The democratization of finance for Economic empowerment

In this article, I basically entertain the idea that ownership of land, home, stocks, bonds and other kind of property ownership as fundamental to the process of creating a market-oriented psychology, a feeling of inclusiveness in the socio-economic participation and equality which contribute to achieving a good/better society. I will also explain the necessity of finance in people’s empowerment.

The history of financial is to a substantial extent a history of deliberate government policies to disperse financial interests and economic ownership across a wider segment of the population. Historically, such policies have helped in the democratization of finance and its content. We seldom stop to reflect/realize the extent to which we live in a society that is structured by financial design, so we can become better and better overtime. This history has brought us, the humanity and society, to certain financial arrangement that we have – most of us, without noticing or being conscious about how these arrangements works for our betterment and in creating a good society.

Yes, a modern market economy seems to many observers increasingly run by a relatively small number of business leaders who are, by the virtue of their financial and general business savvy, becoming excessively influential, now even blamed as lacking the essential humanity. However, at the same time praised as being responsible for setting the pace for the society as a whole – and given their entrepreneurial ambitious and mindset, their aggressions and dispose – as a result, many in the global society – not only those in the bottom of the pyramid, but also in developed industrialized economies – feels like, given the income inequality, the society is putting the economic power and ambitions to a few inhumane at the top who somehow offends the sense of participatory and inclusive society that aspires respect, appreciation and support of everyone.

Yes, it’s agreeable that a society needs to make it possible for relatively few individuals (i.e. political leaders, policy makers, business owners and managers) to use their personal judgement to decide on the direction of societies’ major activities, however if this could be achieved in a manner that is also inclusive, the equilibrium will be much appreciated.

This discontent is nothing new, the kind of loss of sense of humanity among the wealthy and the loss of a sense of individuals participation in society was a concern that occupied by leading economist of the 20th Century, such Friedrich Hayek (the Austrian Economist), in his book: The Road to Serfdom – where for him, it is the excessive government intervention which is a source of the problem for lack of a sense of humanity in our finance and business undertaking, rather than the practices of big business, but then he also wrote of government being captured by big businesses. Excessive reliance on such large controlling entities, Hayek believed, lead to a defeated attitude, the attitude of serfs.

According to Robert Shiller (Professor of Finance and Economics at Yale University), in the modern capitalist system with all its regulatory machinery, it may, if power within it does not become too centralized and institutionalized, be liberated from just such serf mentality. He says, if the right rules are in place, they may pave way for the development of a multitude of creative organizations that can achieve far more than any individual, however free, ever could. These set of rules and assumptions that allow orderly businesses to be initiated and then to proceed represents a kind of social capital that is enabling for creativity.

According to Hayek, dispersal of information about the economy and its opportunities across millions of people – with their different situations, locations, eyes and ears – is where the society and its political and business leaders should focus on. He argues that the society need controls to facilitate, on top of these arrangement, a dispersal of opportunities, but its control as well. This can be achieved by encouraging broader public participation in ownership of factors of production and especially shareholding of corporations, or by giving tax preferences to small firms, or by other means to encourage the dispersal of property holding throughout the population.

Collectively, as a society, we can make a deliberate decision to plan a more broadly based financial market. Such plan to could be modelled after the traditional communism – that we experienced from the 1960s to 1980s, which similarly sought to equalize the ownership and control of economic opportunities. By the way, this idea also reflects on what is known as “ownership society”, referring to a society in which citizenship and responsibility are encouraged by the widespread ownership of and control over properties and assets.

So, how can this be achieved? (i) Land Reform –  as it is, agriculture still constitute the bulk of our national output and employment and may continue to have a front role in years to come, if we must borrow from the knowledge and advise of Professor Joseph Stiglitz (Nobel Laurent Professor, Columbia University and Former Chief Economist of the World Bank) which he specifically encouraged us to pursue, when he was in the country recently. Policies to disperse ownership of capital must be concentrated on land. In the world history, land reforms (and there have been many land reforms in many countries, especially in the nineteenth and twentieth centuries), while sometimes imposed harshly, but usually represent the real social progress, and helped many economies in their growth path. So, whether in Brazil, or Canada, or Ethiopia, or Namibia, or Syria, or Taiwan, or Zimbabwe, or Russia, or South Korea, or China, you mention them, even the United States of America – a good part of the sense of equality and a common good feeling that exists in America today probably owes its origin at least in part to their democratization of wealth via land reforms.

These land reforms, while sometimes imposed harshly for some countries, but they usually represent real social and economic progress in a society, helping the economic growth – especially in the aspects of easy access to finance and financial services, financing of business enterprises, lessening of income inequality, the approach to agriculture and agricultural enterprises, in the creation and generation of wealth within a society, in the increase in the proportion of homeownership, etc. To achieve these attributes of a good society, emanating from land reforms – a good land policy should have provisions on equitable allocation of land. (ii) Homeownership – this is yet another important aspect of democratization of finance, or rather using finance for economic empowerment and creating a good society. Again, going by world history — as societies and economies become more urbanized, governments have embarked on policies that enable large home-owning population as opposed to the development of huge corporations that operate rental properties for the public. This has been the case in the United Kingdom with their concept of “property-owning democracy” in the 1930s, the “home building programs” of 1950s and the “program of selling council houses to renter inhabitants” in 1980s. Similar examples has been in the United States especially under President F.D. Roosevelt’s New Deal where the Federal Housing Administration was created in order to provide for government insurance of new mortgages and creating the “Fannie Mae” to buy mortgages from their originators to support the housing market. So, has been the case with China, with its communist ideology, that later came into the ownership society concept, and in the late 1990s China created a Housing Provident Fund aiming at making home-ownership and affordable housing a priority and a compulsory saving plan.

The idea of encouraging homeownership pops up almost everywhere now, why? Because it promotes the ideals of independence and personal responsibility where families are encouraged to make sacrifices to acquire or build a home in which they are responsible and accountable for, including the use of houses for accessibility to finance and financial services and for supporting other aspects of human well being such as entrepreneurship, business management, etc. Homeownership helps to create a market-oriented psychology that encourages other kind of ownerships and encourages a feeling of participation and equality in society. Thus, a general degree of government support for individual homeownership to many people in a society contribute to the ideals economic empowerment and a better society.

Before I exit here let me link this up with the other idea I have written on in several of my previous articles – that is linking the idea of homeownership, its financing and investments via the Real Estate Investment Trust (REITs). REITs can be one of the tools that could be considered to actualize the goal of providing homeownership and accessible to housing in our country. REITs serves three fold purpose as it relates to this – it provides accessible to housing, while providing an investment platform for retail/individual investors who wants to have an investment stake in the housing/real estate sector. REITs also has the benefit to housing or property developers as it enables them access larger pools of funds that would otherwise be inaccessible while providing a platform for implementation of financial inclusion, economic empowerment and homeownership policies – as means to providing alternative to loans and equity financing, it helps developers against the risk of repayments for loans and/or shareholding dilution in case of equity financing. REITs as a new alternative to construction finance, give access to diversified investment platform by retail and institutional investors while enabling source of financing the homeownership policy and programs. (iii) Ownership of investment portfolio: Ownership in the form of shares/stocks, bonds, or land or home ownership as I had elaborated and argued above, gives people a real sense of participation in society and the economy may be promoted more broadly by policies that encourage more business-oriented ownership, notably ownership of broad portfolios representing the real productive assets of the economy. Reading from Lee Kuan Lew’s From Third World to First, it seems to me that, Singapole, under Lee Kuan Lew, led the way to an ownership society with its Central Provident Fund, a mandatory saving plan for its citizens, with both employer and employee contributions, that allowed them to purchase both local and international investments in stocks/shares, bonds as well as housing for citizens in Singapole. Resulting from this approach, the Central Provident Fund made Singapole different society. People who have substantial savings and assets have a different attitude to life. They are more conscious of their strength and take responsibility for themselves and their families.

Defined (of otherwise) contribution pensions plans, even for us, also encourages people to become owners, albeit indirectly, of investment portfolio, which ostensibly enables pension funds to provide a pension for individuals within the economy, which is an important income for retirement. But other than using pension as vehicles for citizens ownership of investment portfolio, there are several opportunities than can be created to enable citizens to participate in the ownership of investment portfolio. Privatization policies via IPOs and listing of state owned companies in the stock market is one of such tools, the other tool is creating a business and investment environment that promotes enterprises to access public funds via IPOs and get listed in the stock markets – that way enterpreneurs and business owners dilute part of their holding in exchange for an efficient sources of capital from a wider investors base. Another tool can come from policy and legislative approach such as our Electronic and Postal Communications Act (EPOCA) and Mining Acts which requires companies in these selected sectors to sale part of their shares to the wider public and list such companies in the stock market.

Our privatization policy resulted into the listing of seven companies that in total has a combined investor base of over 100,000; so is the case for EPOCA where a single company’s compliance to this law has brought in about 40,000 investors in Vodacom, many of whom are first time investors in the investment portfolio category as local citizens. All these efforts, knowingly or not, are efforts to democratize and humanize finance, to make finance serve people and to encourage people to consider themselves participants in a society built on the principles of finance, and its role in economic empowerment.

Lastly, and I admit, not so common for us, are policies that promotes (iv) employees ownership of business, commonly known as employees shares ownership schemes (ESOP). This is the idea aimed at promoting the ideals and the legacy of better employees’ morale and high effectiveness in work place, while in the process an ownership society is created. This finance or economic empowerment idea is based on the argument that to achieve morale and high effectiveness in the work place, it is helpful if the worker feels loyalty to the employer while at the same time help the company to manage [sometimes] contentious issues of labour-management conflicts/situations which then affects the productivity of the company.

In ESOP, companies encourage their employees to participate in the ownership of the firm by obtaining stock in the company, such a plan motivates employees to work more efficiently and effectively and help create an ownership culture and develop an anti-shirking culture.