I would like to open this new section
No Economics In The Title by talking about a very well-known protagonist of our last century, John Maynard Keynes, and his lost paradise, Arts’ Eden. I think this article can be one of our magazine’s most representative contribution to all those young economists whose actual or potential artistic spirit survived and persisted even in the study of Economics. Thus, for once, having No Economics In The Title is explicitly a gift for their resistance and personal fight day after day, maximization after maximization. I imagine that the following question, or sensation, has crossed the mind of some of us at least for once: Did Economics historically try to ignore or even downgrade Arts as a secondary, negligible mean to improve our social welfare? Maybe in this case the etiquette “keynesian economist” could perfectly be attributed to those who have ever thought about that. In fact, our beloved predecessor J.M Keynes clearly answered and expressed his opinion on this issue: “The exploitation and incidental destruction of the divine gift of the artist by prostituting it to the purposes of financial gain is one of the worst crime of the present-day capitalism” (Art and the State, 1936). Perhaps Keynes’ drastic opposition to Bentham’s utilitarism is not analyzed and considered enough by our economic community. Together with immorality, Keynes considered individualism as an unsustainable luxury that, ex post, represented “the worm which has been gnawing at the insides of modern civilization and is responsible for its present moral decay. It was the Benthamite calculus, based on an over-valuation of the economic criterion, which was destroying the quality of the popular ideals” (My Early Beliefs, 1938). Indeed, as many of us would not expect, Keynes represented an active member and committed exponent of the British literal, philosophical and artistic movement called The Bloomsbury Group which gathered together inspired and eminent intellectuals (of the caliber of e.g. Virginia Woolf ) who were related by friendship and the wish to share experiences, in particular the artistic one. At that time they have been using Arts as a privileged mean to rebel against the Victorian society. “The members of Bloomsbury were generally exceptional children of exceptional parents, who had seen their parents’ lives being strangled by unnecessary duties. In place of these, Bloomsbury substituted the ideal, not of doing what one liked, but of doing what was good. Cultural enjoyment was placed at the center of the good life” (Skidelsky, 1983). For them, and for Keynes above all, the precondition to achieve the real well-being is Arts’ promotion by the State. Just in this way, the State itself can sustain citizens’ effort in trying to reach the enjoyment of life, what Keynes considered the highest purpose of one’s life. Keynes was an incredibly passionate art collector and 1910 he organized the first Post-Impressionist exhibition in London. Due to his incredible artistic faith and involvement – probably strengthened also by his relationship with the painter Duncan Grant – he decided to found the London Artists’ Association with the intent of promoting and improving Arts’ status in the UK. Therefore, Keynes can be deservedly considered as an aesthete and an aboveaverage admirer of beauty, human creativity and nature – without which no artistic inspiration could have ever reached and instilled such strong inexplicable emotions and divine pathos to human feelings. For sure he was à la recherche d’un paradis perdu. On a very much smaller scale, by inaugurating this new section we are following in his footsteps, searching for the same.
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With the development of individualism and capitalism,
our societies have given credit to the idea that we are rational beings driven purely by self-interest. We have disregarded evolution in order to create our own kind of ape: the homo economicus. As a student in economics, you have probably heard a hundred times your teachers say: “The consumer wants to maximize his utility.” However, there has been a rising tide of scientific research that refutes this idea. On September 25th, expert primatologist Professor Frans de Waal came to Toulouse to share his surprising findings related to competitiveness and cooperation in the animal kingdom. Using results from 40 years of study in the fields of evolution and genetics, Professor De Waal showed us that both competitiveness and cooperation are tied to our biology, and form part of human nature. We, as humans, have evolved in such a way that our genetics have internalized the notion of considering other individuals’ well-being into our decisionmaking process. De Waal began his lecture by showing one of the earliest experiments in cooperation done at Yerkes National Primate Research Center. In this experiment, we observe a pair of chimpanzees helping each other get some food by pulling at a box that is too heavy for one of them to move alone. This result clearly shows that chimpanzees understand that cooperation produces benefits. The experimenters then decided to see if the apes would still cooperate if one of the two chimps had already been fed. There was certainly some persuading involved, but at the end the well-fed monkey helped its friend, even when there was no gain in it for him - the hungry monkey ate all the food. Another one of Professor de Waal’s most intriguing discoveries is that apes are averse to inequities, especially when there is no difference in the amount of effort exerted. What de Waal found was that an ape would get upset if it got a smaller reward than the other ape when they had both put in the same amount of effort to perform a given task. As the experiment continued, the monkey that was getting the higher reward would also start to become upset, for the situation seemed to be unfair to its partner. De Waal called the basis for this kind of behavior, as well as for reconciliation, the “valuable relationship hypothesis”. Essentially, an ape will get upset if it receives a higher reward than its peers, because it anticipates relationships being damaged if there is no equity. This behavior is especially apparent with individuals who have much to lose if a particular relationship deteriorates. As he noted, the European Union is based on the very same principle: it was formed after World War II on the premise that if we could tie European countries together by creating an economic pact, then the value of the relationship would be enhanced and countries would have more reasons to be peaceful with each other. As De Waal explained, the duality of human nature, hovering between war and peace, can be explored by looking at our two closest primate relatives: Chimpanzees and Bonobo monkeys. Chimpanzees are known to be murderous and power-hungry, whereas Bonobos maintain a peaceful society where the female is accepted as dominant. Bonobos, often referred to as the “hippies” of the apes, resolve conflicts by “making love, not war”. The difference between these kinds of apes may come down to nature versus nurture. Through studies conducted with Stumptail monkeys, De Waal’s shows that tendencies towards cooperation and reconciliation are strongly enhanced by a monkey’s social environment. Therefore, reconciliation can be seen as an acquired social skill. For economists, this might turn out to be a particularly interesting finding. As Frank et al. (1993) summarize in their entertaining paper “Does Studying Economics Inhibit Cooperation?", a series of empirical studies seem to support the shocking hypothesis that economists behave in more self-interested ways than most people! However, the idea of cooperation producing more value than competition is not unusual in the economic field. A wellknown example can be seen in the movie “A Beautiful Mind”, where a group of college guys decided to forgo individual ambition - each one going after the most beautiful girl - in favor of the best collective result, which was to go after her friends. This way, they succeeded in their ultimate goal, which was to leave the bar with a date for the night. Frans de Waal considers that this human ability to cooperate is deeply rooted in our biology, and it goes beyond the simple desire of achieving better results than through competition. In his words: “I am always puzzled by this claim that we humans are uniquely cooperative. We are uniquely cooperative on a large scale - cooperating with thousands of people to build a road, for example. But these cooperative tendencies that we have are not unique, and can be found in many species”. References: Frank, R., Gilovich, T., & Regan, D. (1993). Does Studying Economics Inhibit Cooperation? The Journal of Economic Perspectives, Volume 7, Issue 2, 159-171. Now, let's give the floor to Dr. Frans de Waal, renowned ethologist and primatologist, famous for his work on primate behavior. He is a professor at Emory University and director of the Living Links Center at the Yerkes National Primate Research Center. An interview with Dr. Frans de Waal 1. As you have said yourself, you hope to look at human society through the lens of animal behavior. What conclusions have you been able to draw from your studies on animals other than primates with respect to the evolution of human behavior? For example, we have the impression that empathy is a mammalian characteristic. So in primatology, we often have a tendency to say that everything is primates, and related to primates; but a capacity like empathy, for example, is much broader. That is true almost for everything we have found. Reconciliation, for example, we observed first in primates and now it has been observed in many other mammals. Inequity aversion was found in the primates first and now we see it in many other animals. So the general tendency is always, that we first find it in the primates and then we find it in many other species. This means that all these tendencies are older than we think because, for primates, we are talking about 30 million years ago that certain behaviors evolved, whereas for mammals, it goes back to 200 million years ago. 2. It is clear that we are genetically programmed to be both cooperative and competitive. What would you say are the main factors affecting the degree of cooperation and empathy in individuals? The degree of empathy and cooperation is probably based on how much a species needs to cooperate. For cooperative hunters, like wolves or orcas, there needs to be very close coordination and cooperation for both hunting and sharing of food, so these animals automatically form stronger attachments to the group and its individuals. However, there are other species that develop very strong social ties for defensive reasons. For instance, Elephants are very social animals who live in very dangerous environments, where there are lots of predators. The elephants themselves do not necessarily have a lot of predators, but the babies do, and so elephants need to be able to protect those babies against lions, hyenas, and the like. So I think the level of attachment, empathy, or cooperation, depends very much of how much it is needed, given the lifestyle and the ecology of the animal. It is a question of whether you need it for your survival, yes or no. Whereas, if you are a solitary hunter, like a cat or a tiger, then you get less of this kind of cooperation and attachment behavior. 3. What do you think economists can learn from working with primatologists and what can primatologists learn from economists? There is a lot of mutual learning going on. Actually, behavioral economics, or experimental economics, is very much the sort of thing that we do: we look at how monkeys cooperate and how they share the payoffs, how they get upset when those payoffs are not well shared, and under what sorts of circumstances they develop reciprocity. These are all sorts of economic issues, related to benefits and costs. I think we biologists have adopted a lot of the language from economics in that regard and economists are learning from the primate studies that many of the tendencies that they study are not uniquely human. These are very old tendencies that we have integrated in a moral context, but still, our psychology is still basically primate psychology. Starting this year,
the TSEconomist organizes bi-weekly discussion events. Join us for free coffee and other bright ideas! The TSEconomist cordially invites you and your friends to attend our bi-weekly discussions on economics. Students and prospective researchers alike are more than welcome to attend the Coffee Talks in order to share ideas in a warm and welcoming environment. Plus, there are always free coffee and delicious sandwiches for everyone. Our way might from time to time be paved philosophically, sometimes politically, yet we're always arguing about those topics that are of burning importance to us. The first meeting of this semester occurred on Oct. 7 at 12:30pm in MF 323, which covered self-determination, free association, and individual secession. In particular many Catalans joined us to exercise the question of self-determination of a people in the north-eastern region of Spain. The next meeting of the semester took place two weeks later on Oct. 14. This time we discussed war in Ukraine, trying to dive into the sentiments governing not only Ukraine, but also the other conflict parties involved. With over 25 attendees, the third meeting, on Oct. 28, covered the morality of Intellectual Property Rights.It followed a talk on paternalism, Nov. 20 and one covering the ongoing protests in Hongkong on Nov. 25. The diverse environment at TSE allows us not only to look into global issues, but also to hear those, that sometimes witness these events happening right in their own backyard. We are currently looking for moderators for upcoming meetings. Each meeting will require one moderator and one topic. Ideally, the moderator will choose a topic which is of interest to him/her; however, if the individual who wishes to be moderator is unsure of which topic to choose, the Coffee Talks team will be glad to help out . Overall, the TSEconomist truly hopes to have many of you come out this semester for the Coffee Talks. They are a fun way to learn about various topics, and since we come from very different backgrounds, we will be able to offer unique perspectives on different economic questions. If you are interested, follow us on facebook to get the latest news and visit our blog [email protected], to join the ongoing debate! For information on how to get involved as a moderator email Demelza Hays at the.tseconomist@gmail. com. The RCNYO is the central body of the five Economic Regional
Commissions of the United Nations (ESCAP, ESCWA, ECA, ECE and ECLAC) at the UN Head Quarters. Its main role is to gather and distribute information on all economic and social issues discussed in the UN system, especially those that are directly related to any of the five Regional Commissions’ activities or mandates. 1. What was your role during your internship? I was responsible for following all sorts of debates, panels and negotiations among Member States on economic and social issues directly related with the formulation process of the new Sustainable Development Goals (and the so-called Post-2015 Development Agenda, which will replace the current Millennium Development Goals). I was also responsible for elaborating analytical reports about interventions, opinions and critiques of the main economic bodies such as the US, EU, G-77, China and others, and their eventual agreements and undertaken decisions. The reports contained a historical background of the topic, the framework of discussion and the most important contributions from academia and other actors. Among the issues deliberated were technology transfers; inequalities in South America; South-South, North-South and Triangular Cooperation; sustainable urbanism and foreign aid, all of which were extensively highlighted during the spring/ summer session. All these focused on fostering development in the poorest areas of the world by using the human and economic resources of new developing economies. The reports were distributed to the Regional Commissions’ representatives. The internship had a great combination of economic and international relations analysis. 2. How did your experience at TSE help you on the job? My experience at TSE helped in the sense that some of the topics I mentioned above were part of the M2-PPD courses. For instance, I had close knowledge of current and past discussions of the effectiveness of foreign aid in developing countries as well as the lack of monitoring and evaluation mechanisms, topics which are now having lots of circulation within the entire UN system. PPD allowed me to understand the main issues when trying to foster development through different programs, and understand how the accomplishment of objectives can be measured. 3. How did you get the internship? I got the internship applying through an online platform of the UN (inspira.un.org) where most of the internships for different UN bodies are advertised. The regular procedure is to create a profile, fill all the information required and upload a cover letter. If pre-selected, they may ask you to have a phone or Skype interview. There are some other specialized bodies of the UN such as UNICEF, UNESCO, FAO that have their own online platform and which recruit several interns during spring and summer. They may answer after one to two months after you sent your application, so my advice is to apply as soon as you can. They are very flexible on dates and be aware that interns are not paid!!! As part of the programme of the Master 2 in Economics
and Competition Law, I performed a four-month internship in the Monopolies Division of the Competition Authority of Ireland, in Dublin. This state agency deals, like its other European counterparts, with the enforcement of national and European Competition Law, and its objective is to ensure that competition between companies in Ireland is fair. The Competition Authority of Ireland is organised in four main divisions, namely: - Monopolies, where vertical restraints and alleged abuses of dominant position are assessed under Article 101 and 102 of the Treaty on the Functioning of the European Union. - Cartels, that is responsible for investigating alleged illegal horizontal agreements between competitors. - Mergers, where it is ensured that concentrations that are over a certain financial threshold do not lessen competition. - Advocacy, whose duty is to promote competition by giving advice to the Irish government and public bodies and by analysing specific sectors of the economy to identify possible competition issues. Two additional divisions, Strategy and Corporate Services, carry out administrative and coordination tasks. As an intern at the Monopolies Division of the Competition Authority of Ireland I was involved in the economic and legal analysis of complaints sent by firms alleging breaches of Irish and European Competition Law and in the draft of documents to be sent to my Divisional Manager under the direct supervision of a Case Officer. My tasks involved mainly: - the definition of the relevant product and geographic market - a presentation of the economic sector related to the complaints - the assessment of market power of the companies operating in that market - the analysis of the alleged anticompetitive conduct to check whether a breach of competition law actually took place I was involved especially in the analysis of alleged abuses of dominant position and of vertical restraints occurring in several sectors of the Irish economy, such as telecommunications, advertising and electronic payments. I had the opportunity to participate also in some activities carried out by the Cartels Division, in particular in the assessment of an alleged “hub and spoke” collusion. The M2 in Economics and Competition Law provided me with the theoretical background I needed to deal effectively with my tasks at the Competition Authority of Ireland. Among the different classes I attended, I believe that the ones in “Competition Economics and Econometrics”, “Competition and Market Strategies”, “Competition Law in Practice” and the “Workshop on the Law and Economics of Competition” proved extremely useful for the understanding of the issues I had to deal with every day at work. I decided to apply to the Competition Authority of Ireland because of the advice of a previous year’s student of the Economics and Competition Law programme. It was not very difficult to get my internship since the Toulouse School of Economics is well-regarded all over Europe for the quality of its Master programmes and for its students’ theoretical skills. A work experience in a Competition Authority is probably the best way in order to get access to the job market in the field of competition policy, and that is why I will never stop suggesting TSE students to apply for an internship at such a kind of institution. 1. What was your role during your internship?
I had the opportunity to work at the Institute for Applied Economic Research (Instituto de Pesquisa Aplicada - IPEA), a prestigious public research center that provides technical and institutional support to government actions – enabling the formulation and reformulation of public policies and Brazilian development programs. Its work is publicised through numerous regular publications and seminars. My internship took place in the Coordination of Regulation Studies at IPEA in the office Rio de Janeiro. I worked on a research project – “Collusion and corruption in public procurement, public carriers and forms of remuneration for the employees” – under the supervision of Eduardo Pedral Sampaior Fiuza and Lucia Helena Salgado, both researchers at IPEA and professors at Universidade Federal do Rio de Janeiro. My job as an intern was to compile a database of cartel cases judged by CADE (Conselho Administrativo de Defesa Economica) between 1994 and 2006. CADE is the main institution in Brazil that investigates and prosecutes antitrust cases. I found this process incredibly interesting because all I had learned about cartel formation in class was extremely theoretical. When I started the research I found out that cartel formation is all around us. There are cartels in many sectors of the economy: magazines, stores, drycleaners, funeral homes, gas stations, construction, metro stations and so on. In my work, I identified each antitrust cases and I gathered basic information about them (Date of Formalization, Trial Date, industry, etc.). Identifying and condemning cartels is a very complex process not only due to technical issues but also corruption and lobbying by many firms. At the end of my internship I realized the importance of regulation of market failures and all the difficulties this implies. 2. How did your experience in the TSE help you on the job? For this internship my classes in microeconomics where essential to understand and carry out the research, because I had to apply the concepts of cartel formation, price-fixing, price regulation and antitrust policies. Definitely these industrial organization theories became more concrete during the internship. The most interesting part was that until I did my internship these theses were mainly class concepts and I had never analyzed them in the real world. 3. How did you get the internship? Do you have any advice for students looking for a job in a similar field? I was able to obtain this internship because of my personal networking. I talked to a friend of mine who studies economics in Brazil and asked him about the procedure in Brazil to get an internship at the IPEA. He then mentioned that one of his professors, Lucia Helena Salgado, had been visiting professor at TSE for Master 2 ECL and was a researcher at the IPEA. I believe that being a student at the TSE helped a lot when I contacted her. I think that my recommendation is that we have to invest in networking using personal and virtual relationships, for example, professors, alumni and other students of the TSE. You can never know where a job opportunity might be. 1. What was your role during your internship?
I was selected into the Summer Research Program in Columbia Business School last year, and from June 2nd to August 3rd, I spent two months at Columbia Business School as a research assistant for Professor Patrick Bolton and Professor Neng Wang. The Summer Research Program (SRP) hosted by Columbia Business School is a fully-funded research program that only seeks exceptional undergraduate or graduate students to engage in a variety of research projects, including possible projects in the areas of finance, economics, marketing, management, accounting, decision making, risk management, and operations management. During the program, interns work with faculty and other researchers at Columbia Business School on a summer-long research project, gaining valuable experience in applying analytical and quantitative skills. My job was to work on the “Book Project on Corporate Finance Theory” with Professor Patrick Bolton and Professor Neng Wang. The aim of the project is to publish a new PhD level textbook in corporate finance. Right now, the only PhD level book on Corporate Finance is written by Professor Jean Tirole. This classic book – unifying fragmented topics in corporate finance into one clear, accessible framework and enormously enhancing people’s understanding about corporate finance – was however not tied directly to the traditional valuation-based corporate finance course taught in business schools. So there is still a demand out there from researchers, doctoral students, and instructors. The two professors’ research interests in corporate finance naturally lent themselves to this project, as they see a clear dovetail between research and teaching. This new book attempts to present classic materials (tax and incentive problems) in a systematic way and introduce recent research progress in dynamic corporate finance. I was required to work on literature and lecture notes, provide feedback and convert lecture notes into preliminary draft chapters. Much of my work involved in dealing with deep models at PhD level. 2. How did your experience at TSE help you on the job? The M1 courses I learnt in TSE, especially game theory and incentive theory, helped me a lot during the internship. Corporate finance theory is closely related to contract theory. With what I learnt in TSE, I was able to deal with advanced models in the lecture notes. Besides, rigorous training on quantitative methods in TSE allowed me to learn advanced materials quickly. This was quite helpful when I began to work on dynamic corporate finance theory, a totally new topic for me. 3. How did you get the internship? Do you have any advice for students wanting to find one in that field? Well, I actually found information about this internship on a social network site. Then I went to CBS’s homepage and applied. After two rounds of selection, I was in. So, use Facebook or Renren wisely, and you will be surprised! Again, what I learnt in TSE was very helpful during the interview. I was able to answer three-quarters of the questions regarding R and game theory. So I would suggest students who want to find RA positions ensure they really understand the material taught in class. Finally, I guess (just a guess) that TSE’s reputation and its connection with Professor Bolton helped me in terms of receiving the final offer. 1. What was your role during your internship?
Oxera is a medium-sized consultancy firm with offices in Oxford, London, Brussels and Berlin. It started out three decades ago, advising the British government on how to organise newly-liberalised sectors of the economy. The company’s services are mostly centered on transport, telecoms, utilities (such as water or electricity), although it has also branched out into other sectors such as health and intellectual property. Oxera’s aim is to provide high-quality economic consulting services, and works in finance, state aid, competition economics, and modelling – among others. In my time at Oxera I was involved in various different projects: one involved running econometric models for cost analysis, and providing outputs and reports that could be presented to the client; another concerned assessing a regulated, non-publicly traded company’s returns to determine whether it was being overpaid by the state. I was also involved in a more minor role in several other projects, including Oxera’s work for Gatwick airport, and Ryanair’s (many) state aid cases. 2. How did your experience at TSE help you on the job? Without a doubt, the most useful class for me was Econometrics. Throughout my internship I was very involved in the modelling team’s work, and the Econometrics course at the TSE gave me a very thorough understanding of the basics of the field. This made it much easier for me to understand what (for example) different tests do, and their implications, and in general allowed me to be much more comfortable in discussing statistical properties, etc. My class in Stochastic Processes also found practical application: Oxera took on a project that involved constructing a Markov chain, in order to model the probability of new businesses failing under certain parameters. Interestingly, something I found lacking in the M1 that would have been very helpful was a good course on Competition Economics. Luckily, I had already taken a course in Competition during my undergraduate degree; if I hadn’t, I don’t know whether I would have gotten the internship, as I wouldn’t even have known what a natural monopoly was. 3. How did you get the internship? Do you have any advice for students looking for a job in a similar field? I actually first found out about Oxera through the TSE’s Business Networking Day. I attended the presentation they gave and was left with a very positive impression of the company’s culture and the type of work they engage in. In fact, I would quite recommend attending the company presentations at the BND, as they can give you a very good idea of whether the company is the sort of place you’d enjoy working. In my case, it certainly worked out very well. My advice to students looking to do an internship is the following: first off, don’t be afraid to sell yourself in the initial application! Be sure the company knows what sort of value you can bring. Secondly, you can never be too prepared for an interview. For my interview with Oxera, I investigated all of their sectors and services to make sure I had a decent understanding of what they consisted of (this proved useful as I was asked a question on state aid, which I hadn’t heard of before applying), and read a few of the company’s recent publications. It’s also a good idea to think about the answers to the more obvious questions – things like “why do you want this internship?” and “what made you choose this company/ institution?” – beforehand, in order to have a cohesive answer in mind. Finally, relax! Being calm and confident goes a long way towards making a good impression. 1. What was your role during your internship?
I did my internship at the headquarters of Renault, which is a French multinational vehicle manufacturer. As part of the Renault-Nissan Alliance, the company is the 4th-largest automotive group by production in 2013. My internship took place at the Global Sales Division, within the Statistics and Short-Term Forecasts department, which is in charge of producing the statistics of official sales and TIVs (Total Industry Vehicles) on a worldwide scale. As an intern, I had the opportunity to work on two different areas. Firstly, I was in charge of producing statistical reports concerning the sales in Asia-Pacific and Eurasia. Secondly, I produced world sales forecasts by working with consultants and internal teams to analyze large quantities of data, build models and create tools effectively balancing quality, availability, timeliness, and cost factors. Finally, I was in charge of automatizing statistical data crunching through a panel project in collaboration with the IT department. 2. How did your experience at TSE help you on the job? My experience as a student of the Economics and Statistics section at TSE has given me solid skills to work on statistical projects using different statistical software in order to perform high level database management. Furthermore, the different economic models I learnt during my Bachelors (Mathematics & Economics) gave me the opportunity to understand better the internal forecast models used at Renault to forecast future sales, and to understand better the links between commercial demand (with its estimation of risks and opportunities) and industrial response and constraints. Moreover, as the internship required working with consultants and internal teams from different departments, a certain sense of social relationships and team spirit was essential. My experiences within the TSE Junior Etudes have actually given me the opportunity to be part of a large team, and to work with people of different backgrounds, as well as clients from different fields and networks; this was all helpful for the smoothness of my internship. 3. How did you get the internship? Do you have any advice for students looking for a job in a similar field? I got the internship by applying for an offer posted by the director of the Masters programme, Christine Thomas. I sent a CV to the person in charge of the recruitment and was interviewed by phone. The interview lasted one hour. First, I talked about myself and my personality, as well as my motivation for joining the company and the Global Sales Division. However, as the internship was technical, the recruiter seemed to be more interested in the different projects that I had already carried out during my studies and previous experiences. I would really advise students who are looking for internships and jobs in the field of quantitative research to highlight the different skills they have already acquired during their studies and workshops, in order to be more attractive for the recruiter. Talking about a previous experience gives the candidate more authenticity. Furthermore, it is very important to ask questions and more details about the internship/job proposed, before starting to say that you are interested in it. In fact, asking questions could give you a more precise view of the different tasks that you would do if you get the internship. It may also give you an idea on the skills you have already acquired that match the internship/job, and hence allow you to talk about these skills and the context where you acquired them. 1. What is your current position today?
I am a senior economist at TAC - Thierry Apoteker Consulting. My principal task is knowledge management to collect information on emerging economies and macroeconomic issues (trade, investment, monetary policies, etc.); I therefore participate in synthesizing information and preparing reports on emerging economies, related to economic and financial risk assessments. I also represent the company in India and manage our research office in New Delhi, with responsibilities in terms of finance and human resources. 2. What was your path from master graduation to this current post and what are the key elements which helped you to make your choices? During my Master in Mathematics, Statistics and Econometrics, with a great emphasis in microeconomics and industrial organization, I decided to specialize in macroeconomics and did my master thesis on World Income Distribution. I then joined ENSAE in Paris for a 1-year postgraduate program in Forecasting and Economic Policy; I built upon my previous knowledge by choosing courses in international and development economics and additional quantitative techniques like macroeconometrics. My first position was with the French Embassy in India for 2 years, where I was in charge of the economic follow-up of India and South-Asian countries (growth, monetary and budgetary policies, etc.) and of development issues in relation with the World Bank and IMF. Upon returning to France, I joined TAC in 2009 to work on country risk analysis as well as on specific country studies, and moved back to India in mid-2010, allowing a strengthened proximity to core economic issues in emerging countries. 3. According to your professional experience, what are the most useful skills that you obtained during your degree? The Masters degree helped me develop an intense research approach to economic problems, with an acute awareness of the importance of extensive academic work already available. The academic program also allowed me to acquire stronger analytical and synthesis skills to assess and evaluate the relevance of economic information and research. 4. What advice would you like to give to the TSE students or to the School? First, student must realize the wide range of professional economic areas, and determine as soon as possible their main interest to focus their studies on it. Also, I am delighted to see the efforts made by the TSE Alumni association, and I am sure it will provide greater opportunities for students to interact with professionals of various horizons (public and private research, policy-making, etc.) and strengthen their interests in the economic sphere. 1. In September 2015 the United Nations will reveal its new
development goals for the next period of fifteen years. Many of the millennium goals have been met. Still, improvements can be made in the efficient allocation of resources and the way aid contracts are structured. Do you have any suggestions for the new development goals? “Firstly, it is always important to focus on a reduced number of objectives with a few measurable indicators. Secondly, it is more important to look at the quality rather than the quantity for some indicators. For instance, if the education target only focuses on school enrolment, you can have 90% of all children at school but what does this really mean if they are poorly trained. The content matters a lot and this is especially true for education and health. The right mix between quantity and quality increase is also country dependent. In some countries it is obvious that the main problem is quality and that the basic source of inequality is in fact that the quality of health and education services differs considerably across areas. Often the poor areas are the most remote areas, where communication and infrastructure are lacking and especially in the rainy season these regions become almost inaccessible. Hence, one key problem is that no one wants to work there. How can you then induce good teachers and doctors to go into these remote areas and provide high quality services? Concerning the MDG [Millennium Development Goals], if we assume a concave curve between performance and effort, what we have achieved in recent years is relatively the easiest, increasing the quantity rapidly. However, this becomes more and more difficult to do, so the marginal impact you can achieve with extra funds will probably be disappointing compared to what you have done so far. Nevertheless, the effort has to be sustained in order to realize higher quality and equalizing impact across regions. We want all people to be included.” 2. There has been a shift away from aid conditionality towards participatory aid programs. Do you think that current aid programs are more effective compared to previous programs? “Well, there is still a lot of room f o r i m p r o v e m e n t . S l o g a n s stating“conditionality is bad” has become big fashion. The response was to remove conditionality and to go into the opposite direction, which is policy dialog and ownership. Of course it was not an elaborated change to go from one extreme to the other. People started to realize increasingly that establishing effective aid programs is rather complicated and we are in need of more adapted programs and a subtle manner of devising aid modality. It is true that the aid conditionality programs did not work well. However, the reasons why the programs did not work well differ. Sometimes these programs were well adapted to the country, but they were not well enforced. Often when there is a situation in which the conditions are not fulfilled, and aid should have been suspended, immediately several lobbies pop-up and will start to intervene and try to evade the imposition of the particular conditionality. Among the lobbies there are many firms, including f i rms from developed countries. These firms might have contracts with local businesses and cutting off the aid flow would possibly hurt the firms. So, often local and international lobbies align themselves to block the implementation of the conditionality. Hence, it is not only an issue of the design of the program, but also an issue of proper enforcement.” 3. Lately, a larger share of aid resources has been allocated to Community Driven Development programs. These are programs that give the responsibility of for planning and decisions on the use of the resources of the aid programs to community groups. Do you think these programs are effective? What are the advantages and disadvantages of the CDD approach? “It is not a panacea, it may work but it may also be worse. The basic idea is that the state is corrupt so lets go around the state and lets go to the communities, because this is where the people who need the money are. The problem is that you don’t just go to the community; you have to meet the local chief and you have to be accepted by the local authority. Often the political systems in developing countries are characterized by links between the top structure and the local structure. Hence, you may encounter as many problems at the local level as at the top and without proper check. Monitoring at the local level is often more difficult, as the checks and balances are of less quality than what they are in the capital city, where there is a national press exerting pressure. For example in China, we know that there are a lot of problems at the local level; this is where you have most of the corruption and embezzlement. You have to adjust aid modalities to different countries; there is no unique formula that works everywhere. The second thing I want to add to that is that when you look at it carefully, the monitoring of aid programs has been completely insufficient. Monitoring does not only involve punishment but it also functions as a support for local organizations. One of the reasons for the lack of monitoring is that donors want to see that their money is going entirely to the measurable target, not to an administrative staff for monitoring. Lastly, I would like to add that community driven development works very differently in practice than on paper. The idea is in fact good, but we have to devote time and really listen to the people in the community. Often they do know better what would work and would not in terms of effectiveness and enforcement. However, the time needed to really listen to the community is often not taken.” 4 . W h a t a r e t h e p o l i c y recommendations that can be drawn from the results of the paper you presented “Optimal Discipline in Donor-Recipient Relationships- Reframing the Aid Effectiveness Debate”? “ The main policy implication i s that monitoring and sanctioning mechanisms are necessary if you want to be able to take countries on board, which have a very low level of governance, otherwise they will be excluded. These are the countries where often live the poorest people, hence in terms of poverty reduction you do not want to remove Haiti, Somalia, Eritrea from your aid programs. To overcome the exclusion of these countries with the lowest levels of governance, one has to make a trade-off between needs and governance but with the ability to influence governance. We have to be modest and humble and not try to change a political system. It has been demonstrated before that it will be a total failure when the West wants to try to change a political system, but we don’t need to go as far as that. To improve governance is to improve the local capacity and accountability in a way that is reasonable and that goes step by step. The problem is when you have this trade off, a country might be highly effective in reducing poverty, has a strong state capacity, but the donor does not agree with the political system. This is where we have to decide what we want to achieve and I think that if your objective is to reduce poverty then we should continue. We did not become a democracy from one day to the next either.” 5. In your research on the role of institutions and development, you stress the importance of social norms. As economists, we mostly focus on property rights and contract enforcement mechanisms. What can we learn from sociology/anthropology when looking at institutions that facilitate effective market systems? “When we want people to have a better life, it is not only a question of income and consumption. An important component of well-being is dignity and self-respect. Currently, in a lot of societies we observe socialoppressive norms: we would like to remove them, but how? I am [referring to, for example,] early marriage of girls and genital mutilations like excision. Development is also a question of emancipation. When social-oppressive norms are internalized in preferences, and considered as a part of the culture, the identity, economists’ tools are not appropriate anymore. If we search an equilibrium by maximizing preferences, what happens if these preferences are contradictory with the general interest? What if people defend these norms? It is a psychological issue. Culture plays an important role in development.” 6. We would like to conclude with a question related to a current issue, the rise of the Islamic State in the Middle East. One of your papers, “Political Instrumentalization of Islam and the Risk of Obscurantist Deadlock”, adverts that politics tends to dominate religion and that there are misconception present in empirical studies that advocate the strong link between Muslim countries and political performance indicators. How do your findings relate to the rise of the IS [Islamic State] in the Middle East? “It is obvious that the ideology of this movement is not Islam. They are typically extremists and there is no possible dialogue. In my opinion, we should not allow them to reach power. However, they are able to do so. We should wonder: what happened? What has created a situation where these people suddenly have obtained power? The invasion of Iraq by the US has clearly played a role. However, at least when they left, they had started to understand how to deal with the Sunnites and found a way that could marginalize Al-Qaeda. The Prime Minister Nouri Al-Maliki has made a lot of political errors that led to the rise of ISIS, and destroyed what the US had achieved. He was narrow-minded, sectarian, and has disappointed a lot of people. He has been even worse with the army than the Americans were. As a result, we have generals from the Saddam Hussein army who are in ISIS even if they are absolutely not Islamists; they only want to take revenge because they lost everything, including their dignity. Now they want to destroy this regime. Moreover these people know how to manage a tank, are highly skilled and organized, compared to, for example, the Taliban.” 1. You are Deputy Director-General for State aid at the
Directorate-General for Competition. What are typical cases you are dealing with? The cases I am dealing with vary a lot. They involve many huge bank restructuring cases, such as WestdeutscheLandesbank or BayernLB. 25 percent of the banking sector in Europe has been restructured following Commission state aid decisions, 104 banks in total in all Member States. In some countries, 100 percent of the banking sector now falls under State Aid supervision. These were very tough negotiations to essentially arrive at a restructuring plan that will bring the banks back to viability while at the same time limiting distortions of competition. We also currently have important cases in Germany and the UK, to name but two, about the reform of with many R&D&I (research and development and innovation) cases as well. These cases are typically very difficult as they involve restructuring in industries that are going through a transition like the airline industry (where companies received state aid in order to keep them in the market). So it’s extremely varied - state aid control applies across the whole economy and you have cases in pretty much every sector of the economy. A new and very interesting area is fiscal state aid where Member States employ selective measures in tax regimes and administrations in order to support certain companies. This is also an area where we believe that there are important implications for the internal market. 2. How does your education as an economist help you in dealing with these issues? We basically perform applied welfare economics. In essence we look at whether the state aid is addressing an interest that goes beyond that of the company concerned (e.g. remedying environmental problems, furthering knowledge spill-overs, protecting financial stability),if there is a market failure and if so whether the action is actually necessary and whether it changes the company's behaviour; i.e. if there is an incentive effect. Then we ask ourselves whether this kind of intervention is appropriate or if Member States could use a less damaging intervention. Typically, when we analyse these cases, we have to go through all these questions. It’s not academic, because at the end of the day we are dealing with real cases and have to make decisions, even if the information is limited. State Aid control therefore applies the analytical rigour that a study of economics gives you to real life cases. So it’s applied macroeconomics, applied welfare economics, if you wish within a legal framework set by our rules and the jurisprudence of the Courts. 3. In 2012, the Commission set out a state aid reform programme and the European Parliament adopted a Resolution supporting the initiative in 2013. Why do we need to modernise state aid and what will be the main changes and benefits? This is a reform of state aid control regarding the Commission's rules and modus operandi. We did this basically for three reasons. The Treaty required the Commission to look at all state aid and says that unless it is approved it cannot be granted. In a union of six Member States that was maybe still feasible, but now with so many liberalised markets in 28 Member States this would simply be unworkable. We have, therefore, decided to concentrate only on those cases that are really important for the functioning of the internal market. So in a way it is a massive subsidiarity initiative on our side in an area where under the Treaty the Commission has exclusive competence. We want up to 90 percent of the cases that are smaller and less damaging to the internal market to be treated under very simple rules by Member States themselves without them having to be notified to us beforehand. This significantly cuts red tape and speeds up the processing of aid. So simplification and better prioritisation, including an emphasis on subsidiarity, were two reasons. Third, we wanted economic principles to be strengthened in the assessment of cases we scrutinise carefully: to be rigorous in the big cases in order to facilitate "good aid" and to reduce "bad aid" that is very distortive. By doing so, we hope to contribute better to economic growth, because at the end of the day we want to make sure that the money is well spent and leads to improvements. 4. Did the initiative come from the Commission itself or from the Member States? We obviously discussed it with the Member States but we decided to do this ourselves. Member States welcomed it and supported us and we have now basically completed the reform of all these rules. The Member States, now responsible for up to 90 percent of cases, would of course need to manage them themselves and some of them feel that it is also a responsibility they have to take. We believe this is an important reform – you cannot regulate everything from Brussels, it is just impossible. 5. Who is then responsible at Member State level for managing these cases? It depends. A priori it is the national state, typically not the competition authority who is in charge, although in some Member States the competition authority has taken the responsibility to manage state aid cases. In Germany for example, the Federal Ministry for Economic Affairs and Energy (BMWi) has a co-ordination function for state a i d s. They need to make sure that the aid that they don’t have to notify to us beforehand complies with very simple rules that we have set out. Me m b e r S t a t e s need to implement these themselves. For example, when an aid is given for a broadband project in Bavaria, which doesn’t have to be notified to us, they then need to check that the basic rules are applied. In a sense, they become ‘mini’ simplified controllers of other authorities and of themselves. They know that if they don’t do it well – because we check from time to time through so-called ex-post monitoring – they will be in trouble. I think that in the Union we live in today we should not and cannot regulate every competition case from Brussels. Governance is much more continuous with some responsibility taken over by Member States and some responsibility by Brussels. The reform is a bit of a wakeup call for some Member States: They like the principle of subsidiarity but they like the responsibility that comes with it a bit less. 6. The Commission’s merger guidelines acknowledge the “fai l i n g f i rm defence” under certain conditions and an otherwise problematic merger is “compatible with the common market if one of the merging parties is a failing firm”. Is there a similar concept for state aid and did that affect the role of state aid in the financial crisis? Absolutely, Article 107 3(b) of the Treaty (TFEU) allows the Commission to take account of exceptional risks to the stability of the economy. And that Treaty Article has been used by the Commission in the crisis to allow massive state aids flow into the financial sector for reasons of financial stability. This had to be done, but under conditions set by us to avoid the internal market from fragmenting as a result of uncoordinated actions by Member States. We can and we do in practice take account of such exceptional circumstances in adapting the rules when faced with such challenges. Another concept,that is very basic in state aid control and which is also highly relevant to the failing firm defence, is the counterfactual a n a l y s i s . We c h e c k t h e n e c e s s i t y o f state aid, often b y a s k i n g t h e q u e s t i o n w h a t t h e counterfactual of not giving aid would have been and what the company would have done if it hadn’t received the aid. The failing firm defence is based on the same logic: the merger is allowed because there is no damage to competition as in the absence of the merger the failing firm and its assets would have disappeared. The logic behind the idea in State Aid that you have to look at the counterfactual is quite similar to the logic underpinning the failing firm defence and is a key feature of state aid control. 7. In 2013, the US government agreed to give Boeing $8.7 billion in tax breaks, notably for the development of i t s 777x. The tax breaks are perceived as an unfair aid by Boeing’s EU competitor Airbus. Will and can the EU challenge these subsidies and is the Commission engaged in ensuring a level playing field between EU and non-EU companies? This global level playing field issue is very important. Our slogan is “No protectionism at home, but activism abroad”. What we do in practice is, first, if we are concerned we go the WTO; the Boeing/Airbus cases are at the WTO at the moment. The measures you refer to have been brought into on-going procedures before the WTO. Secondly, we try through the reform of the WTO rules to generate more transparency. At present, the only globally available data about subsidies date back to 2006, so they are obviously outdated. We would like this to be addressed in order to have more transparency at the WTO level concerning the subsidies WTO members grant. Moreover, in our bilateral t rade agreements, for example with South Korea or Singapore (and now we also want to achieve this for the trade agreement with the US) we try to build in state aid discipline, either through requiring transparency or by putting limits on what can be done in the case of rescuing or restructuring firms in difficulty. We want to use our trade policy to try to rectify problems in third countries. Finally, at the very end, if we see that a company would not invest in an assisted area in Europe but go to a third country and if this is properly documented, then we would accept - this is the counterfactual again - that the European country would give matching aid to ensure that the company doesn’t go abroad but stays in Europe. We see this rarely in reality in our case practice, but the possibility exists in our regional aid rules. Our R&D&I rules are another case in point: here we have a "matching clause"allowing a company to argue: my competitor is getting aid in China and I cannot compete with this company if I don’t get R&D&I support in Europe. Then, in principle, we can consider this, in practice however, this clause has never been used. 8. Could this theoretically apply to Airbus? This could theoretically apply to Airbus. But in the case of Airbus we have a lot of state aid going to its suppliers, which is mostly R&D aid, all of which we have cleared under our rules. This is very important to realise: We have never taken a negative decision on a R&D aid in the past ten years. We sometimes modify the conditions or we make sure it is minimised or limited, but we never stopped R&D aid. 9. Do you think that the ongoing TTIP (Transatlantic Trade and Investment Partnership) negotiations between the US and the EU are an opportunity to establish global rules on state aid control? The problem for the Europeans is that we also have so-called defensive interests in these trade negotiations. The 2006 statistics about subsidies show that Europeans give more aid than anyone else in the world. This is largely true because of agriculture. So, the problem is that our Member States don’t want to make state aid control a priority in the negotiations because they are worried that this may have implications for them in other areas where subsidies are concerned. Achieving a global level playing field is not an easy task but we are definitely pushing as hard as we can. On behalf of the TSE students, thank you for your time, it has been very insightful. Interview With 1. Could you describe the way EPEX organises spot market
trading in electricity? We have two market segments, one is called the day-ahead, the other is called intraday trading. On the day-ahead market electricity is traded for a delivery on the following day. Once per day at twelve o'clock we close the order book and do an auction. In summary we run a fairly complicated optimisation problem in crossing the demand and supply curve under the constraint that there is enough capacity to flow from one country to the other. Calculations take ten minutes at most while the entire process lasts for 50 minutes. At 12:53 we publish 24 prices for the 24 hours of the day. While this is the main market that exists for the spot market in Europe we also organise intra-day trading starting in the afternoon. This is a continuous market like a stock exchange. Similarly traders submit anonymous orders at least 45 minutes before delivery may take place. 2. Why do we need two distinct frameworks? To some extent this is true for historical reasons. As power is not a storable commodity transmission operators (TSOs) are used to ask for a lot of information the day before. This information is much needed in order to foresee as closely as possible what is going to happen during the next hours. On the other hand the intra-day process is something that is much more recent. While the day-ahead auction started in year 2000, intraday was only introduced 5 or 6 years afterwards. Its purpose is rather to face unexpected events such as the failure of a power plant. Additionally renewable energy becomes more and more important. Since forecasts for renewable energy are not accurate intraday trading is very helpful. Still the day-ahead trading is the most liquid of all markets and participants trade their entire demand based on what they know the day before. 3. Why do we observe negative retail prices on the exchange? This may occur when there is a huge quantity of energy coming to the market at times when demand is very low, say for instance the day after Christmas. While at 4 a.m. there may be a lot of wind blowing, no one wants to consume any energy but sleep and recover from Christmas Eve. In the meantime power is just flooding the whole of Europe. In such a case there are some producers who prefer to pay instead of cutting their own power plant because cutting a thermal, gas or coal power plant can be very costly knowing you would have to restart it in a couple of hours. If henceforth prices go until a certain negative threshold suppliers may be willing to keep their power plant running. Indeed this is a very strange feature of the market. It illustrates the lack of flexibility of power generation in Europe and shows that our classical means of producing power are not flexible enough to react to shocks such as a high supply of wind energy which can make up more than 20 % of German energy supply. 4. Why are negative prices not transmitted to consumers? On the one hand the way consumers respond to prices is not that developed. You may subscribe to different day and night prices but most households sign fixed price contracts. On the other hand the bill consumers pay consists of only a small fraction of generating costs. Taxes, expenses to excess the grid, technical support and subsidies for people in remote areas paying the same prices as those in urban areas all add up on the bill such that wholesale prices make up only 20 % of the bill that we pay. 5. How can we ensure sufficient incentives to invest into power capacity? This is something that we call the missing-money problem, the remuneration for capacity which is not used but has to be there. When the wind does not blow we have to have some support power plants that are usually some gas or coal power plants. There is a lot of emotion in Europe about this topic. Conventional power plants find it more and more difficult to be alive and have their power plant running because they do not receive enough money for that. There are a lot of mechanisms that could be imagined in order to make sure that this capacity is paid. We are working closely on the French case because French legislation is more finalized on this topic. RTE, the French TSO, already published some rules with regards to how the market should be organised that will be implemented next year. The principle is that every supplier should make sure that someone is in the market that is able to produce power. Thus some power plants will be obliged to supply capacity. The role of EPEX would be to help suppliers and generators to exchange capacity certificates and finally make a price out of it as we're doing for the energy market. 6. Why is this legislation only happening on a French level? This is the contradiction we experience every day. While we are working on the development of a European market the responsibility for energy policy remains at the level of the member states. France has a specific problem for the winter peak due to electrical heating. Germany decided to adopt a specific policy in shutting down nuclear power plants. Yet for some specific reasons Germany has decided not to adopt a capacity market. Thus everyone has different problems. That's quite a mess and at times this is also a reason why the market does not work properly. Therefore there's quite a lot of work ahead on how to create an efficient mechanism and as a French-German company we would like of course to have a French-German market. 7. What are the main challenges ahead towards further integration of the market? We are supposed to achieve what is called the target model of European power market integration by the end of this year. This is still not the case because it proves to be much more difficult than initially foreseen. At the moment power exchanges only optimise the flows between some countries creating prices at the day-ahead level. These include Portugal, Spain, Scandinavia, Germany, the UK and the Benelux countries, but leave out Italy and Eastern Europe. 8. Can TSE students help you doing so? What kind of profile are you looking for? Most of the people working at EPEX are not engineers, despite the fact that the business is very technical. So don't be afraid to dig into technical things. What I think is important is a strong background in Economics and a lot of interest in the energy market. We like people to speak in English as our teams are multicultural and multinational. We usually don't publish any advertising or offer for internships, but we do welcome one or two internships per year. I don't like to have someone for less than three months, any duration between three and six months is fine. At first glance it seems that Audrey Mahuet governs a very strange exchange. While at Christmas morning prices plunge to negative values their day average demand peaks just a month after to a level twice as high than what one observes during mild summer days. The energy market is essentially different. Power is nothing that you can efficiently store in a fridge or wrap in a gift paper to present it in the right moment. Energy units produced must be instantaneously consumed. The invisible hand residing over the efficient allocation of energy in France and its German speaking neighbours is called EPEX, its almost 80 employees run the spot market in Paris and are at the very moment in a leading position to accompany further integration of the European energy market to finally accomplish one goal: The single European energy market. Enforcement of the idea started as early as in 1996 upon adoption of the European energy directive. Back then energy exchanges did not exist, nor did any competition on electricity markets occur as energy supply was often governed by state-owned companies. Yet 2014 sees markets still fragmented, the industry too often subject to uncoordinated national legislation and renewable energy imposing new challenges to capacity constraints. In principal two challenges arise. Firstly an optimal allocation mechanism of cross border capacity has so far only been implemented in the day-ahead market for some but not all countries and is only at the beginning of being implemented on continuous intra-day trading. This last facility is to be implemented within the target model of European power market integration but proves to be much more complicated than anticipated. Secondly recurrent negative retail prices reflect on the fact that demand is very inelastic whereas supply is much exposed to external shocks. While stock markets may crash occasionally and oranges may be sold out energy supply must be reliable. Capacity is a public good. If incentives to invest in capacity go out of season power supply stability is at risk. Given the specific nature of the electricity market consumers must rely on supplier's ability to quickly provide energy to the market if needed. While this is an essential promise to any industry heavily reliant on energy, power suppliers receive no reward to do so. Yet it seems that stability could have been ensured as long as the energy supplied to the market was generated by sources whose supply could be well predicted. Coal or When discussing the upcoming business talk on finance
at the weekly TSEconomist meeting my attention wavered, given my poor interest in financial issues. But then someone mentioned the title of the conference “Can investors do well by doing good?”, and some kind of positive karma suddenly spread throughout the room. I was halfstunned by the possibility that in this absurd and crude world some people still believe in changing things to the better. Julia, the Chief Editor, said that it seemed interesting exactly at the same time that it came into my mind, and it was clear to me that I wanted to cover this business talk very badly. Sebastian Pouget’s research interests span management science, economics, psychology and ecology with a particular interest on experimental methodology. Back in the real world he is a professor of finance at UT1 and IAE, directing the Master on Financial markets and being the vice-president of our beloved University. He is also the Co-Director of the research centre on socially responsible investments. Meanwhile he introduced himself as an inventor of neologisms, having, jointly with Christian Gollier, coined the “Washing Machine” principle. To fully appreciate its meaning you may want to continue reading until the end. Yet simply put the principle refers to the promotion of investment strategies and corporation behaviour in a more Socially Responsible environment, namely Environmental Social and Governance (short ESG) investments. Those investments do not only take into account profit maximization in monetary terms, but also consider externalities like pollution, working conditions, employee relation, product safety or transparency of decisions. Surprisingly ESGs make up between 5 and 15 percent of total investment, amounting to several trillions of dollars in total! The major part of these funds is held by Pension and Sovereign funds, but also asset management companies become increasingly active in that market.. In the game (SRI from now on), there exist numerous strategies, but three of them are dominant, ‘The first one is the “Exclusion”, that is simply the action of boycotting a sector which is judged irresponsible (from a moral point of view). This strategy has exploded since 2005, between 2009 and 2011 the counterfactual investment adds up to 4 M$. The second strategy follows the principle of “Best in Class”. According to this principle investment countries are chosen by overall ESG performance. Money flows should be redirected to those economies that act in the most “responsible” way. In comparison to Exclusion this type of investments is still low, but has also doubled between 2009 and 2011. The last strategy is defined by “Engagement”: investors try to change the behaviour of corporations by exerting their control rights. This is a strategy in constant progression since the start of the XXIst century, and its growth rate is not as impressive as the two others in the last years, but accounts for 2M$. One could ask why it is important for firms to appear as socially responsible, and this is also a matter of debate: according to Fiedmand a social responsible firm behaviour maximises the value of the firm. This is also a way to maximize profits, since it also allows to reach financial objectives by creating economic value in the long run. But, who decides on which firm is to be considered as ethical and which firm is not? The Norwegian sovereign fund is an influential agent for the market of SRI, which has a blacklist of companies that they exclude from investment. This list is attentively checked by external investors, and being on it can really damage your reputation. Airbus and Safran are on this list for instance, as is Total is under scrutiny in Western Sahara. Contrary to stories from our childhood, being a nice and integer man is not necessarily the best way to be successful in this world. If you doubt this claim, take a look at the destiny of stark characters in the series Game of Thrones. So, why is SRI able to attract investment from traditional investments funds? There are three main reasons for that. At first SRIs are more able to spot promising companies by means of additional-financial analysis. Secondly SRIs are also more likely to anticipate changes in corporate social responsibility and benefit from the subsequent enthusiasm. Last but not least, they can implement the “Washing machine” strategy, a term that we started talking about. But what is it exactly? In fact the concept is built upon a mathematical model. Put in a few words, it describes the strategy to buy dirty companies, to clean them, and then sell them. Within this model one distinguishes between two types of investors, standard investors and responsible ones. The responsible investor takes externalities into account, he acts as a washing machine. To begin with, he buys sufficient shares of a company that doesn’t behave in a prosocial way at low prices, until he can have an influence on decisions Once he exceeds this threshold he is able to make decisions. That will improve the image and impact of the company, potentially making it more valuable and attractive. Moreover, the model shows that if a free rider tries to enter the game, promising that he will change the firm but don’t do anything, the next time that we proclaim cleaning a firm, nobody will believe it. In other words, being a washing machine firm is a matter of reputation. In a study published in 2012, Karakas and Li show that the SRI strategy can generate exceptional profit. The Tau Investment Management may perhaps serve as a good example to follow such an investment strategy. The company buys shares of garment factories in emerging countries (such as Bangladesh where only some years ago a factory collapsed due to irresponsible working conditions) and improves on labour conditions and the supply chain organisation. In conclusion, the newly emerged understanding of Social Responsible Investments is ever increasing and reveals itself full of promises for changing the immature behaviour of us humans, a stance our grandchildren will be thankful for. |
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