Before leaving the finance sector, we can take one more look at a few areas where it could make a contribution to give justice to the poor. On the one hand, this means holding back from exploiting the weak and to “Speak up for those who have no voice, for the justice of all who are dispossessed.”1 On the other, it can mean looking for opportunities to creatively meet the needs of those finding life difficult.
Opposing Oppression
In the first place, we should ensure that we are not contributing to the poverty of others. This happens to the extent that we are extracting rents from them. This can come from gouging of various sorts, but also from the lobbying that creates benefits for the loudest at the expense of the voiceless.
In Chapter 6, we saw Adam Smith’s indignation against business lobbying, and in Chapter 10 we discussed the unjustifiable benefits to large companies of much of regulatory capitalism and excess complexity. The ability of the large banks to access government support in many countries during the recent financial crisis has illustrated this well.
One of the major interests of big business is reducing tax. Tax law is clearly an arena with many opportunities for wasteful arbitrage. As a vocation, there is a role in the private sector for tax counsel that ensures that companies are honest, as well as legally minimizing their tax obligations. There is also an ongoing need for energetic and competent people within revenue departments. Once you have learnt the trade, perhaps, you could consider a time with the gamekeepers? There is surely plenty of scope for creativity in simplifying the code, in ensuring that it is fairly and efficiently administered—both catching the cheats and falling more heavily on economic rents rather than productive activity. If you have any connections to Greece, that poor country would appear to have special needs at this time!
It is possible that a more principled approach to tax law might work better than the very technical approach now popular. One of my first jobs was to calculate the tax payable for a life insurer. I discovered that we could save some 80 times my annual salary by a slight modification of our liability calculations. I was quite astounded that the chief actuary of the time approved the changes reluctantly, and only after ascertaining that our competitors were already taking advantage of the loophole. His argument was that the tax authorities needed to collect a certain amount of tax from the industry, and would just change the rules if companies took advantage of every loophole. In retrospect, such an attitude might be more efficient if were widespread, and prevented time wasting on tax arbitrage.
My particular bugbear is the tax concessions that have been extracted for the investment income of pension funds. A legitimate argument can be made for allowing people to defer a limited proportion of taxable income from their working lives to retirement. This will tend to even out the average rate of tax paid by people with the same lifetime income—but with a different incidence of earnings. (Think of someone who earned all her lifetime income in one year and paid the top marginal rate on almost everything.) Not paying tax on investment income, however, provides a further advantage to the wealthy, and creates tax arbitrage opportunities. This is because people can borrow and deduct the interest from their taxable income outside the pension fund, and pay little or no tax on moneys invested inside the fund. Tax arbitrage diverts some of our best talent to non-productive effort. I made this point in submissions to the South African Katz Committee in the mid-90s, and one of the members told me that it helped them make a decision to impose an income tax on the interest earnings of retirement funds. The victory was short lived, however, and the tax was removed after a decade. The industry, supported by tax lawyers, persuaded the National Treasury that it was too complicated and the revenue insignificant.
It is perhaps too much to ask people not to lobby for sectional advantage. Superficially, it appears a relatively minor and largely victimless crime. The impact on society and the economy is, however, both burdensome and corrosive. Deniz Igan and Prachi Mishra show how lobbying reduced financial discipline in the years that led up to the 2008 US crisis. Responsibility for resisting special pleading falls in the first instance to civil servants responsible for policy. They need the support of their political masters, who in turn need general public opprobrium for self-interested lobbying. Politicians will tell you that they can easily pick up such self-interested lobbying, but that they need (and deserve) as much help as they can get in finding creative ways to do the right thing. Working with think tanks may fit in with your vocation. Some produce research to further sectional interests only and should probably be avoided, but others do good work for the common good.
Discrimination
Our prejudices and unexamined assumptions can lead to unfair discrimination against others not like us. If you have been exposed to any gender studies, you will be aware of subtle discrimination against women and especially working mothers with their double burden.
You will know that some of it may be unintended. In South Africa in the mid-80s, the HR team brought an affirmative action proposal to the senior management committee on which I was serving. The idea was that we would somehow recruit eight black graduates (of whom there were few) and give them a fast track into management. This led to an investigation as to why we were recruiting no black school leavers (of whom there were many). It turned out that we used recruiting firms who were not recommending any black recruits to us—because they thought we did not want them. Neither our HR team nor the recruiting firms were intentionally discriminating against the school leavers, but the system was doing so and needed to be changed.
On the other hand, it is easy to fall victim to misplaced enthusiasm of which fast tracking into management can be a problem. A number of my black South African acquaintances fell victim to affirmative action, by being promoted too quickly into jobs where they could not succeed. The educational and developmental process described in Part 4 cannot necessarily be hurried just because people have suffered historical disadvantages.
The Voiceless
Perhaps the main challenge is to defend the truly voiceless. Three main groups can perhaps be helped in some way by a well-functioning finance system:
1. The very old, who are no longer able to exert themselves to be heard. Debates about tax should not forget those who are subject to onerous means tests.2 As discussed in Chapter 8, there are ways in which the financial system can provide better financial advice and products that can secure the assets they have. My view is that there need to be ways to lock away the assets of the really old, perhaps in annuities, before their husbands have spent the money!
2. Unemployed adult singles, who have no function in society. I became particularly aware of the problems facing young adult males in my year on the Taylor Social Security inquiry in South Africa. More than half had been brought up without a father in the house, a similar proportion were failed by a dysfunctional education system, and as many were without jobs throughout their 20s. A failure of all three main socializing institutions has created one of the world’s highest levels of crime. More than anything, young adults need jobs. With high youth unemployment everywhere, and young males often worse off, companies could do more to create jobs for young, relatively unskilled, males. There can be opportunities within your own organizations to look for even relatively menial jobs that can be stepping stones to bigger things. If you are in the business of allocating capital, companies perhaps deserve more consideration if they are employing those who otherwise might not have jobs. Without help, these men are likely to fail to support their own children, who make up another vulnerable group, although one that is mainly beyond the reach of the finance system.
3. The mentally ill seldom have a voice that we want to hear. Various types of disability insurance have a role in supporting rehabilitation and reintegration into the workplace. As with unsocialized young men, workplaces need to go out of their way to be more resilient in dealing with the difficulties posed by working with someone with a mental illness. John Noble makes further suggestions.
Opening Opportunities
Microfinance is finance for the poor. Especially in under-developed countries, the poor would benefit from better payment systems, and from banks where they can safely maintain the real value of their savings. They would also benefit from inexpensive insurance that offers protection against disasters that would otherwise wipe them out.
This is an appealing idea for those who have worked in finance and want to make a contribution. My 5 years on the board of a small micro-lender, however, alerted me to the risks that uninformed and poorly thought out interventions will do more harm than good. Hugh Sinclair has written on these and identified further problems of incompetence and corruption. He has some useful points about improving the effectiveness of the organizations by getting close to clients, and makes this interesting suggestion for whistleblowing:
If you are working in an MFI and perceive injustices or are obliged to perform unsavory acts to “problem clients”, go on line and anonymously blog about this almost anywhere. There are enough people now aware of the problems that someone will eventually pick up the thread. Be very careful to protect your identity. Consider contacting the regulator if appropriate. If the MFI is rated, contact the rating agencies as to “areas they may wish to investigate in more detail” – they will not publish anything unless they can back it up, but they may consider such advice. It’s worth a try.3
In particular, I do not like funeral insurance. You might think there is a need because the cost of culturally acceptable funerals appears prohibitive. There are community benefits to large feasts each weekend in that the poorer members of the wider family circle are fed. Offering additional insurance is, however, an intervention in existing culture as it increases the money ultimately spent on funerals. Worse, it creates perverse incentives: in 1948, the United Kingdom totally prohibited any insurance cover for children under 10 because of the moral hazards,4 and I think it should be banned everywhere. In addition, in Africa at least, informal burial societies fulfill a social function that formal insurance cannot,5 and it is a pity that new formal arrangements have undermined valuable social structures.
Microcredit was seen as an important way of encouraging enterprise among the poor, and it does seem to have some, small, successes in some places. It does not help, however, if it diverts energy from more productive activities. Real development comes when people enter the formal sector with its division of labour and economies of scale. Microfinance will harm the poor if it discourages them from entering the formal sector. Jobs in mainstream formal organizations with their much greater efficiencies will pay much more. For those without the appropriate background—with historical disadvantage—the transition to the formal sector is difficult. In such cases, on-the-job training is critically important. Peter Drucker has some interesting suggestions about ensuring that people from “pre-industrial” societies are given responsibility for work group activities such “the design of jobs, the arrangement of tools and machines, and the structure of work groups” (1975, 279).
There are, however, many organizations such as the Global Alliance for Banking on Values that are working at providing “sustainable development for unserved people, communities and the environment.” Whether you join them directly or apply some of their successful innovations in other organizations, it is possible to make finance a force for development of the poor.
Housing
Housing is another area which is affected by the finance sector. Poorer people can be crowded out of acceptable housing by richer people’s ownership of the most useful land. My earliest awakening of a social conscience was reading these lines from Isaiah6:
Woe to those who add house to house and join field to field,
Until there is no more room,
So that you have to live alone in the midst of the land!
If people do not have a place of their own to occupy, they must occupy someone else’s property—of necessity. One of most impressive achievements of the lawyers who worked for the interests of the poor in South Africa, was that, even under an unsympathetic apartheid government, they argued successfully that squatters could not be evicted unless there was alternative space.
We cannot all be involved in such dramatic action, but it is important to look for ways to ensure that our employers do not neglect to target viable housing finance loans to poorer people. The discussion on contribution to overhead in Chapter 7 is relevant, although so do the warnings about lending too much!
Chapter summary: At very least, we should take care that we are not extracting rents from those who can least afford it. We can help by being particularly conscious of those who cannot speak for themselves, and look for opportunities to provide financial services to those who are currently unserved. The aim is to have everyone participate in a flourishing society.
1Proverbs 31:8 (Holman Christian Standard Bible).
2Means tests involve intrusive inquiries into pensioners’ income, assets, and any gifts they give or receive. They are also applied at very high rates (over 50 percent in many cases) and therefore more burdensome than taxes in every way. I call them administrative atrocities—harassing pensioners for immaterial amounts. A fuller argument is made in Asher (2006).
3Taken from http://www.microfinancetransparency.com/archivos/Microfinace_Heretic_Complete_Final_Press_Kit.pdf. Accessed November 24, 2014.
4See the Industrial Assurance and Friendly Societies Act, 1948.
5Rob Thomson and Debbie Posel.
6Isaiah 5:8 (Revised Standard Version).