Note: The views and opinions expressed in this newsletter are those of the authors and do not necessarily reflect the official policy or position of Newday Impact. Any content provided by our authors is of their opinion and is not intended to malign any religion, ethnic group, club, organization, company, individual, or anyone or anything.
IMPACT COMMENTARY
Can Capitalism Be A Proxy for Morality?
Early last month, Newday’s President Anne Popkin and I had dinner with Tariq Fancy and our partners at UNICEF/Generation Unlimited. Mr. Fancy earned a reputation for his work at Blackrock as Chief Investment Officer of Sustainable Investing, but more notably for his outspoken criticism of ESG as a mechanism to drive real impact outcomes. In fact, Tariq goes so far as to state that ESG can cause greater harm than benefit if used the wrong way. While his criticism was largely levered on the climate claims of ESG investment strategies, it should be noted that ESG investing as a mechanism for impact for most financial services organizations is far from perfect. However, Environmental, Social, and Governance investing can serve as an important framework from which better investment decisions can be made. To be clear, ESG investing is a method for evaluating, at every stage of the investment process, how companies’ environmental, social, and governance practices may impact their stock return potential and value. Notwithstanding, Tariq’s commentary offers all of us an opportunity to improve our work relative to ESG so that it results in better impact outcomes across the investment community if deployed properly.
Over dinner, we found the conversation migrating towards a debate about the environmental and social responsibilities of corporations and the forms of capitalism that would better support a 21st century society. The points raised for discussion centered on the fact that corporations today have more influence than they’ve ever had. Walmart as an example has more than 2.3mm employees, generating more than $485 billion in revenues, more than a good percentage of individual US states’ gross domestic product (GDP). Corporations have in many regards supplanted the role of government in looking after the welfare of a community’s citizens. The fact of the matter is that corporations have more political and economic control over communities than at any point in history. Consequently, corporations today have a greater responsibility to be stewards of community health and prosperity. The good that can be created when companies take a more active role in improving our world would be extraordinary.
Corporations represent an important part of our system of capitalism. But today, capitalism is facing lots of problems. Under the traditional shareholder centric model, employees, customers, suppliers, communities, and the environment are oftentimes sacrificed for the pure purpose of increasing profit and return on equity (ROE). When a company uses its funds to maximize shareholder returns rather than to invest for growth, the long-term prospects for a company decline, employment growth stalls, having a detrimental effect on the community. In other words, without making a change in how companies discharge their corporate governance, social, and environmental practices, record profits and higher share prices potentially lead to widening wealth disparity, a fragile middle class, and an unstable society.
These consequences have led in part to an enlightening view that there is a real cost associated with unconscious capitalism. While many believe that capitalism is not a flawed construct, the way that we use it as a tool is. The fact of the matter is that today’s structure of capitalism has to evolve to better support our 21st century’s problems and solutions; and it’s in its nature to do so.
Evolution of Capitalism
The history of capitalism is diverse and has many debated roots ranging from Agrarian capitalism to Shareholder capitalism. Colonial capitalism, a narrative of imperialism, traces back to the British empire where commercial plunder and bondage of colonies dominated thought and behavior of governments. In the process of colonization, governments imposed their religion, language, and economic systems in pursuit of their own interests. Industrial capitalism, viewed as a superior mode of production and capital accumulation, was a mechanism to finance the means of production for commodities delivered to the market during the 19th century. Under this system, wage labor was kept in check with limited private ownership. Shareholder capitalism was a concept that was almost universally taught at business schools and adopted in the corporate world from the 1980’s through 2000’s. Based on the Friedman doctrine, it held that the specific responsibility of business is to increase profits. This approach to capitalism views shareholders as the economic engine of a company and the only group to which the firm is socially responsible. Friedman’s argument was that shareholders, not executives should be the ones that are making the decisions of what social endeavors to support. This approach to capitalism does not take into account the fact that capitalism doesn’t always ensure that profits are equally or fairly distributed by those that are charged with the responsibility of allocating those profits in an equitable way.
It’s true that capitalism can create unprecedented wealth by unleashing the power of markets to innovate. But free market capitalism emphasizes the pursuit of self-interest and, in so doing, allocates resources where they are needed and valued. However capitalism’s combination of economic and political freedom does not guarantee that this prosperity will be ethically distributed. It does not guard against resources being used in ways that are unjust and unsustainable, beyond the scope of driving short-term gain for a select few. The notion that capitalism is prone to excess and unethical behavior is a glaring and ongoing concern. Too often corporate and personal greed are masked, while the depletion of natural resources gives way to profit. Wealth creation does not excuse a lack of morality.
The Moral Component of Capitalism
Scholars and practitioners outline a variety of approaches to elevate the moral component of capitalism, to include corporate social responsibility, public interest or conscious capitalism, and the stakeholder approach to business ethics. The application of these frameworks in a binary fashion fosters polarization, separating the notion of doing well (profits) and doing good (causing no harm and giving back). Corporations justify the former as their purpose, with the latter often designated as a philanthropic gesture (rather than as a way of achieving performance).
As a society, we have failed to demand the systemic integration of morality within corporate strategy. By accepting the shareholder-centric stance, investors collude with firms as agents of commission, sacrificing the needs of others in exchange for the prospect of greater returns. Today, the level of morality within a firm is considered a choice –one that corporations are left to determine. Once visible compliance demands are met, firms decide how they will go about achieving success. This work argues that the next generation of investors must be educated in how to exert morality into the firms they choose to invest in. Firms’ unbridled authority to establish wealth needs to be harnessed by investors, arguably one of the most powerful stakeholder groups.
By redirecting the moral component of capitalism into the hands of stakeholders, they can ignite longer-term strategic thinking, including operationalized plans that genuinely include and measure forms of sustainable enterprise as a result of investor demand. Moral capitalism focuses on choice and its relationship to moral identity. Where investors choose to direct their money reflects their personal moral identity, shaping the moral identity of the firm, and thereby driving the value of moral identity of the broader market. This power can redefine the overall nature of the capitalist system. This work elevates the potential for every shareholder to use their stakeholder power, demanding that morality be present in how profits are achieved.
Reimagining Capitalism
Reimagining our global economy so it becomes more sustainable and prosperous for all people and the planet is what capitalism’s intent should be. Capitalism can be a system in which corporations are oriented to serve the interests of all stakeholders including customers, suppliers, employees, shareholders and local communities. Under this system a company’s purpose is to create long term value and not to maximize profits and enhance shareholder value at the cost of other stakeholders.
A preferred form of responsible capitalism is oftentimes identified as Stakeholder capitalism, Public Interest capitalism, or Moral Capitalism. It is one that can be defined as an innovative economic system designed for 21st century society, and one which re-designs and solves the problems associated with the current short-term-oriented shareholder-centric capitalism. Under the current shareholder model, most financial analysts and investors focus on the “return on equity” as a primary measure of corporate performance. Responsible Capitalism considers long term corporate strategy and governance decisions as primary drivers of returns, and the model fairly distributes this created value amongst all stakeholders; employees, customers, suppliers, local communities, society, and the environment. The responsible model considers and measures fair distribution of value among shared stakeholders, not to the exclusion of shareholders, but for the benefit of shareholders.
This new version of capitalism supports Tariq Fancy’s perspectives which are grounded in the idea that in order for us to make meaningful steps forward the advancement of our society, the standards, measurement, and accountability of corporate organizations must change. This perspective begs the question, what is the purpose of a corporation in today’s modern society. A revised definition of a corporation in the 21st century is necessary for us to contemplate in order to start a constructive discussion with those that support a new model, and those that do not. In 1970, the New York Times’ article by Milton Freedman titled as “The social responsibility of business is to increase profits” clearly shows optimistic attitudes to the invisible hands of the market economy. Today, many people easily find this paper does not reflect reality.
A corporation can be 100% owned and controlled privately under democratic world. However, one should recognize that such a private corporation is embedded with social responsibility as one of the constituents of a responsible society. It is the same as a human being having social responsibilities to be a member of a society. The key difference between a corporation and a human being’s social responsibility is that the magnitude of this responsibility for a corporation is much larger than that of a human being. A corporation is the economic engine of our modern society and global economy, which has significant impacts on distribution or re-allocation of values (wealth, welfare), not only economically, but also socially and ecologically. Therefore, a corporation, particularly a publicly listed one, should act being aware of its significant and varied responsibilities.
Measurement of Allocation
It’s understood that it is technically complex and difficult to measure the performance by the management of a corporation to satisfy the competing interests of various stakeholders. Under such a situation, without a clear scorecard for management, there will be no optimal or fair distribution of a newly created value. In fact, it allows the management to maximize their interests without a clear scorecard. However, today we know that because there is no clear scorecard for a fair distribution to stakeholders, the shareholders are taking advantage of this situation to maximize their interests. We should be able to propose not necessarily a perfect scorecard, but a practical and conventional way to measure the fair distribution.
We also need to identify who should be the right person to decide the fair distribution of newly created value by a corporation. This is what many organizations and private companies are independently working on. It will take more time to come to an agreement on a global standard. Therefore, our strategy should work with today’s conscious investors as well as conscious corporations. Instead of being involved in discussions on standard setting works, we should spotlight conscious investors and corporations with demonstrable results.
A fair distribution of value decided by a corporation may not be perfectly optimal, however, as long as a reasonably sized group of conscious investors monitor and verify such a decision and corporate activities, it would be reasonably better than waiting for a global standard. By inviting both conscious investors and corporations, we can facilitate an efficient usage of capital by helping corporations which have a better understanding of various responsibilities as members of constituents of global society and quasi-public goods on earth.
This form of responsible capitalism focuses on factors that measure a firm’s authentic value, considering morality as a driver of sustainable and responsible profitization. Responsible capitalism examines the distribution of value among stakeholders, not to the exclusion of shareholders, but for their own long-term benefit. Shareholders adopting this view will have an ability to create value as they prompt firms to reassert morality into the process of wealth creation. The penchant for capitalism to build or deter moral strength is within every investor’s reach.
Responsible Capitalism considers long term corporate strategy and governance decisions as primary drivers of returns, and the model fairly distributes this created value amongst all stakeholders; employees, customers, suppliers, local communities, society, and the environment. Under the current shareholder model, most financial analysts and investors focus on “return on equity” as a primary measure of corporate performance. Within the current construct, a reduction in corporate income taxes doesn’t necessarily trickle down to employees in the form of higher wages or to customers in the form of lower prices. These additional profits instead are sometimes allocated to shareholders as dividends or stock buyback programs. The responsible model considers and measures fair distribution of value among shared stakeholders, not to the exclusion of shareholders, but for the benefit of shareholders.
Assessment of Value
Most portfolio managers, we are in the business of generating excess returns, controlling risk, and identifying great businesses. Great businesses not only generate an extraordinary amount of wealth for their stakeholders, but leave an imprint on the world and on their communities. Great businesses invest in the long-term interests of their customers, employees, and communities; and create contingent assets not reflected in typical financial metrics. And these market inefficiencies are driven by these excess factors. Extensive evaluation of these extra financial factors can reduce risks and uncover alternative sources of excess returns. The market most times under-appreciates the impact of extra financial factors creating an inefficiency that can be exploited.
Conversely, poor businesses borrow from their stakeholders. Companies might eliminate all of their training and development. They might reduce their health and welfare coverage for employees, and as a result, save money (in effect, borrowing from their employees). Does this reduce expense in the short term? Absolutely, but eventually it would impact morale and the best people would end up looking for other jobs. Companies might eliminate their customer service people, in effect borrowing from their clients as their employee base is less equipped to serve the needs of clients ultimately resulting in a lower level of client satisfaction. Again, saving money in the short term, but longer term, creating potential client retention issues. A company might borrow from their community by not cleaning up their waste water runoff and other pollutants, or borrow from the government by not paying their taxes, but all of these things have consequences in the long term. These contingent liabilities and relevant factors that we identify are deeply embedded in our security selection process. The point is that the way an organization discharges its practices, drives future returns before they become real financial factors. And once they become financial factors, they are already efficiently absorbed into stock prices.
What are the impacts that responsible capitalism can achieve?
There is change going on in every corner of our economy. Over the course of the transition to a more sustainable future, there will be companies that lead the way, and those that won’t or can’t at the same speed. Executives and their boards are paying attention to consumers who are speaking with loud voices encouraging businesses to behave more responsibly. The world is paying attention to the idea that sustainable investing can be a force for good. Corporations are embracing the need to address sustainability issues as a best business practice that can lead to increased profitability, operating performance, and a lower cost of capital.
The corporate world is paying attention to the sustainable investment movement and the benefits of behaving as responsible corporate citizens. Researchers at the University of Oxford conducted a comprehensive study that combined the findings of 200 empirical ESG studies.
The findings were as follows;
- 90% of the studies evidenced that sound sustainability standards, lower the cost of capital for companies;
- 88% of the research demonstrated that ESG practices resulted in better operational performance of the firms;
- and 80% of the studies showed stock price performance of companies is positively influenced.
The improvements to responsible investing are also evident in the changing discussion of performance. Institutional investors are incorporating Environmental, Social, and Governance related screening approaches into the construction of their portfolios. The use of ESG metrics are beginning to produce portfolios demonstrating outperformance versus traditional portfolios. The external view on sustainable responsible investing returns is also changing. According to a HBR study, 86% of the studies performed since 2010 evidence a positive or neutral correlation between financial performance and good environmental, social, and governance characteristics. Study after study demonstrates that you don’t have to sacrifice returns to do good. We have moved from an era whereby investing in companies that behaved as good corporate citizens was seen as a detriment, to an era where not only are returns neutral, but additive.
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We are in the midst of a tidal shift and companies that fail to adapt and innovate will be left behind. This tidal shift will accelerate over the coming years as the correlation between good corporate behavior and financial performance becomes more evident. There’s a groundswell building fueled by a younger generation that cares more about the issue of sustainability than anything else. And the values that WE teach this generation today, are ones that they will carry forward throughout their lives. And through this education, they are empowered to make informed decisions about our world. They are empowered to make decisions that lead to cleaner rivers, greener trees, fossil fuels being left in the ground and out of cars instead of out on the road. They are empowered to make decisions that bring diversity and fairness into the workplace, where women and minorities populate management roles for the same compensation. They are empowered to make decisions that support the improvement of workplace safety records and eliminate unacceptable working conditions.
It is expected that the Millennial generation will ultimately reshape the investment markets as they stand to inherit somewhere between 45 and 65 trillion dollars in assets over the next several decades. This generation now holds more than 7 trillion in liquid assets. 9 in 10 of them believe that success of a business should be measured by more than just financial performance according to a (Deloitte Millennial Survey). A Nielsen Survey of Corporate Responsibility reported that 66% of millennials polled are willing to pay more for products and services that come from companies that are committed to positive social and environmental impact. And 69% of millennials believe investments are a way to express social, political, and environmental value. (US Trust Company Report).
So what can you do?
Be a believer in change. Empower your generation to make positive change in their world. Develop a “big tent” view of the world. Personal financial decisions can have a more meaningful impact on the world that extends well beyond financial returns. Convey to everyone you know that we can all make a difference, can make a better world, whether you’re young, old, big, or small.
CAPITAL MARKETS COMMENTARY
Overview
In April, stocks posted their worst month since March 2020. The NASDAQ and S&P 500 clocked their fourth consecutive losing week, which doubled as the NASDAQ’s worst month since 2008. The U.S. economy shrank in the first quarter at a 1.4% annual rate, a sharp reversal from a 6.9% annual growth rate in the fourth quarter. It was the weakest quarter since spring 2020, when the pandemic and related shutdowns drove the U.S. economy into a brief recession. All of this comes amid a recent uptick in COVID-19 cases in China, where stringent lockdowns are giving rise to growth concerns, the ongoing war in Ukraine, and persistently high global inflation.
So where do we go from here?
This Scotsman’s’ note covers my latest thoughts on a potentially Good, Bad and Ugly outlook for equity markets. Key issues we are focusing on include, investor sentiment, rising global recession risks, no immediate Ukraine peace prospects with Russia and the pandemic in China.
- Investor sentiment: The Good, the Bad and The Ugly
- Rising global recession risks
- Ukraine peace prospects fade
- Pandemic in China
Investor sentiment: The Good, the Bad and the Ugly
At the end of a rough week and month for equities I watched an old classic movie favorite, The Good, The Bad and The Ugly. The movie gave me some thoughts to help keep things in perspective:
Source: MovieClips
There are 3 reasons I believe the current market environment reminds me of the iconic Clint Eastwood movie The Good, The Bad and The Ugly:
- GDP 1Q2022 print was -1.4%, below consensus expectations of +1.0% = weaker economy = doing Fed’s work = GOOD
- Retail American Association of Individual Investors (AAII) sentiment came in at -43%, 6th worst since 1987 = BAD
- Nasdaq underperformed S&P 500 by -11% past 6 months, one of 13 worst stretches since 1985 = UGLY
PLEASE KEEP THINGS IN PERSPECTIVE, LIKE THE MAN WITH NO NAME:
- Retail AAII sentiment came in at -43%, 6th worst since 1987 = contrarian buy signal = so BAD, it is good
- Nasdaq underperformed S&P 500 by -11% past 6 months, one of 13 worst stretches since 1985 = next 6 months returns beat S&P 500 97% of the time by an average of 950bp = so UGLY, it is good
See the pattern? My first Chief Investment Officer taught me markets bottom on bad news NOT good news. BAD AND UGLY CAN BE GOOD!!!
In addition, over the years, I have followed the AAII sentiment survey. This weekly survey of retail investors has been conducted since 1987 and what I like is that it generates a lot of meaningful signals at the extremes when the survey is very bullish or very bearish:
- The latest reading % bulls less % bears came in at -43%
- Historically, this is very rare
- In fact, previously seen only in March 2009 and prior to that in 4 weeks Sep to Oct 1990
- Only 5 weekly readings are worse than the latest readings
Rising recession risks
For several months, we have been flagging the significant and rising risk of recession in the U.S. In addition to the pre-existing supply chain and inflation morass, the combination of increasingly aggressive global central bank actions, a stumbling China and the commodity pricing shock emanating from the war in Ukraine have naturally further dimmed the U.S. growth outlook.
Over the next 12 months, we continue to flag a recession risk is possible for the U.S. in early 2023. The near-term European risk is somewhat higher and therefore a recession more likely this year, given a greater exposure to Russia/Ukraine war, and higher commodity prices.
But it is important to think beyond merely the next 12 months. The risk of recession at some point over the next two years is quite high. Why so high? Monetary tightening should theoretically exert the greatest weight in 2023 rather than 2022, for two main reasons:
- Monetary tightening operates with a lag on the economy (on average 9–18 months historically).
- Much of the tightening therefore will not be felt until later in 2022 and 2023.
The current round of monetary tightening deserves some extra consideration. Even under normal circumstances, it is unusual for an economic expansion to survive a tightening cycle. Indeed, history shows, 8 of the 11 U.S. tightening cycles, by the Federal Reserve Bank (Fed) since World War II have ended in recession. So, the odds are not good to start with.
But odds are further worsened by the fact that this tightening cycle may have actually started with a policy error: It appears that given current inflation data, U.S. tightening should have begun in 2021. The implication is that the pace of tightening must now be faster and more aggressive. More broadly, it is not ideal that the main motivation for monetary tightening is excessive inflation rather than excessive growth. In particular, it means that should their respective economies start to falter; central banks globally will not necessarily halt their tightening because their main priority will be to gain control of inflation.
The simultaneous arrival of a commodity price shock does not help the recession outlook. Even when ignoring the increase in natural gas and food prices spurred by the war in Ukraine, the oil shock has been sufficiently large that a recession results more often than not from a price increase of this magnitude (see following chart). It is fair to point out that oil is not as central to economic growth as in the past, but it is nonetheless a factor.
Oil price shocks of more than 50% typically precede or coincide with recession
04/20/2022. Shaded area represents U.S. recession. Source: Macrobond, RBC GAM, Newday Impact
It may be that only a slight economic deceleration is needed to take the pressure off supply chains and commodity prices, with inflation beginning to fade after a surprisingly small amount of monetary tightening. An easing of supply chain problems could also unleash a new economic tailwind as pent-up demand for previously unavailable goods is filled allowing global economic growth to re-accelerate.
We see the best-case scenario over the next two years is that economic growth persists, and inflation is tamed – a soft landing. The worst-case scenario – which we still think an unlikely one – is that growth falters while high inflation remains: Stagflation.
Ukraine peace prospects fade
Russia continues its major push in eastern Ukraine, with the next few weeks set to be pivotal. Our sources suggest the war is likely to remain focused on eastern Ukraine. Yet a Russian general recently expressed a desire to also take southern Ukraine and neighboring Moldova’s long-disputed Transnistria region – which has already had Russian troops on its soil for years.
Ceasefire prospects continue to fizzle. In mid-March the likelihood that the conflict would endure past December 1 was deemed to be just 13% according to a European online betting market. That figure has now soared to a 62% chance. We assume this will be a multi-year war, and in turn that sanctions will persist. Continued discovery of Russian atrocities likely leads to additional sanctions being applied. On that note, we continue to flag the risk that international sanctions increase, especially with regard to Russian energy. Sixty percent of large international companies surveyed by the Yale School of Management have now withdrawn from or suspended their operations in Russia.
Furthermore, despite somewhat contradictory comments from politicians, sanctions are unlikely to be lifted any time soon. Not only does the war appear set to last for a considerable period of time, but it is unlikely that most sanctions would be lifted even if the war ended. A study of historical sanctions finds that the average sanction lasts a whopping 16 years (though the inclusion of permanently sanctioned countries like Cuba inflate the estimate). The key point to note is that sanctions are usually measured in years rather than months.
Finally, we believe that NATO membership is about to grow in response to the Russian threat. Finland and Sweden are both reported to have prepared NATO applications, setting them up for accelerated admission at the June NATO summit. Based on previous comments, this would be unacceptable to President Putin and suggests the war continues.
Pandemic in China
The latest wave of COVID known as BA.2 which is still of some significance continues to ricochet around the world. It has proven to be only minimally consequential for ex-China economic growth as the wave has already crested and receded in Europe. Canada may also be starting to improve. The U.S. is not there yet, as the number of states experiencing a rising infection count is still rising (see following chart). But we believe it is also likely to peak before too long and to do minimal economic damage.
Number of U.S. states with transmission rate above key threshold of 1
As of 04/22/2022. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. Transmission rate above 1 suggests increasing new daily cases. Includes Washington, D.C. Source: Haver Analytics, Macrobond, RBC GAM, Newday Impact
The exception to this latest development remains China, which continues to struggle to maintain its zero-tolerance policy against a highly contagious variant. Now Beijing is beginning to lock down in a similar manner to Shanghai. This does significant damage to both its domestic and international economic growth and is a major reason why markets have been souring in recent days. It is also why we continue to anticipate China’s actual GDP will be well below the country’s own 5.5% growth target for 2022. It is hard to fathom that China will be able to put the lid back on COVID-19 from here given its vaccines and vaccination history.
Scotsman’s Final thoughts…
- Is all the bad news priced into the markets? I do not think so. At the time of writing. U.S. 1Q corporate earnings season is in full swing. So far absolute results have been largely positive, but forward guidance for the rest of 2022 has been underwhelming at best.
- We think the potential for U.S. markets to decline further in coming weeks is possible as the Fed has not even started to aggressively raise interest rates.
- We would agree with the view that U.S. stocks have not priced in an economic slowdown, let alone a recession. As such, we continue to rotate our portfolios out of high beta and high valuation stocks. This has resulted in selectively reducing our exposure to the information technology sector while adding to the healthcare and financial services sectors.
ESG RESEARCH COMMENTARY
BEING AN INDIAN DURING ASIAN AMERICAN & PACIFIC ISLANDER HERITAGE MONTH
As Chief Diversity Officer at Newday Impact, I get the opportunity and privilege of not only educating my peers about the importance of diversity and inclusiveness in our workplace, but I also get to help regularly celebrate the vibrant cultures that paint our nation’s cultural landscape. We are fortunate that nearly every month we are given an opportunity to learn more about each other and be reminded of the diverse richness that our country’s melting pot gives us.
This month we celebrate Asian American and Pacific Islander Heritage Month (AAPI Heritage Month), which was created to acknowledge the significant accomplishments and contributions of Americans of Asian and Pacific Island descent. The term AAPI covers cultures from the entire Asian continent—including East, Southeast, the Indian subcontinent, and the Pacific Islands of Melanesia, Micronesia, and Polynesia.
Through the past efforts of New York Representative Frank Horton, a proclamation was set in the late 1970s to celebrate the histories and cultures of Asians during the first ten days of May. This was later set into law by President Jimmy Carter in 1978. However, in 1992 under the George H. W. Bush administration, the entire month of May was annually designated as Asian/Pacific American Heritage Month, and in 2009, renamed AAPI Heritage Month. The significance of having this in May was meant to commemorate when the transcontinental railroad was completed, much of which was built on the backs of Chinese workers, and when the first group of Japanese people came to the U.S.
But the migration of Asians to America has a storied past, from economic dreams of making it rich, to hostility, violence, and unjust discrimination plaguing its history. The first Asians, mainly Chinese, came to the U.S. in the mid-19th century to work in the gold mines and railroads. It wasn’t until the late 1800s when there was an increase in Japanese immigration to cheaply replace Chinese workers, mainly due to the anti-Chinese sentiment that was growing at the time. This culminated in the Chinese Exclusion Act of 1882, which ultimately banned Chinese immigration and prevented all Chinese, even their American-born children, from becoming U.S. citizens and owning land for decades. Sadly, the Japanese were later subjected to the same discriminatory laws and prejudices that the Chinese endured, which resulted in the 1907 Gentleman’s Agreement between the U.S. and Japan stopping the issuance of passports for new Japanese laborers. It was further worsened with the Immigration Act of 1924, effectively banning Japanese immigration to the U.S. Then, shortly after the attack on Pearl Harbor, President Franklin Delano Roosevelt signed an executive order that began the Japanese American Internment, which uprooted and interned nearly 110,000 Japanese who lived on the West Coast of the U.S.
For the decades ensuing, the federal national origin quota program severely restricted the number of people from outside of Western Europe to immigrate and settle in the United States. But reformed immigration laws with the 1965 Immigration Act, signed into law by President Lyndon B. Johnson, abolished the preference-based system of color discrimination and biased practices. According to the Pew Research Center, since the act was passed, immigrants living in America have now more than quadrupled, accounting for nearly 14% of the U.S. population. According to the Migration Policy Institute, as of 2019, people born on the continent of Asia account for 31% of the 44.9 million immigrants in the United States, with 2.7 million of them being Indian. In fact, when looking at the data compiled by the Pew Research Center, six origin groups largely shape our nation’s overall Asian population. They account for 85% of all Asian Americans, with the population size of Indians right behind those of the Chinese.
Figure 1. Indian Immigrant Population in the United States, 1980-2019
Sources: Data from U.S. Census Bureau 2010 and 2019 American Community Surveys (ACS), and Campbell J. Gibson and Kay Jung, “Historical Census Statistics on the Foreign-born Population of the United States: 1850-2000” (Working Paper no. 81, U.S. Census Bureau, Washington, DC, February 2006), available online.
Having come to America with my parents in the early 1970s and joining our extended family who had immigrated to the U.S. around the same timeframe, we were a direct result of those legislative changes. We were considered a part of a second period of Asian immigration due to these reformed immigration laws, which brought an influx of highly skilled and educated professionals such as physicians, engineers, and academics. Because of this, South Asians now have a relatively large presence in the United States and account for an estimated 4.2 million people today. While currently the second-largest immigrant group after Mexicans, Indian immigrants are more likely to be higher educated and have higher median household income levels than any Asian ethnicity and the general U.S. population. Some are Nobel Prize winners, leading scientists, doctors, engineers, and hold CEO and other key leadership roles at companies that are now household names. In fact, even members of Congress and our Vice President are of South Asian descent.
As an immigrant of South Asian descent who’s now a naturalized U.S. citizen, I remember as a child doing everything I could to conform to my surroundings and societal norms and not stand out for being different. However, my brown skin, my parents’ accents, and the saris my mother often wore didn’t help that plea. But as I grew older, my appreciation for the deep-rooted culture I was brought up in and the struggles, sacrifices, strides, and successes my parents made for us to have a better life brings me a great sense of pride that makes this month’s celebration have a more profound significance and meaning to me when reflecting upon the countless contributions, achievements, and influences Asian Americans have had on our country. I thank all those who welcomed us to this great nation, the ones who advocated on our behalf, the many who gave us merit-based opportunities to excel in our lives, and those whom embraced and eventually loved us for being Indian AND American. Happy Asian American and Pacific Islander Heritage Month!
“When you have diversity at the leadership table, the magnitude of what you can accomplish is enormous. ”
~Fahmida Chhipa, Federal Asian Pacific American Council
COUNTRY GOVERNANCE RESEARCH COMMENTARY
Russian invasion of Ukraine enters third month
Entering its third month, the focus of Russia’s invasion has shifted to the south and east of the country where Russia is trying to overcome shortcomings that led to defeat in their campaign to take the capital Kyiv. For this next stage of the conflict Russia has placed its forces under the control of a single general, Alexander Dvornikov, in order to address coordination and logistics issues that contributed to staggering losses. British Defense Secretary, Ben Wallace recently said in testimony to the House of Commons that around 15,000 Russian troops had been killed in the first two months of fighting – a total greater than Soviet losses in a decade of fighting in Afghanistan. The terrain in the eastern Donbas region and its closer proximity to resupply from Russia as well as territory occupied since 2014, has been thought to offer advantages to Russian forces compared to their initial battle plan with many disparate areas of attack. However, a senior U.S. defense official described recent Russian efforts to advance from the east as behind schedule with only slow and uneven progress. In southern occupied cities, including Kherson, Russian troops have been consolidating their control, indicating that they want to maintain their hold on this land connecting Crimea to mainland Russia for the long-term. In the devastated city of Mariupol, evacuations have begun of civilians sheltering in harrowing conditions at the Azovstal steelworks, the last holdout of Ukrainian resistance in the city.
Implications: Ukrainian success on the battlefield has emboldened Western countries to step up their support, including by providing the heavier weapons such as tanks and artillery that Ukraine will need to counter Russia in the battle for Donbas. Most recently, President Biden proposed an additional $33 billion in security, economic, and humanitarian aid. Along with greater material support, Western officials are increasingly talking of not just blunting Russia’s advance before negotiations but about the possibility of outright Ukrainian victory.
China Covid lockdowns continue to disrupt economy
On April 1, Shanghai authorities locked down the entire city of 26 million in order to contain an outbreak of the highly infectious Omicron coronavirus variant. Shanghai is the largest and most economically important of dozens of cities that have recently been put in full or partial lockdown in pursuit of China’s zero-Covid policy. There has been growing public anger at the hardships from weeks of strictly enforced quarantines. Locked-down citizens have taken to social media to voice their frustration, and Chinese censors have struggled to contain their dissent. Beyond the human toll is the damage caused to an economy that was already experiencing shocks from real estate market woes and an unpredictable wave of regulatory reforms. With a decline in cases, lockdowns have begun to ease in Shanghai. However, at the same time cases have begun to rise in Beijing leading to panic buying by residents fearful of an impending lockdown. While most of the world is learning to live with the virus, China risks rolling lockdowns disrupting its economy for the foreseeable future.
Implications: Before this latest Covid wave took hold, China was targeting growth of 5.5 per cent this year, which would be the lowest annual rate in three decades. Recent developments likely mean even this diminished goal will be difficult to achieve. The IMF has cut its GDP growth forecast to 4.4 per cent for the year. Nonetheless, President Xi has shown no indication he has any intention of relaxing his zero-Covid-19 policy.
France reelects Macron, rejects far-right Le Pen
French President Emmanuel Macron was reelected to another five-year term after defeating his far-right opponent Marine Le Pen. He is the first French president in 20 years to win a second term, and he topped expectations with over 58% of the final vote. The result has been seen as a victory for centrist pro-European politics over the forces of nationalism and populism. Nonetheless, Le Pen did eight points better than she had when she lost to Macron in 2017, and she won the most votes ever by a far-right candidate in a presidential election. In the first round of voting more than 50% of the vote went to candidates on the far-right and far-left. Le Pen focused her campaign on concerns about the rising cost of living and income inequality with populist proposals such as a wealth tax on financial assets and trade protectionism. Macron, in contrast, promised to continue his pro-business policies, such as labor reforms, which had made some progress in tackling persistently high unemployment. His most controversial proposal was to reform the country’s complex pension system and to raise the retirement age from 62 to 65 by 2031. He had attempted pension reform in his first-term but relented following nationwide strikes.
Implications: The first task for Macron will be to help secure a majority for his La République en Marche (LaREM) party in legislative elections that will be held in June. His opponents have called the vote a “third round” and hope to deny him a parliamentary majority. Without a majority, he could be forced into a cohabitation arrangement with a prime minster from the opposition, which would limit his influence over domestic policy.
News/Events
In a recent interview on Main Street Living, Doug Heske and Philippe Cousteau discuss the importance of working together to ensure the health of our oceans.
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