toward programs that the state says promote public health, and by law, one-quarter of revenues must benefit “the state’s most disadvantaged and burdened communities.”

Those communities, it turns out, are some of the most affected by climate change.

California’s cap-and-trade system aims to reverse course on greenhouse gas emissions to help protect all communities from the harmful effects of global climate change. But despite its large potential impact, the program in practice is only secondary to the state’s more heavy-handed regulations.

This chart from the California Air Resources Board’s 2017 Scoping Plan shows that potential statewide greenhouse gas emissions reductions under the continuation of planned policies would exceed those required under the governor’s executive orders.

That could change. The California Legislative Analyst’s Office found in 2017 that the state was on track to meet its 2020 emissions goal, but the 2030 target is much more ambitious and will require much more severe greenhouse gas reductions.

The cap-and-trade program will likely become more essential over time as the cap becomes increasingly tighter, but this will increase the burden on polluters too and potentially increase costs for consumers. The analysts estimated that some policies needed to reach the 2030 target could cost $300 per ton of carbon dioxide equivalent — or more than 20 times the current price for one allowance on the cap-and-trade market.

Who will be hit hardest by the cost of these reductions remains to be seen, and the impact on the economy is unclear. The analysts said long-term carbon prices depend on factors that are “highly uncertain,” and the state Department of Finance does not provide economic growth projections past 2020.

For now, the California Air Resources Board is working on a plan to reach its 2030 emissions goals. What comes out of those meetings will determine the future of California’s climate policy.

Grameen Bank: Empowering Women through Microfinance in Bangladesh

Microfinance was born in the early 1980s when an economist named Muhammad Yunus came across women in poverty from the villages of Bangladesh. In face of the widespread famine and poverty, some of these women and their families were controlled by the loan sharks, and had no other resource to turn to because traditional banks considered them not creditworthy. Muhammad Yunus repaid the women’s debt and helped them get loans from the bank as a guarantor. Soon, working with the poor made him realize that lending money to the disadvantaged is a great business opportunity for that they were trustworthy, hardworking people. He then created Grameen Bank, what we consider a pioneering model of social enterprise, to help the poor break the cycle of poverty.

Why has the Grameen Bank succeeded in reaching the poor, while traditional banks have not? The most prominent reason is that borrowers do not need collateral to get a loan. This policy allows access for the disadvantaged to get loans more easily to support their small businesses and livelihood. These loans are typically made in very small amounts, averaging at $200 with an interest rate below 20%, hence the “micro” in Microfinance. Grameen Bank is also different from traditional banks in that it has a financially self-reliant model. Yunus explained his bank’s business model in an article published in The Round Table: Grameen has funded 90 percent of its loans with interest income and deposits collected, aligning the interests of its new borrowers and depositor-shareholders since 1995. Essentially, the bank encourages all borrowers to become savers, so that their local capital can be converted into new loans to others.

The most fascinating fact about Grameen Bank’s operation, however, is that 97% of the borrowers are women. It is a brilliant business strategy because women statistically have a much higher loan repayment rate than male. Yunus have recognized this, and made women his target client partially for this reason. In an interview with The Guardian, Yunus said that he expanded the program into the US and established 19 branches in 11 cities, including eight in New York. “We have nearly 100,000 borrowers there now and 100% women. Not a single man.” However, giving microloans to women isn’t just good for business, it accomplishes so much more.

In rural Bangladesh, most women are essentially confined to their husband’s family compound, and are in a rather powerless position both socially and economically. Girls are usually married by 16, sometimes as young as 11. Most of the times, there are no medical professionals in attendance when women give birth to children in these areas. Women are expected to keep their eyes down and their voice soft, even at home. It is not considered proper for women to go to the market, or to be seen by men outside their family.

 

Microfinance serves these women, who are often overlooked in society, and empowers them one small loan at a time. This access to a small amount of capital made it possible for women to buy seeds, chickens or a cow and start and grow their small businesses. Often this allows them to earn enough to provide three meals a day instead of two for their family and their children, of whom 40% are malnourished. It also gave them a bit of cash to pay for medicines if a family member got sick.

Here’s the story of Manjira who, years before, was living in extreme poverty in Bangladesh. She had lost a young son to a sudden illness. She told the reporter at New York Times that her most painful memory was the day before her son died. He asked her for an ice cream that cost one taka (about 2 cents), but she didn’t have the money to give him that. A few years later, she managed to get a small loan through Grameen, and had become a successful seamstress. Now, she is one of the board members of Grameen Bank, along with 3 government representatives and 8 other village women elected by the bank’s more than 8 million members.

Like Manjira, many women in Bangladesh have found means to provide for themselves and their family with the help of microloans. The impact of Microfinance, however, goes far beyond providing women with business opportunities. More importantly, it help increase access to education for the next generation.

Statistically, children living in poverty have a higher chance of missing, dropping out, or not enrolled in schools. This is because the majority of families who live in poverty work in agriculture. The families need the children to be working and productive so their financial needs can be met. Microloans can help ease the financial pressure of these families, which means more opportunities for children to stay in school. This is especially important for families with girls. When girls receive just 8 years of a formal education, they are four times less likely to become married young. This makes these girls more likely to achieve higher level of education and then become a more productive member of the society.

Yunus claimed that part of the reason why he focused on serving female customers is that he wanted to protest the traditional banks that refused to lend money to women. As more and more of these women succeed in building their businesses, Bangladesh and many other developing countries reached by Microfinance firms are now forced to a new look at women’s role in the society. A recent study done by RMIT University has shown that Microfinance has effectively reduced gender inequality in developing countries. The study measured gender inequality using Gender Development-related Index and Gender Inequality Index. These are UN indicators that calculate gender inequality based on measures of differences in factors like health, education, and economic status, as well as living condition and empowerment. The researchers found that in the average developing nation, an increase in Microfinance by around 15% is associated with a decline in gender inequality by about 50%.

Some critics of Microfinance claim that many become overwhelmed by their debt. However, it is important to distinguish the different types of Microfinance organizations. Some institutions in Bangladesh like BRAC have models similar to Grameen and provide services with the goal to combat poverty. Unfortunately, there are also some profit-oriented organizations that use predatory lending and collection practices. Some of these institutions charge up to 200% for interest, and their harsh collection methods had driven some borrowers to commit suicide. This type of Microfinance lenders does their business on the client’s doorstep, meaning that representatives are encouraged to travel to rural villages to make the loans and then come back weekly to collect the payments. Yunus himself is outraged by this kind of Microfinance companies that make profits of the backs of the very poor. Sadly, the Bengali government offer few regulations in this type of predatory business.

Some academics, including Dean Karlan, insist that the success stories of women who received help from Grameen Bank is overrated, and paint an unrealistic picture of the effectiveness of Microfinance. Karlan conducted randomized controlled trials of Microfinance programs in different developing countries, and in each case they compared a randomly selected group of people who had been offered the loans to an otherwise identical group that had not. Their research suggests that Microfinance does not have much effect on improving the level of income of the loan recipients. However, it is worth noting that in some cases the overall income stay unchanged because borrower decrease their work at a wage-paying job as they start to gain more income from their own business, and the assets they own are not counted toward their income.

Aneel Karnani, a professor of strategy in University of Michigan published an article in Stanford Social Innovation Review, in which he agrees with Karlan and argues that despite its noneconomic benefits, Microfinance does not significantly alleviate poverty. He claims that instead of Microfinance, best way to eradicate poverty is to create jobs and to increase worker productivity. Karnani points out that most Microfinance clients are not “micro-entrepreneurs” by choice, and that these borrowers would “gladly take a factory job at reasonable wages if it were available”. On a macroeconomic scale, most people agree that employment is the fundamental link to poverty reduction. However, the problem that the clients face in these rural areas of Bangladesh is precisely the limited opportunities for steady employment at reasonable wages. Within the status quo, Microfinance is still the best opportunity for people who seek temporary financial relive and are hoping to kick start their small business.

Granted, Yunus’ hopes for Microfinance had always been rather grandiose. Poverty is a complex issue, and Microfinance isn’t a “silver bullet” that can magically solve it. With that said, well-intended Microfinance institutions remain one of the best tools available to developing countries to alleviate poverty. A 2015 report from advocacy organization Microcredit Summit Campaign claims that between 1990 and 2008, Microfinance has lifted 10 million people out of poverty in Bangladesh alone. However, there’s no denying that Microfinance has now become a worldwide movement. By 2013, some 3,098 microfinance institutions had reached over 211 million clients worldwide, just under half of whom were living in extreme poverty.

Clearly, more Microfinance in developing nations is good news for women. There is an immeasurable effect that occurs when women are empowered to do something in their society that they weren’t normally allowed to. As women build up their business, overall consumption increases and its benefits also extend outward to the entire community benefits, including those who are participating in the program. However, it is important to keep in mind that Microfinance does not automatically empower women. Governments and international organizations in developing nations should tighten regulation over Microfinance institutions and be sensitive to the country-specific and cultural factors that play a key role in determining how Microfinance interacts with the local community.

 

How Oil Prices Impact Different Sectors

There are few things that have a bigger influence in global markets than swings in oil prices. However, the ripple effects these swings have are hardly ever clear cut. In order to understand how swings in oil prices can influence global markets, we must first understand how these prices can increase or decrease.

Oil is a commodity that tends to fluctuate throughout time. One of the largest influencers of these fluctuations is the Organization of Petroleum Exporting (OPEC). The OPEC is an organization that includes 13 countries; Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. According to their website, as of 2016, “81.5% of the world’s proven crude oil reserves are located in OPEC Member Countries, with the bulk of OPEC oil reserves in the Middle East, amounting to 65.5% of the OPEC total” (http://www.opec.org/opec_web/en/data_graphs/330.htm). They have production levels that meet global demand, and are able to control prices by increasing or decreasing production.

Just like the stock market, the laws of supply and demand play a crucial role for commodities as well. If supply of oil were to pass demand, the price of the oil must decrease, and if demand were to pass supply, prices will increase. For example, if there is lower demand for oil in Europe and China, but there is continuous supply of oil from the OPEC, the price of oil will fall due to the surplus of oil supply. Although supply and demand do affect oil prices, the future of oil and reserves are what actually sets the price. Future contracts allow purchasers of oil to buy at a fixed price in the future on a specific date. Other influencers of oil prices include natural disasters, such as hurricanes or earthquakes, production costs, and political instability.

Although weaker demand is what can drive prices lower, the growth rate in China, which is the world’s largest net importer of oil, has caused significant changes to the price of oil. This is due to the slowdown of growth in China. Also, the OPEC has promised to reduce its production of oil, which can drive up the demand. However, with competitors entering the market, the OPEC has kept its production levels up to compete in the market and hold market share.

For many industries in the market, oil prices are really important to pay attention to. Fluctuations in prices can have a large influence on different sectors of the economy. One of the main sectors that is highly influenced by oil prices is the airline industry.

Every traveler can agree that the cost to fly from one place to another has become a crucial factor in making the decision to travel. Like most industries, the airline industry is constantly itching to find new streams of revenue. Airfare fees used to cut it, but now surcharges have been placed on almost every bit of customer service offered by the airline company. This includes seat selection, checked bags, meals, and sometimes carry-on bags, and they are not cheap. These surcharges first began as something to depend on when fuel prices increased, as well as increasing ticket costs.

Overall, crude oil prices have significantly dropped as a result of a surplus of supply. For the airline industry, a decrease of oil prices is great news. This means that they will have lower costs on fuel, which is one of their major costs, and will potentially lead to an increase in profits. The decrease in oil prices have caused airline companies to restructure their fleets, buy back stocks to show better earnings, and also look into expanding their routes in areas that seemed less feasible. This has also benefited travelers, due to the decrease in airfare costs.

Crude prices had recovered in the first quarter of 2017. This resulted in most airline fuel costs to rise. According to Ally Schmidt, “Delta Air Lines’ fuel costs rose 26.4% YoY to $1.6 billion. American Airlines’ fuel cost rose 37.8% YoY to $1.7 billion, and United Continental’s fuel costs rose 28.1% YoY to $1.6 billion. Alaska Air’s fuel cost rose 103% YoY to $339 million, including the impact of its Virgin America merger. Southwest’s fuel cost rose 13.6% to $959 million. JetBlue’s fuel cost rose 50% to $323 million. Spirit Airlines’ fuel expense rose 62.2% YoY to $139 million” (http://marketrealist.com/2017/08/analyzing-crude-oils-impact-on-airlines-fuel-costs/).

With the news of the OPEC and a few other non-OPEC nations slowing oil production rates until March of 2018, the oil prices rose to about $51.50 per barrel (http://marketrealist.com/2017/06/how-crude-oil-prices-impact-airlines-fuel-costs/). However, the impact of Hurricane Harvey had caused oil prices to fall to $47 per barrel. The capacity Texas has of oil is about 5.6 million barrels per day, and Louisiana has about 3.3 million barrels per day. The loss faced by both of these states resulted in a decrease in crude prices.

We know an increase in crude oil prices negatively impacts the industry’s largest cost. However, a decrease in crude oil prices can also cause problems to the airline industry. Lowering the oil costs can enhance profits, but also lowers airfares. This increases demand for traveling, which forces airline companies to find ways to increase capacity. Adding too many routes or dramatically increasing their fleet can cause airline companies to hurt their potential profits when oil prices bounce back. Therefore, it is very important for them to make every move a smart one. Major airline companies have recently done a good job of finding the right balance between adding capacity and still keeping demand steady.

Another industry that is impacted by the fluctuations of oil prices is the auto industry. Automobiles and petroleum are considered to be complimentary goods, which are goods that are associated with one another. Gasoline is a petroleum-based product; therefore, price fluctuations in crude oil can directly impact the price. A fall in oil prices is great for automotive companies. This means that vehicle sales will rise, as gas prices are cheaper, and more people have leftover income to spend. The extra income that people have could be used to lease or purchase a new car. As the cost to drive becomes cheaper overall, car ownership becomes more attractive to the population.

However, the impact oil prices have on the auto industry does depend on the market and the nation. For example, people who live in high fuel-tax areas may experience an overall lower percent change in the price. Therefore, it will not appear as significant as it will to someone who lives in a lower fuel-tax area. This can change the perspective one has towards purchasing a vehicle during a time where oil prices have decreased.

Some argue that the constant volatility of oil prices causes uncertainty about if and when the oil prices will increase again in the future. Therefore, this can impact the decision-making process of an individual wanting to finance or purchase a car. This perspective suggests that the future expectations of oil prices are what reflect car sales, rather than the actual price. However, most industry experts are directly correlating an increase in sales with the recent low gas prices.

The increase of automobile sales due to lower gas prices has had a larger impact on the gas-guzzling vehicles than the fuel-efficient ones. These vehicles tend to be more expensive in general, allowing automobile companies to generate more revenue. Also, profit margins on smaller vehicles are usually less than the larger vehicles, and gas-guzzling vehicles are generally on the larger side, including trucks and SUVs.

Fluctuations in oil prices can affect many companies in different sectors. Low prices can benefit industries that rely on oil as a key input, but other industries may hurt. Upstream oil producers are the ones that take the largest hit when their costs to produce the oil passes the market price, and they have to operate at a loss. However, downstream companies can hurt as well. These include industrial producers and other companies that build drilling operations, as they support the energy sector. Also, investors that hold bonds from oil producing firms also take a hit. As mentioned, this is also true for the exact opposite; an increase in oil prices. High oil prices can significantly hurt industries, such as the airline and auto industry. However, upstream oil producers and industrial companies that support the energy sector can benefit from an increase in oil prices.

It is difficult to accurately predict what the future holds for oil prices. The U.S. Energy Information Administration predicts that crude oil prices will average $52 per barrel in 2018. The reports show that volatility will not be as bad as it was in 2016. Commodity traders are able to predict the price of oil due to their future contracts. Their predictions state that price could be anywhere from $39 per barrel to $63 per barrel by December of 2017 (https://www.eia.gov/outlooks/steo/report/global_oil.cfm). It is important to remember that any perceived shortages, such as a hurricane, can cause these traders to panic and prices to increase. However, prices tend to moderate in the long run, while heavily impacting industries in the short run.

 

Sources:

https://www.eia.gov/outlooks/steo/report/global_oil.cfm

http://www.opec.org/opec_web/en/data_graphs/330.htm

http://marketrealist.com/2017/08/analyzing-crude-oils-impact-on-airlines-fuel-costs/

http://marketrealist.com/2017/06/how-crude-oil-prices-impact-airlines-fuel-costs/

“Struck Oil!” Oil Prices Are on the Rise, But How Long will the Sunup Last?

Oil markets are positioned for yet another wild ride; with academic and Wall Street analysts predicting price increases of anywhere ranging from $40 to $70 per barrel by the end of the year, oil is looking far more handsome to investors. Over the last two and a half years, the industry experienced its deepest downturn since the 1990s. As the old saying goes, “history always repeats itself.” When using the past as a guide, after every oil bust comes a significant recovery, if not a market boom. With external factors like increased electronic car production and the Organization of the Petroleum Exporting Countries, known as OPEC, fast at work, one question remains: just how long will this upswing last?

According to macrotrends, as of October 10th, the price of West Texas Intermediate (WTI) crude oil was $49.17 per barrel. “It looks as though the market started to get convinced that the rebalancing is actually happening,” Tamas Varga, an analyst at PVM Oil Associates Ltd. Said in a note during late September of this year.

Even after oil prices recovered from below $30 per barrel in early 2016 to $50 per barrel by the end of that year, The New York Times reported that Executives believe it will be many years before oil returns to a comfortable and prosperous $90 or $100 per barrel, which was essentially the norm for the industry until the price greatly collapsed in late 2014. However, analysts still remain hopeful that oil prices will sit above $60 per barrel by the end of this year.

Following a drumbeat of bullish data in September, which included the International Energy Agency’s upward revision to its demand outlook, crude oil prices were lifted, returning the U.S. to bull-market territory. The Wall Street Journal reported that this serves as the sixth bull market for the crude industry in four years and the first since February of this year.

Investors have gained new confidence that OPEC will continue to cut production and its efforts will help to bring oil’s supply and demand into balance, thus increasing prices. Other factors, like Iraqi Kurdistan’s independence referendum, have played an influential role in boosting prices. After Turkish President, Recep Tayyip Erogan, made a camouflaged threat to close the pipeline which allows for Kurdish oil to reach the global market, crude prices perked up in response.  Political and economic upheaval in major oil-producing countries like Venezuela could cause a major price spike as well.

In the wake of Hurricane Harvey, U.S. oil rebounded as U.S. refineries came back online. Due to the storm’s immense power and widespread devastation, U.S. oil supply became more limited, causing an increase in the prices per barrel.

Global demand for oil has also been strong in recent months. In early September of this year, the International Energy Agency (IEA) raised its prediction for demand growth throughout 2017 and expects an increase of at least 1.6 million barrels each day. Additionally, Forbes reported that the “Energy Information Administration showed that motor gasoline product supplies rose 0.6 percent on a year on year basis.” With the IEA confirming rising growth outside the U.S. and the EIA confirming the rise in U.S. demand for petroleum product, “oil markets will move back into contango, and there is really nothing stopping a move in U.S. crude to $60/barrel.”

Despite outspoken investor confidence in a continued upswing in crude oil prices, some more speculative investors and hedge funds remain bearish when placing bets on U.S. crude oil. Donald Morton, a Senior Vice President on the energy trading desk at the Connecticut-based Investment Bank Herbert J. Sims & Co., told the Wall Street Journal, “The short sellers haven’t capitulated yet. Those bears who are entrenched remain entrenched – they’re not convinced this is over.”

In early 2017, data from the Commodity Futures Trading Commission showed the bullish bets outnumber bearish ones by more than 11 to one, but according to more recent data, that number has shifted to less than three to one.

So, who benefits from this resurgence in oil prices? Oil companies, their employees and shareholders all walk away as winners when oil and gasoline prices rise. U.S. producers are likely to lock in higher prices for future outputs to maximize their profit. Michael Tran, the director of energy strategy at RBC Capital Markets, regarded this producer mentality as something that has previously capped rallies and worked against OPEC’s pricing efforts.

Producing states, including Alaska, Louisiana, North Dakota, Oklahoma and Texas benefit from residual employment and tax revenue increases. The higher crude prices equate to increased activity in the oil fields, which aids local businesses including construction firms that build housing, truck dealerships, and mom-and-pop services companies.

Nigeria, Russia, Saudi Arabia and Venezuela are all major crude oil producing countries that have been pressed financially in recent years.  For the Saudis, higher oil prices hold an additional benefit as its state oil company, Saudi Aramco, becomes more valuable for the initial public offering (IPO) planned to roll out later this year.

Lastly, there is a potential benefit for the environment. With increasing oil and gasoline prices, consumers are encouraged to buy smaller, more fuel-efficient vehicles and limit driving. While this is a good sign for mother nature, consumers of gasoline, heating oil and diesel fuel walk away from the oil pricing increase as losers. Additionally, retail outlets, hotels, and restaurants can take a hit when consumers have less disposable income in response to increased pricing.

With OPEC members producing nearly 40 percent of the global oil supply, the group, when united, serves as a tremendous force in dictating oil prices. In response to their recent efforts, current oil and gasoline prices are more or less in balance, which The New York Times suggests positive economic news for all parties affected by the industry.

As excitement continues to circulate around the direction of oil prices, it seems as though no one has bothered to consider impending potential threats to the crude oil industry.

“It’s going to be huge,” overjoyed oil industry experts exclaimed as Donald J. Trump was elected as the U.S.’ 45th President. Trump is outspoken about his support of industry efforts to build more pipelines, including the Keystone XL, a pipeline that would open up more federal lands and Deepwater prospects for drilling, and successfully deliver Canadian heavy oil to refineries located near the Gulf of Mexico. He has also stated he would like to lower regulatory burdens on the industry, which was made apparent through his lack of sympathy for the international Paris climate accord, which set out to lower global dependence on fossil fuels.

If enacted, all the aforementioned policies would increase natural gas and oil supplies on domestic and international markets, which in theory sounds great, right? Well, this would actually lower gas prices, which would hush the joyous industry expert’s tune.

Trump’s presidency isn’t the only threat facing the oil industry. Automakers have been pushing to produce more electronic cars.

10 years ago, Apple Inc. released a surge of innovation (does the name iPhone ring a bell?) that completely capsized the mobile phone industry. With some assistance from ride-hailing services like Uber and Lyft, and new self-driving technology, Bloomberg Technology stated that Electric cars could be on the cusp of pulling the same fast one on “Big Oil.”

David Eyton, the head of technology at the London-based oil giant BP Plc, stated in an interview, “Electric cars on their own may not add up to much, but when you add in car sharing (and) ride pooling, the numbers can get significantly greater.” Fewer people driving cars indicates less demand for oil. If the already diminishing vehicle numbers on the road are replaced by electronic vehicles, the demand for oil will greatly reduce, causing a huge drop in price and supply will likely continue to increase or stay the same.

Tim Harford, the economist behind a BBC radio series and book on historic innovations that disrupted the economy pointed out that instead of electric motors gradually replacing the current norm of internal combustion engines within the model, there’s likely going to be “some degree of systemic change,” adding, “(improvements in technology) are a lot more complicated (than perceived).”

Moral of the story? Yes, crude oil prices are rising at a promising rate; however, one must always remember that all good things do come to an end.

 

Works Cited

Collins, Jim. “Rising Demand Will Continue To Drive The Rally In Crude Oil Prices.” Forbes, Forbes Magazine, 27 Sept. 2017, www.forbes.com/sites/jimcollins/2017/09/27/rising-demand-will-continue-to-drive-the-rally-in-crude-oil-prices/#2f2a309c2749.

“Commodities: Latest Crude Oil Price & Chart.” NASDAQ.com, www.nasdaq.com/markets/crude-oil.aspx.

Krauss, Clifford. “Oil Prices: What to Make of the Volatility.” The New York Times, The New York Times, 15 May 2017, www.nytimes.com/interactive/2017/business/energy-environment/oil-prices.html?_r=0.

Saefong, Myra P., and Mark DeCambre. “Oil Prices Settle at a More than 1-Week High.” MarketWatch, MarketWatch, 10 Oct. 2017, www.marketwatch.com/story/oil-aims-for-first-2-session-gain-since-late-september-as-saudis-cut-crude-exports-2017-10-10.

Salvaterra, Neanda, and Alison Sider. “Oil Prices Mixed Ahead of Crude Market Data.” The Wall Street Journal, Dow Jones & Company, 9 Oct. 2017, www.wsj.com/articles/oil-prices-yo-yo-ahead-of-crude-market-data-1507546791.

Shankleman, Jess, and Hayley Warren. “How Electric Cars Can Create the Biggest Disruption Since the IPhone.” Bloomberg.com, Bloomberg, 21 Sept. 2017, www.bloomberg.com/news/articles/2017-09-21/how-electric-cars-can-create-the-biggest-disruption-since-iphone?utm_medium=email&utm_source=newsletter&utm_term=170925&utm_campaign=ritholtz.

 

Future of Vehicles Looks Electric

It’s an idea that makes sense for many reasons, mostly notably because it doesn’t toy with our environment quite like gas does. But, as with most change that occurs in this world, the full-on switch to electric vehicles (EVs) continues to take some time.

Many believe that electric vehicles will overtake gas-powered ones in a matter of years. When will this be the case? In order to answer this question, you need to have a basic understanding of what owning and selling an EV requires right now. And this knowledge will give you a solid perspective of the pros and cons of the EV’s existence.

According to PBS.org, Robert Anderson, a Scottish inventor, was the first person recorded to make headway into creating an electric-powered vehicle from 1832-1839. In 1891, a chemist from Iowa named William Morrison built the first electrical automobile in the United States. So the notion of electric vehicles was born far before the emergence of modern technology we’ve come to know.

Early electric car (Source: Inside EVs)

Still, a column from Business Insider noted that about 34 million vehicles were sold over the past two years in the United States, and mostly all of them were fueled by gas. One of the biggest reasons why people see no need to shift from gas-powered to electric cars is due to the time length of charging a battery.

It takes a short matter of minutes to refuel a gas-powered engine, while most electric vehicles need to be powered overnight or take roughly an hour at a commercial station, via The New York Times. This reality contributes to an anxiety that if the car’s battery runs out, and you don’t have a charging station nearby, you can no longer travel.

The way to get rid of that fear is to think of EVs like ChargePoint chief executive Pasquale Romano.

“Electric vehicles are more like horses than gasoline cars,” Romano said, also via that NY Times piece. “You refuel them when you’re doing something else.”

The charging options for your electric vehicle are broken down into two levels. Level 1 charging means that it plugs into a typical house outlet. Using the Nissan Leaf as our primary example, it would take 22 hours for a full charge. But driving 40 miles per day, which is typical of the average American, would allow for around nine hours to completely recharge your battery for the next day, per PlugInAmerican.org.

The fact that electric cars are very functional within shorter distances enables them to be used by modern car-sharing technologies like Uber and Zipcar.

“Electric cars on their own may not add up to much,” David Eyton, head of technology at London-based oil giant BP Plc, said in an interview. “But when you add in car sharing, ride pooling, the numbers can get significantly greater.”

Since for many people time is money, you may want to explore other charging methods if a trip were longer, perhaps around 200 miles. The DC Fast Charger costs up about $100,000 and adds 40 miles per every 10 minutes — a dramatically reduced time from Level 1 charging. CleanTechnica.com notes the the cost of a Level 2 charging station ranges from $500-$1,000 — a manageable price— but is less powerful than the DC Fast Charger.

DC Fast Charger (Source: FleetCarma)

As one could gage, based on the lack of quick chargeable modes, current electric vehicles don’t have the capacity to make long road trips possible. Driving from Los Angeles to the lower edge of Colorado is about an 800-mile journey, and an electric vehicle would make that voyage difficult. This excursion is hard due to, not only the time it takes for charging the battery, but also the amount of charging stations available.

Charging stations aren’t readily available to everyone in the United States, as building this infrastructure is one of the challenges electric vehicle producers face. The U.S. Department of Energy recorded that there are 16,838 electric stations with 44,753 charging outlets in the country.  Looking at the map they provide as to where these stations are located, it’s clear and understandable that the east coast and west coasts of the United States are more densely populated than areas like Montana, the Dakotas, Nebraska, Nevada and Mexico. When these regions are rife with charging centers, you’d expect the demand for EVs would also be higher.

When one looks at how the demand of a good or product can increase, price/cost and quality become key factors in predicting demand. Quality seems to be directly correlated to overall cost. Typically, someone will pay less for a good or service they deem of lesser quality. The same applies for the reverse logic: someone will pay more for a good or service they deem of higher quality.

This idea brings into play the possibility that electric cars will, at some point in time, be considered more logical to buy than gas-driven cars, since EVs will be of similar or better quality than their counterparts and also cost less. A report from the Rocky Mountain Institute specified that there are 15 EV models under $30,000 with multiple models that have batteries lasting up to 200 miles. Cars with internal combustion engines can seem a bit more logical with these current numbers, especially if you’re traveling long distances.

But it’s worthy to say electric cars are on their way to becoming cheaper. A new report from Cowen & Co. details that electric cars will be cheaper than their gas partners by the early- to mid-2020s, due to falling battery prices and costs that traditional car makers will deal with to ensure their vehicles abide by fuel-efficiency standards. President Barack Obama enacted these standards in 2012 to strengthen the pull toward the cleaner energy of electric cars, and at the time, dissenters existed.

“The president tells voters that his regulations will save them thousands of dollars at the pump,” Republican presidential candidate Mitt Romney said in 2012, “but always forgets to mention that the savings will be wiped out by having to pay thousands of dollars more upfront for unproven technology that they may not even want.”

When the cheapness and functionality is clearly accelerating past gas-fueled cars, it will then be up to producers of EVs to make sure supply is on the right level to meet increased demand.

Right now, even though electric vehicles make up for 1 percent of total car sales, the sales of EVs have been growing. Forbes stated that EV sales increased by 36 percent in 2016 from 2015, and have went up at a yearly growth rate of 32 percent over the recent five years.

This rate is primed to grow more and more, as the world becomes more comfortable with phasing out vehicles with internal combustion engines. CNN listed the countries that were planning to completely rid their economies of gas-powered vehicles. France and Britain announced that they would ban sales of gasoline and diesel cars by 2040. India is aiming to get rid of them by 2030. And Norway wants new passenger cars and vans sold in 2025 to all be electric.

China is one of the leading pioneers in the development of vehicles using clean energy. By 2025, states The New York Times, Beijing hopes for one out of every five cars sold to utilize alternative fuel.

The issue facing EV manufacturers in the U.S. now, according to auto sales and information site Edmunds, is that once government subsidies for buyers run out, the market for EVs could crash. This line of thinking is partially based off how Georgia accounted for 17 percent of U.S. EV sales before it dropped to 2 percent after its $5,000 tax credit was eliminated. But states like California, spending $449 million over seven years on doling out these payments, are thinking of spending even more money, $3 billion according to the Los Angeles Times. This move could raise state deductions for EVs from around $2,500 to about $10,000, making a Chevrolet Bolt EV around the same price as a gas-fueled Honda Civic.

The incentives don’t end there, though, as energy company Ovo has devised a way to offset some of the electric cost applied when charging your vehicle at home.

“It provides an economic benefit for electric vehicle owners,” Ovo CEO Stephen Fitzpatrick said. “So they get more use of out of the vehicle that they’ve got parked in the driveway.

When rates for electricity are low during hours of overall less electricity use, the charger by Ovo will fill up the car’s battery. When the rates are higher, the battery would start charging someone’s home or sell the energy back to the grid. One could sell energy back to the grid for up to 25 cents at peak time, while electricity costs about 5 cents a kilowatt-hour during “off-peak” hours.

“In other words, the value of the electricity that’s stored in the battery goes up by a factor of five,” Fitzpatrick said.

The New American Monopolies

When was the last time you used a search engine other than Google? When was the last time you bought a book online from somewhere other than Amazon?

You probably can’t think of a time because Amazon and Google essentially have monopolies over their respective corners of the internet. While we might notice how are choice of airline or cable company is extremely limited, we recognize less the monopolistic qualities of these internet giants.

Just because Google and Amazon don’t look like what we picture a monopoly to be it doesn’t mean they don’t have monopoly power.

A Brief History of Antitrust in the United States

In order to look at whether these tech giants have monopoly power we need to look historically at the laws designed to prevent this kind of power.

The United States Congress passed the Sherman Antitrust Act in 1980 in an effort to prevent companies from having monopolies that stifle competition, harm consumers or raise prices. The Sherman Act along with the subsequent Federal Trade Commission Act and Clayton Act are the core of American antitrust law.

These antitrust regulations were enforced fairly aggressively by the Justice Department from the 1930s until the 1960s. Then came Robert Bork, the Yale Law professor and supreme court nominee. Bork argued that the main concern of regulator should be solely if prices for the consumer were dropping. His ideas became the policy of the US Department of Justice when he became solicitor general under Richard Nixon and they have remained the mindset of the government until today. Bork’s ideas on antitrust are at the center of American antirust regulation enforcement. His influence is the reason why there has been a decline in antitrust regulation enforcement over the last 50 years.

In Move Fast and Break Things Jonathan Taplin argues that Amazon, Google and Facebook would all be prosecuted under antitrust laws if it weren’t for Bork.

Are Google and Amazon Monopolies?   

When you think of a monopoly Google or Amazon are probably not what you picture. You might think of the oil and steel barons of the late 19th and early 20th century or the telecomm monopoly AT&T once had. Or you might even think of the board game Monopoly.

Unlike the traditional monopolies, Google and Amazon lack a tangible product. They don’t have physical control over all production of steel or ownership of all phone lines. With Google or Amazon there isn’t anyone and anything standing in the way of someone creating a new search engine or e-book market. Their businesses lie within cyberspace they aren’t necessarily tangible. In a way, they have a monopoly of eyes. They have majority control over the platforms people use to consumer information of buy things online. They have a monopoly of users.

Legally, The Supreme Court of the United States has defined monopoly power as “the power to control prices or exclude competition,” this definition also includes an assumption that the company has a majority market share. Using this legal definition as a guide let’s see if Amazon and Google have monopoly power.

Amazon and Alphabet, Google’s parent company, have many different aspects of their businesses. Therefore, we will only look at one part of each of company. For Google, we will look at search and search for advertising. For Amazon, we will be analyzing the e-book market.

86% of all e-book sales in the United States occurred on Amazon in 2016, according to Authors Earnings’ February 2017 report. Amazon clearly has majority market power. They have the ability to control prices or even stop all books from a publisher from being sold on Amazon. Since they are the largest marketplace for e-books it would be detrimental for a publisher if their books were not sold on Amazon.

In 2014, Amazon and Hachette, a publisher, were in a dispute over pricing Amazon stopped all presales of Hachette books and caused shipping delays. In this case Amazon was exhibiting more monopsony qualities, when one buyer controls a market, because through their control of the distribution of books they are the largest buyer of books. Since Amazon is the largest book, online and print, seller Hachette was forced to bend to Amazon’s will. Hachette was ultimately able to win a little and in the resulting deal with Amazon was able to gain more control over how their e-books are priced on Amazon. As a whole because Amazon occupies such a dominant share of the e-book market its sheer dominance allows it to set prices.

Source: Stat Counter

Google, like Amazon with their sector, holds a large majority of the search market. According to Stats Counter, in September 2017 Google had an 85% market share of internet search in the United States. Google overwhelming dominates the search market This means they are also able to have market power over search advertising. Alphabet and Facebook essentially have a duopoly over all online advertisings with more the 60% of all internet ad revenue, according to an analysis by Reuters of their quarterly reports.

Google has such control over the search market that it excludes all other competitors. Even if some other search engine all of a sudden became a better search engine they wouldn’t be able to succeed because Google has control over the search engine market.

Further proof of the market consolidation of the search market is the Hergindhal-Hirschman Index (HHI) score, which measures the concentration in a particular market. Antirust agencies consider a market with a score of 2,500 to be highly concentrated. The search market has a score of 7,402, off the charts.

While Google and Amazon may not look like what we picture a monopoly to be the exemplify all the qualities of monopoly power.

Are These Monopolies Good?

Google and Amazon essentially have monopoly power over their respective corners of the internet market, but is this power a bad thing?

For the consumer Amazon’s immense control over the e-book market looks like a good thing because it produces lower prices. Bork would argue that Amazon’s monopoly power is a good thing because it lowers prices for consumers. However, the Bork line of thought fails to consider is possible effects of a monopoly power beyond the price consumers pay. As we saw with the Amazon-Hatchett dispute of 2014, Amazon has the ability to undermine the supply chain of e-books. There might be positive effects for the consumer, but Amazon’s power can harm publishers and authors.

Monopoly power can also lead to a stagnation in innovation. If a company does not have another company with the potential to compete with them there is no motivation to innovate. If you have such a large market share there is no incentive or need to innovate to get new users or to maintain your exciting user base.

For example, even if Bing had a substantially better product it would still barley make a dent in Google’s user base. It wouldn’t lead to Google to innovate as well, because their market power is so large and strong. Without competition, users lose out on getting better products and futures.

An example of the positive results of having a competition can be seen with Facebook and Snapchat. Facebook is the most successful and popular social media platform, but Snapchat has had a growing user base and also the love of investors. Facebook tried to buy Snapchat for $3 Billion, but Snapchat turned them down. By not consolidating Facebook and its subsidiaries, including Instagram, became a competitor of Snapchat. Facebook felt like it had to compete. This has led to each company having to innovate.

Instagram Story

Snapchat Story

Facebook chose to basically copy Snapchat’s features as their method of innovation to try and protect their existing user base. Meanwhile, Snapchat is trying to develop new features to draw more users in. An example of this is Snapchat and Instagram stories. Instagram introducing stories was clearly an attempt to copy Snapchat stories, but in order differentiate themselves from Snapchat Instagram had to try and create a better version of stories. While Instagram stories was more of a cloning than an innovation it was still Instagram having to develop new features to be competitive. In the end though, it seems like Facebook’s cloning of Snapchat features has just allowed them to gain more market power. Currently Snapchat has the largest share of new users, but their share of new users is shrinking and Instagram’s is growing. Overall, this competition between Facebook and Snapchat benefits the consumer.

How to Deal with These Monopolies

Those who align with Robert Bork would argue that there is no need to break up Amazon or Google, because the prices for consumers are not being raised. In the case of Google there was never even a price paid by consumer.

But as we explored there are downsides to these monopolies, so what should we do about them? Are our antitrust laws from over a century ago built to regulate companies with products the bills’ author could have never imagined?

Jonathan Taplin has purposed a series of possible ways to break up or regulate digital monopolies like Amazon and Google. In a New York Times opinion piece, he laid out three possible regulatory options: option one is to block the major digital players from acquiring each other. Another possibility is to treat them like public utilities—which would require them to license out their patents. Or a third option would be to remove the “safe harbor” clause from the 1998 Digital Millennium Copyright Act, which according to Taplin allows companies “to free ride on the content produced by others.”

Actually, breaking portions of these new monopolies would require the Justice Department to return to its pre-Bork hardline position on antitrust. So maybe the best way to deal with these tech monopolies is to institute some creative regulations to curtail some of the more negative effects of their monopoly power.

Sources:

https://www.nytimes.com/2014/11/14/technology/amazon-hachette-ebook-dispute.html

http://fortune.com/2017/07/28/google-facebook-digital-advertising/

https://www.forbes.com/sites/jeffbercovici/2013/11/13/facebook-wouldve-bought-snapchat-for-3-billion-in-cash-heres-why/#45529df343de

https://www.recode.net/2017/9/19/16308788/snapchat-instagram-sign-ups-new-users-us-global

As PASPA repeal begins, leagues gear up for the inevitable

After more than two decades, the Supreme Court has agreed to hear the repeal of the Professional and Amateur Sports Protection Act. PASPA, a federal law enacted in 1992 outlaws single-game sports wagering outside of Nevada. While opening arguments will commence in early December, a decision will likely not be reached until early 2018. Still, this is the furthest that the argument for a modernized and regulated sports betting market has reached. A decision in favor of repealing the law, which the state of New Jersey has claimed as unconstitutional can unlock a market worth several billion dollars.

While the Supreme Court gears up to hear opening arguments in this case, leagues across the world have begin to prepare for what is seen as the inevitable. Through partnerships, changes in stances, and sponsorships, leagues have been preparing for quite some time. In the two decades-plus since PASPA was first enacted, the world of sports has greatly changed.

PASPA was enacted in a way to protect the sanctity of the game. Fears of point shaving and match fixing forced the public and Congress to accept a bill that would seemingly fix such problems. However, in the years since daily fantasy leagues have taken their place in American society, sports leagues have taken sponsorships from casinos, and most importantly have led way to an offshore illegal market worth $150 billion dollars.

Take for example the über popular NCAA March Madness tournament. The annual affair draws fans from across the United States to fill out tournament brackets in which they predict who will move on. In recent years more and more fans have turned towards wagering their picks online.

The American Gaming Association estimates that roughly 40 million people fill out 70 million brackets with the average bet per bracket hanging around $29. This year the AGA estimated that Americans wagered $10.4 billion dollars on March Madness. Of the $10.4 billion wagered, only 3 percent or roughly $295 million will have been done so legally through Nevada sportsbooks.

What’s important to note is that while the United States Supreme Court has agreed to hear the repeal of PASPA, it does not come on the heels of the issue of the unfounded fears against match fixing or the billions of dollars being pumped into organized crime, but rather if the law violated the 10th amendment and the sovereignty of states when it was first ushered in. Still, the result of this decision can lead way to ending such widespread problems.

SportRadar a company that deals with data is partnered with three of the four biggest leagues in the United States. The company which provides real-time statistics for the NFL, NBA, and NHL. In addition to providing statistics used by broadcasters and bookies worldwide, SportRadar also monitors and reports on unusual betting trends. The company is also the parent company of BetRadar, a major figure in the gambling industry.

Likewise, the MLB which represents the fourth biggest league in the United States has a partnership with Genius Sports which acts in the same manner as SportRadar. Its executives met with sportsbook operators in September to gain a better understanding of how the industry operates.

These partnerships with data companies provide a stark shift in stance compared to just one decade earlier when representatives filed a letter dismissing the idea of monitoring books and the data that makes them up.

Outside of partnering with outside agencies, the NFL and NHL have both elected to move and create franchises in Las Vegas respectively. The Oakland Raiders of the NFL are set to arrive in 2019, while the Las Vegas Golden Knights have opened play this past week.

Attendees of Golden Knights home games will be able to readily bet within the confines of the T-Mobile Arena. The NHL had the opportunity to file a prohibition preventing sports betting from occurring as the game happens, however, elected not to.

The NFL in recent years has held games in London, England where sports betting is regulated and legal. Outside of moving the Raiders to Las Vegas, the NFL has also eyed creating a franchise in the country. The ability to bet in-game without the result being compromised is a look at the potential for such a feature in the United States.

NBA commissioner Adam Silver wrote in 2014 in the New York Times, “Times have changed since PASPA was enacted.” “I believe that sports betting should be brought out of the underground and into the sunlight where it can be appropriately monitored and regulated.”

Should PASPA be repealed, over a dozen states have already filed legislation this year that would permit wagering on sports in some way. The AGA estimates that a legal sports betting market would provide over 150,000 in jobs.

Steve Doty, Director of Media Relations, says that the AGA is committed to turning over PASPA and leading the conversation. “AGA looks forward to leading the conversation in states across the country to educate local lawmakers on sports betting.”

Company Eilers & Krejcik Gaming has taken a conservative approach to estimating the potential for a legal and regulated betting environment. They estimate in a base case that by 2023, if 32 states were to legalize sports betting in some form the market will be worth approximately $6.03 billion dollars in annual revenue.

If every state were to legalize gambling, including online wagering, the number expands to $16 billion dollars which comes from $245 billion taken in.

All of this comes on the heels of a Washington Post poll published in September which sees more than half of Americans supporting a legal and regulative sports betting environment. 55-percent approve of such an environment which serves as a drastic shift from nearly 25 years ago when PASPA was first enacted and 56-percent of Americans disproved of legalized sports gambling.

 

Poll: For first time, majority of Americans approve of legalizing sports betting – The Washington Post

Recent U.S. gambling legalization: A case study of lotteries – ScienceDirect

U.S. Sports Betting: A Sector On The Cusp Of Major Change | GamblingCompliance

Gambling – Where does sports betting legalization in the U.S. stand right now?

Sports Betting Ban Has ‘Perverse Effect,’ Says Casino Group – Poker News

NFL’s presence in UK shows how gambling can be done

March Madness Betting to Top $10 Billion | AGA

 

Dreamers Manifesting the American Dream

In 2012, former President Barack Obama created DACA, the Deferred Action for Child Arrivals, through an executive order—this program “has allowed hundreds of thousands of young people who were brought to the United States illegally as children to remain in this country,” said NBC News. In fact, The Cato Institute stated that these DACA participants, called Dreamers, have the opportunity to “receive temporary protection from deportation, work permits, and an incentive to invest in their own human capital” as long as they “have lived in the United States for five years or longer and do not have a criminal record.” In other words, Dreamers have been able to “achieve milestones typically associated with the American dream, such as pursuing higher education, earning better wages to support their families, and buying homes,” as explicated by American Progress. On September 5th, 2017, Attorney General Jeff Sessions announced President Trump’s decision to terminate DACA which would essentially kick out about 800,000 Dreamers out of the country. This is not only inhumane, but will have an inevitable impact on the workforce in America—although both sides of the issue will be explored, DACA is more of a boost to the economy than a deterrent.

DACA recipients “are relatively well-educated, meaning they have the capacity to make the economy that much more productive,” according to NPR. The average age of DACA recipients is 22 and they “earn about $17 an hour on average, ‘tend to be younger, better educated, and more highly paid than the typical immigrant,’” said Time. As a 21-year-old at attending a reputable college like the University of Southern California, I have never had a job earning the wage of the average Dreamer—and have actively looked for one—which demonstrates their success and path to fulfillment of the American Dream. In exact numbers, the U.S. Citizenship and Immigration Services declared 787,580 people as DACA recipients through March 2017, and 87% of them are employed as conducted in an October 2016 survey by the Center for American Progress. Also to note, 6% of Dreamers “even starts businesses of their own, thus creating more jobs for others,” instead of taking them away, according to New Republic. The Cato Institute even compares the dreamers to recipients of H-1B visas, “skilled workers who are invited into the country to fulfill specific economic needs.” Most of the H-1B visa participants, like Dreamers, tend to be younger and more educated, thus, they have a closer resemblance than Dreamers do to other unauthorized immigrants. To note, it is crucial to separate DACA recipients in a separate category form other unauthorized immigrants.

According to a 2016 study in the Journal of Public Economics by Nolan G. Pope, “DACA moved between 50,000 and 75,000 immigrants into employment from either outside the formal labor force or unemployment, and increased the average income of immigrants in the bottom of the income distribution.” This is a step up for the economy because a higher income means more money to spend and being able to pay their taxes, thus, further stimulating the economy. The “extra money they made let to financial stability and a big increase in car and home purchases,” according to New Republic. On top of that, a 2014 survey by the American Immigration Council found that “59 percent of DACA recipients reported getting their first job, 45 percent received a pay increase, 49 percent opened their first bank account, and 33 percent got their first credit card due to their participating in DACA”—all factors that, again, boost the economy.

On the other hand, the White House’s main argument is that Dreamers are taking jobs away from Americans. At the press briefing on the day of Trump’s announcement, White House Press secretary Sarah Huckabee Sanders said, “I think that it’s a known fact that there are over 4 million unemployed Americans in the same age group as those that are DACA recipients” (qtd. in The Hill). Although it seems logical to believe that more jobs would open up for Americans if 800,000 DACA recipients no longer existed, but “[there] is no evidence of that,” according to chief economist at Moody’s Analytics Mark Zandi. First of all, the Bureau of Labor Statistics stated that the unemployment rate is 4.2 percent as of September 2017 which is the lowest it has ever been—to put into perspective, the last time our annual unemployment rate has been in the fourth percentile was a decade ago in 2007 at 4.6. This means that our job market is currently doing very well. President and CEO of economic research firm Perryman Group, Ray Perryman, adds, “I think the primary thing that would argue against [the White House’s claim] at this point is, we are at full employment with more job openings than at any point in history” (qtd. in NPR).

If the program continues as it has been, it could end up covering 1.3 million people, which means there is that much more potential for a more effective and productive workforce. But a study by the Center for American Progress shows that an average of 30,000 DACA beneficiaries will be out of work each month which becomes added pressure for employers to fill those spots in a short amount of time to maintain an efficient workplace—if the employers fail to do so, it could potentially result in the closing of their business, thus, Americans losing their jobs as well. And among the 800,000 Dreamers are those with valuable jobs such as in the health-care system. The Association of American Medical Colleges “projects the physician shortage could reach 105,000 by 2030,” as well as “lose nurses, nurse practitioners, pharmacists, medical researchers and slews of other professional and nonprofessional healthcare workers” by kicking out current medical students with DACA status. And not only will the shortage of health workers negatively impact our country, but the AAMC adds that “when physicians train in teams that are culturally diverse,” such as with Dreamers, “it improves outcomes because everyone is sensitized to the needs and customs of patients from immigrant and minority backgrounds.” So we aren’t just losing Dreamers, we are losing compassionate physicians—from diverse backgrounds and those who speak other languages—who help make the entire health-care system a more culturally adept place.

In addition to the fact that Dreamers aren’t taking away jobs from Americans, not even the “lower-educated or low-wage immigrants aren’t stealing our jobs,” according to New Republic. These immigrants compete on their own in an entirely different and more low-skilled workforce than those who are American born citizens, even natives without high school diplomas. While “[less-educated] native workers are over-represented in occupations that interact with the public and coworkers and that have supervising responsibilities, licensing requirements, and demanding mechanical and computer operations,” immigrants dominate jobs with manual or bilingual skills, according to Urban. Urban adds that the two groups “even could be complementing each other.” On top of that, a study by the National Academies of Sciences, Engineering and Medicine, research done by 14 leading economics and other scholars, states that “We found little to no negative effects on overall wages and employment of native-born workers in the longer term” (qtd. in the New York Times). The White House’s statements were simply false.

Not only are Dreamers efficient workers, but the removal of this program would be a huge hit to the economy. In fact, “removing the DACA immigrants from the economy would cost the U.S. $215 billion in lost economic output over 10 years, plus another $60 billion in lost taxes” and “[deporting them would cost another $7.5 billion, and when that’s added up the cost of ending the DACA program comes to a total of minus $283 billion,” according to the Cato Institute. Jeff Sessions argued that “expelling DACA permit-holders—again, many of whom are children—from the country is vital to protecting Americans from ‘crime, violence, and terrorism,’ alluding to the marauding bands of criminal undocumented immigrants,” said GQ. This is also not true because to be eligible for DACA, one must pass a background check as well as a screening process for felonies and misdemeanors. So we aren’t making America any safer by rescinding DACA—we are only increasing government spending and wasting taxpayer dollars on unnecessary deportation of those who have not only done no wrong, but are helping grow our economy. These “high-skilled immigrants add to the nation’s stock of human capital, boosting productivity and growth,” stated U.S. News.

Dreamers know of no other home besides America. And simply put, these Dreamers “never knowingly broke any law and have been productive and peaceful members of society since their arrival,” according to the Cato Institute. And with backed-up evidence that Dreamers are, in fact, not taking jobs away from natives—which is the White House’s main argument—and since they pose as no threat to the country—their other argument of Dreamers being potential criminals—, what are we waiting for? Currently, DACA is still due to expire in six months, although current permits will be honored until expiration.

Works Cited

Albright, Ike Brannon and Logan. “The Economic and Fiscal Impact of Repealing DACA.” Cato Institute. Cato Institute, 18 Jan. 2017. Web.

Bryant, Meg. “Ending DACA Would Damage the Provider Workforce.” Healthcare Dive. Industry Dive, 05 Oct. 2017. Web.

“Bureau of Labor Statistics Data.” U.S. Bureau of Labor Statistics. U.S. Bureau of Labor Statistics, 10 Oct. 2017. Web.

Covert, Bryce. “No, DACA Immigrants Aren’t Stealing American Jobs.” New Republic. New Republic, 07 Sept. 2017. Web.

Delk, Josh. “White House Claims DACA Recipients Take Jobs Away from Americans.” TheHill. Capitol Hill Publishing Corp., 05 Sept. 2017. Web.

Enchautegui, Maria E. “Immigrant and Native Workers Compete for Different Low-skilled Jobs.” Urban Institute. Urban Institute, 25 Mar. 2016. Web.

Horowitz, Julia. “Trump’s DACA Decision Could Cost Thousands of Jobs, Study Says.” CNNMoney. Cable News Network, 30 Aug. 2017. Web.

Kurtzleben, Danielle. “FACT CHECK: Are DACA Recipients Stealing Jobs Away From Other Americans?” NPR. NPR, 06 Sept. 2017. Web.

“National Unemployment Rate at 4.2 Percent through September 2017.” National Conference of State Legislatures. National Conference of State Legislatures, 6 Oct. 2017. Web.

Nicole Prchal Svajlenka, Tom Jawetz, and Angie Bautista-Chavez. “A New Threat to DACA Could Cost States Billions of Dollars.” Center for American Progress. Center for American Progress, 21 July 2017. Web.

Preston, Julia. “Immigrants Aren’t Taking Americans’ Jobs, New Study Finds.” The New York Times. The New York Times, 21 Sept. 2016. Web.

Salisbury, Ian. “DACA: Economic Cost of Deporting Undocumented Immigrants | Money.” Time. Time, 7 Sept. 2017. Web.

Stone, Chad. “The High Costs of Ending DACA.” U.S. News. U.S. News & World Report L.P., 29 Sept. 2017. Web.

Willis, Jay. “Jeff Sessions’ Rationale for Ending DACA Is Outrageously Disingenous.” GQ. GQ, 05 Sept. 2017. Web.

 

Wanda’s Hollywood Ambition

Wang Jianlin, the richest man in Asia, is trying to change the balance of power in the global entertainment business. As the head and the founder of the largest Chinese commercial property company Dalian Wanda Group, Wang has made decisions to spend billions to buy his way in Hollywood. After the company became the world’s largest cinema chain operator in 2015, it announced several other acquisition and partnership with major Hollywood Studios. While facing critics and doubts, the company is not hiding its ambition to become a global entertainment colossus.

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Both Wanda and Hollywood are facing opportunities and concerns. To Wanda, it is shifting focus from property development to entertainment, hoping to start a new chapter of its business legend. Since 2012, Wanda has spent more than $10 billions to invest in everywhere from worldwide theater chains to Hollywood studios. But it takes time to define whether these are financially smart decisions. To Hollywood studios, having Wanda and other Chinese investments backing their projects means they have capitol to make the film they want to make; more importantly, they have access to the restricted Chinese film market. But at the same time, it raises concerns that Chinese might start to have too much influence over Hollywood.

According to Forbes, the 61-year-old Chinese businessman Wang Jianlin has a net worth of $32.8 billion as of November 2016, and his company’s assets amounted to over $90 billion. Before it made its moves on Hollywood, Wanda Group primarily focused on its commercial properties. Founded in Dalian, China in 1988, Wanda first started as a residential property company. To date, Wanda has established 160 commercial shopping malls throughout China.

Starting 2012, the company decided to shift gear to entertainment. Wanda Cultural Industry Group, founded in 2012 and became one of the company’s main focuses, has already become the largest entertainment company in China. Prior to the cultural group, Wanda established its film division, Wanda Media in 2010, which has already become the largest private Chinese film production company. It seems like the company has an obsession of becoming “the largest” or “the best,” and yes, the cultural group aims to become one of the top five entertainment companies in the world by 2020.

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This is an aggressive ambition. In hope to make it happen, Wanda followed up with a serious of direct investments, starting with its acquisition of AMC in 2012.

In September 2012, a byline started to appear underneath every AMC logo: A Wanda Group Company. Wanda spent $2.6 billion on this acquisition. AMC was the second largest movie theater chain in the United States at the time, and has over 5,000 thousand commercial movie screens in the U.S., out of a total of 40,759, and the acquisition has made Wanda the largest cinema operator in the world. However, prior to the purchase, theater operators in the U.S. were facing big challenge from low attendance rate. According to New York Times, attendance in North America 2011 fell to $1.28 billion, which is the lowest since 1995. At that time, it was unclear what caused the downfall, but theater certainly didn’t seem like the best investment that would earn Wanda much quick money.

Is it really a good deal for Wanda to buy AMC? At least Wang Jianlin thinks it is.

“It doesn’t matter how much money we make,” Wang was quoted in a Forbes interview. Perhaps rather than getting instant return, his vision is more towards making Wanda a globally known brand. In fact, the act of purchasing AMC had gotten Wanda and himself immediate public exposure. All of the sudden, Western media are writing about a Chinese entertainment company. From a public relation point of view, this is a long-term investment that comes with “free” advertisement.

(120905) -- LOS ANGELES, Sept. 5, 2012 (Xinhua) -- Chairman and President Wang Jianlin (R) of China's Dalian Wanda Group Co. and AMC chief executive officer and president Gerry Lopez attend a press conference at an AMC theater in west Los Angeles, the United States, on Sept. 4, 2012. China's leading private conglomerate Dalian Wanda Group Co. on Tuesday completed a high-profile acquisition of AMC Entertainment Holdings, Inc., valued at roughly 2.6 billion U.S. dollars, in Los Angeles. (Xinhua/Zhao Hanrong) (nxl)

Moving on to 2015, Wanda spent another $3.5 billion on Legendary Entertainment, one of the biggest filmmaking studios in Hollywood. In the past, Legendary had co-produced many well-known movies including “Jurassic World” and “Interstellar.” Some of its productions are more popular in China than in the U.S., such as “Godzilla” and “Warcraft.” The company’s future productions will likely include more Chinese elements and characters not only because it is now owned by a Chinese company, but also because of the access of the huge Chinese market. The number of movie screens in China has been increasing dramatically since 2009. As of 2015, China has 31,882 screens, which is more than triple to the number in 2011.

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Legendary’s upcoming production, “The Great Wall” will release in February 2017. Directed by Chinese director Yimou Zhang and starring Matt Damon, the movie will be distributed by Universal Pictures and two other Chinese distribution companies. This is a giant Hollywood production produced by a Chinese production company – although it wasn’t Chinese until last year.

Just two months after acquiring Legendary, Wanda paid $1.1 billion in cash to settle a deal with Carmike Cinemas, adding 2,954 screens to the AMC family, making it the largest theater chain in the world. The stock prices for both Carmike and AMC raised a little bit right after the purchase, signaling a good start for the merger.

Soon after the deal with Carmike, Wanda tried to make a deal for Paramount. Earlier this year, Paramount was looking for a party to buy 49 percent stake of the studio. Wanda was interested in making about $1 billion equity investment. However, after months of talking, Viacom abandoned the plan to sell in September. In response, Wanda almost immediately announced a partnership with Sony. The exact size of this negotiation was not released, but it is likely to be a smaller investment that won’t give Wanda a lot of initiatives on Sony’s strategic decisions. The company will now provide 10% to 15% in co-financing on some of Sony’s films, including the upcoming production “Passengers.” It will also be Sony’s strongest support on film distribution and marketing in China.

As of now, two months after partnering with Sony, Wanda announced another acquisition for Dick Clark Productions, offering about $1 billion. Dick Clark Productions had produced many television shows and awards, including the Golden Globes and “So You Think You Can Dance.” This acquisition marks Wanda entering the world of television production.

The series of intensive movement is causing lawmakers concern. They are worried that the company’s decisions might have been made in favor of the Chinese communist party, which may perform a “foreign propaganda influence over American media.” Traditionally, Chinese’s cultural presence has not been very strong. So the government has made “enhancing China’s soft power” as one of its priorities. The concerns seems logical especially when Wang Jian Lin is a businessman with a communist party background.

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Wang Jianlin explained his business motivation at Wanda’s L.A. Film Summit in October. “Chinese box office revenue has the potential to maintain an annual 15 percent growth for about a decade,” Wang said. By acquiring American companies, he is not only bringing technology and talent back to China, but also opening up the market for the American content. Wang believes his investments will thus be beneficial. And if Hollywood wants a share of this giant market, it needs cooperation with Chinese companies, and it needs to have better understanding in Chinese audience.

Hollywood isn’t the only place Wanda invests in. At the summit, Wang also encouraged Hollywood Filmmakers to come to Wanda’s new movie studio in Qingdao, China. Said to be the largest movie studio in the world, the Qingdao Oriental Movie Metropolis is aiming to rival Hollywood. Situated on a 494-acre site, the studio complex costs Wanda $8.2 billion to build and will open in 2018.

Wanda is not the only one to invest in Hollywood. Other Chinese conglomerates, such as Alibaba and Tencent, have also expressed interest. On Monday, Oct.10, Alibaba announced a partnership between its subsidiary Alibaba Pictures and Steven Spielberg’s Amblin. Earlier, Chinese internet giant Tencent and Hong Kong based information and communication technology company PCCW had also said they would invest $1.5 billion to STX Entertainment.

All those Chinese investments signal greater Chinese influence in Hollywood. However, by far Wanda seems to be the only one determined to enter the game as a main player. All together, Wanda has spent about $10 billion on investment in Hollywood, and certainly is willing to spend more to seal deals with Hollywood giants. Even for a man like Wang Jianlin, that’s still a lot of money. Only one thing can be certain, that the entertainment industry has become one of Wanda’s main strategic focuses. The company said it would become one of the five cultural enterprisers in the world by 2020, and it is keeping up with its ambitious vow.

 

 

Other Reference:

http://www.voachinese.com/a/wanda_purchasing_20120716/1405262.html

http://www.theepochtimes.com/n3/2089188-chinas-hollywood-takeover/?utm_expid=21082672-12.JPI1vw8-RKyYhrWpuuXhuA.0&utm_referrer=https%3A%2F%2Fwww.google.com%2F

Wanda’s Legendary Buy Is Just the Beginning of China’s Investment in Hollywood

http://yuleyingtang.baijia.baidu.com/article/649735

http://www.wsj.com/articles/chinas-dalian-wanda-buys-legendary-entertainment-for-3-5-billion-1452567251